Stan Ross - CEO Tom Heckman - CFO

Frank Giacalone - Aegis Capital Bryan Lubitz - Aegis Capital William Gibson - ROTH Capital Partners Brian Rockowitz - Aegis Capital Ishfaque Faruk - WestPark Capital

Good morning. And welcome to the Digital Ally's First Quarter 2016 Operating Results Conference Call. All participants will be in the listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. Statements made on today's call will include forward-looking statements including statements regarding our expectations, beliefs, intentions, or strategies regarding the future including statements around projected spending. We intend that such forward-looking statements to be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking statements information is based on current information and expectations regarding Digital Ally Incorporated. These estimates and statements speak as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risk and uncertainties that could cause our actual results to differ materially. These risks discussed in our press release we issued today and in greater detail and our quarterly report on Form 10-Q filed this morning. You may find this in our other SEC filings on our Web site at www.digitalallyinc.com. Please note this event is being recorded. I would now like to turn the conference over to Stan Ross, CEO of Digital Ally Inc. and Tom Heckman, CFO of Digital Ally Inc. Please go ahead.

Thanks Darla. Thank all for joining us today. I know that first quarter calls are always sort of that seems like we're just going through the motions in regards to what's going on after coming off of our year-end call in which -- but little over 45 days ago. So anyway I don't think there is any real surprises on how everything played out today. As far as our numbers, we knew we had a quite a bit of a hangover from the -- TASER Digital Ally litigation in regards to the patent infringement and other charges that we have against them. That seems to be though given some traction, we are noticing that a lot of the departments that were concerned or worried about how to position themselves in regards to this patent that we have, both the 292 and the 452 patents. Those things are starting to get a lot more clear and I will touch on the litigation side of things here a little bit giving on an update. But, right now, I think what we'll do is, we'd let Tom jump into the numbers, and then, I'll touch on the litigation side real quickly and give you some insight on how things seem to be shaping up for the remainder of the year. So Tom?

Yes. Thank you, Stan, and welcome everyone. I appreciate you joining us today for the conference call. I will tell you that we did file our Form 10-Q earlier today and I do encourage everyone to take a look at that and because it is a full representation of what's going on and what's behind the numbers that we posted for the quarter. I'll be brief in my remarks here so we can leave some time for Q&A at the end of this thing. I guess I will start with revenue, revenues were $4.4 million in the first quarter 2016 that represents about a 4% increase over prior year quarter. So year-over-year it was a pretty good comparison. However, if you look at the sequential quarter from 2015 -- Q4 2015, we were over $5 million in revenue. So it's a step backwards from that standpoint. But, I will advise you that the first quarter is historically our course quarter revenue wise. I don't know why it is, it seems like everybody comes back from the holidays and it just takes a while to get started. So, historically, the first quarter is always one of our slowest, if not the slowest for the year and I think that's what we'll find here. I will caution you or advice you that there were several larger orders in the pipeline that could have closed in the first quarter that did not but we do expect to close in the second quarter that hopefully we will have a meaningful impact on our second quarter numbers. So, don't read too much into the first quarter revenue figures from that standpoint. We are still struggling as Stan mentioned with the after effects of the TASER press releases and sort of a disinformation that's going on about the status of our VuLink patent. And again, the VuLink patent is the auto activation for body-worn camera which we believe has quickly become very standard for the industry. It's required or at least asked for and well over 90% of the bids that come in to us on a daily basis. So it's quickly become a very standard. There is some disinformations some confusion out there about what the status of that VuLink patent is. Certainly given the fact that we have filed litigation against TASER claiming patent infringement with respect to their version of our VuLink patent, our VuLink technology. We are pleased with what we're seeing out there, there are several large cities are either stopping certainly reviewing and in some cases even resending some of their previous decisions on body-worn camera purchases. If you look in the papers, obviously, there is some larger cities that have stopped the process and re-looking at it and potentially even re-bidding it those include Los Angeles, Memphis and others out there. And quite frankly, we're seeing a lot of calls coming in that ask us for status of that and clarification of what the patent really is and so on and so forth. So I see the tide changing a little bit in that regard and cities are taking their responsibilities seriously as to who they buy from and what the patent rights have in terms of what Digital Ally has in the VuLink patent. So, we believe the trends are very positive and we hope that that continues and we'll have an impact on the balance of 2016 revenues. I also mentioned that our international revenues although not large or very much improved $313,000 in the first quarter on 2016. That is compared to a total for all of 2015 of the $148,000, so we more than doubled in the first quarter our international revenues. Some of that is caused by a reversal and the strength of the dollar and hopefully that will continue and we are seeing some stalled projects starting to break loose and go forward especially in Mexico and South America and elsewhere in the world. So we have high hopes for what's going on in the international arena, but remember as we've always said you can never count on international revenues in terms of timing, amounts when the funds are going to be transferred and so on and so forth. But we do see some encouraging trends there. The gross margins in the first quarter 2016 were improved to 42% versus 31% in Q4 2015 and 39% in the year ago first quarter 2015. So, certainly an improvement although it's certainly less than what our goal is. Our goal is to get it around 60%, so we got ways to go. What we're seeing there generally is a little bit of a hangover from our FirstVu connector issue and upgrade that we completed in the third and fourth quarter. We're actually going through the boards, it got returned and we're trying to sort through which are good and which are bad, so there was some scrap that came out of that that affected our gross margins. But certainly, we believe and certainly hope that the balance of 2016 will see improvement in gross margins hopefully towards our 60% overall goal. SG&A expense for the first quarter 2016 was 16% over last year's came in at $4.2 million versus $3.6 million in the prior year. The largest driver in that increase was $280,000 increase in our professional fees and primarily that's litigation related. We do have the two suits going on right now, the TASER suit, which I think everyone is aware of. And also the Utility Associate suit that's been going for about two years, but we're rapidly approaching court dates on the Utility matter. So there is more activity going on with the Utility and quite frankly, we couldn't be more pleased with how that thing is progressing. We believe, we'll get a good result from that litigation. I think the court date is actually in the third quarter of this year. So we should have some type of culmination of that litigation by the end of this calendar year. Beyond professional fees, non-cash stock compensation increased about $150,000 year-over-year. We are utilizing more restricted stock in terms of incentive compensation and quite frankly the grand dictates how much non-cash expense is amortized to SG&A expenses. So it's a matter of timing and our higher utilization of restricted stock for incentive compensation purposes. I will say we did had some headcount in the selling area, we added a new international base sales rep just added them here in the last month or so. He is based in the U.K. and he will be responsible for European activities and elsewhere actually. So we're happy to have him on board. We also increased our domestic sales group by one person and it's a she and she is in-charge of large opportunities and high profile customers. So we're hoping that that will make a difference on the domestic sales. We also added two commercial sales reps, so we're beefing up our sales in anticipation of increased activity during 2016. From a positive perspective, we remain very strong, we got roughly $6 million in available cash balances $17 million in positive working capital. We have no interest bearing debt. We do have a couple of capital leases, small capital leases so -- we'll see a little dab of interest expense, but for the most part, we're debt free as far as that goes. We have $17 million in stockholder's equity. If you look at our net book value per share is around $3.20 per share and we have well over $1 per share sitting in cash alone. So our balance sheet is very strong and with the cash reserves we have we feel confident that there is no need to raise additional funds or capital based on our current business plan for 2016. I will also tell you that we are having our annual shareholders meeting tomorrow here in Kansas City. I encourage everyone to attend that. I do want to address one issue that I have received a number of calls and there is a little bit of a disinformation going on out there on some of the bulls and boards regarding the -- our request or the -- item require -- that we're trying to authorize 10 million shares of preferred stock. We have -- that's only authorized shares, we're not issuing them, it's in no way dilutive into the existing shareholders. We had no plans to issue those shares. Really what we're trying to do is provide our Board and management more flexibility for the longer term and if and when we might need additional capital. But again, we have no current plans to issue those it's really just to provide flexibility for future -- long-term future plans. At this point, I'll turn it back to Stan.

Thanks Tom. Yes, just touching on the litigation side of things a little bit, the Utility lawsuit that we've had for some time and that had begun to recap with the scenario where we had -- a let's say a competitor that felt the need to send out letters stating basically the whole industry was violating a patent of theirs and we were very successful in not only addressing that, but also their patent being kicked out in regards to the majority of everyone -- the claims associated with that patent. And so there is no patent infringement. There never was any patent infringement and the only thing that we're now doing is going back for the damages that was caused due to their activities. In regards to the TASER litigation a little bit of scenario. I think TASER is sort of attempted to do similar situation, which they challenged our patent and as many of you know the patent office looked at our patent again as they should and took a look at it and had us amend or let's say some defined some of the claims that were within the patent. And so it still have 20 broader claims that we ended up with 59 somewhat a little bit narrower claims and but all in all the patent withstood the challenge and very pleased that to see it appears the whole industry is going to an auto-activation and a little bit of clarification there. It's one thing to sit there as a police officer and have a body camera and will not have a body camera. But if you have a body camera and that body camera is not being activated when you pull over a potential suspect then you get really scrutinized because how come you did not turn on your body camera, was there something racial there, was there something -- you can come up with a number of excuses. But, in short auto-activation has now become an absolute almost mandatory in the industry, so a lot of the bids that we're seeing come across our tables now are requesting that. And with us having this patent in place and even having the patent that had been challenged, we're really confident and very comfortable with our ability to be one of the only ones that can deliver that therefore we hope to have a big leg up on these bit packages that we're now seeing. So, real encouraged by that as Tom mentioned really encouraged a little bit on the international side, while we were not totally count on that to happen there seems to be some activity there and we're also very pleased that our next generation products that also has some additional patents and features in them we will be seeing later this year. So, pretty exciting 2016, we've got ahead of us, and look forward to continuing to press forward on all fronts. The commercial side is getting quite exciting as well. That product continues to get a lot of momentum and as Tom and I both said. We think that it's very possible by 2017 that over half of our revenues will come from outside law enforcement and that's not because we see the law enforcement slowing up by the means, but the commercial side greatly increasing. So, exciting times ahead of us. I think we'll go ahead and open up the floor for Q&A.

[Operator Instructions] And your first question comes from Frank Giacalone with Aegis Capital.

Hey Stan, hey Tom, how are you guys doing?

Good Frank.

Good to hear your voice guys. And then, thanks again for your hard work and very informative conference call. My question is, you answered a lot of my questions. But my question is with TASER, now we're into discovery phase of the core case, are they still playing games or have they come forth with their information? And the second part of my question is, this core case you think it will come to ahead somewhat this year or is it going to be early next year, where are we?

Yes. So I was able to participate in a call with the both sides and their attorneys and the judge. And I was very pleased that the judge indicated that this is not going to be something that you're going to be able to continue to ask for extensions, more time and stuff like that they said, don't get me wrong I somewhat have to give you one, if there is legitimate request. But she said don't be thinking that you're getting any more than 30 days. So things are moving rather rapidly on that front. We look to start receiving some of our information in regards to discovery over the next 30 days as well and we will then look for a little bit of timeline in which -- regards to when the courts will let us get in front of them and present our case. Now, there will be a tremendous amount of -- what you will say, depositions, discovery, we got some subpoenas going out requesting information from municipalities and stuff along those lines. So gathering that isn't going to happen overnight either. But regards to traction and really seeing where we stand on this thing. I do think that some of the writing that will be on the wall before the year is out, but clearly look for this thing to be settled by probably second quarter of next year at the longest.

So, we'll have some daylight probably where this is heading sometime this year. The summary of judgment they've been all throwing out, have they ever filed again on that?

So, what they basically did, there is one out there that they're trying to get a sniff and that's basically the bribery and unfair trade practices. They're trying to say that everything they did in Orlando, in Albuquerque and Memphis and numerous, numerous you guys have seen the press, numerous places throughout the country that's not considered bribery. And so they have the -- they are allowed the opportunity to present an argument. And so let's just see how they -- I don't know how they get around it. That's the only thing that's outstanding then its game on let's go, let's get things moving.

Yes. Frank, this is Tom. Let me elaborate just a little bit more, early on there was a motion to dismiss both counts or both and by the count, I mean the patent side as well as the unfair competition side. The patent side has been dealt with and it's going forward there is no longer any motion dismissed out there on the patent side. The other side has not been ruled on yet, the other side being the unfair competition side. So we believe it's a matter of time and then that motion of dismiss will be denied as well and then it will be game on and we'll go on about our business. But as it sits today there is still as a motion to dismiss outstanding on the bribery and the unfair competition claims and hopefully that will get resolved in our favor in short-term.

I'm curious about the discovery, Tom. I want to see how far and how deep and who they spoke to on the contracts and that couldn't actually issue more subpoenas at that point once they disclose who, what, when and where and how they -- and how that practices. So that's very, that's definitely going to be something -- everybody should keep their eye on because that will separate everything from…

It will bring a lot of clarity to everyone…

Yes. We have seen time, date emails and I think everything will start to…

Absolutely. I don't know if you've seen that that the story they did in the Wall Street Journal. But I mean they did the Freedom of Information Act or whatever and got some of copies of some emails. And again, is this just like mind boggling on the few cities that they were able to get information from what was said in those emails. So we obviously are on the frontlines and we've seen things, we've heard things, have been told thing by may be not the very top brass, but by the people that are out there in the field utilizing the equipment who like the equipment really was excited about the possibility of pilots and testing our product. And then, all of a sudden the door gets slammed. That -- those are municipalities that will sure like to understand how come that happened all of a sudden. But, I'm sure we're going to uncover a lot of information.

Once they issue the timelines with the emails and everything you get to see exactly how it transpired. And then, certain questions will be raised and a lot of people will be uncomfortable and unfortunately this is what's going to happen so.

Yes. So anyway, but getting back to the meat of the product. I mean the patent have been the -- that's a little unfair trade practices aside the patent side let's just keep moving forward on that. I mean again its already been what the attorneys call has been washed in other words, it was challenged, it was looked at again not only by a individual patent office but a panel at the patent office, so a numerous people looked at it and came back and said nice its legit, strong, patents innovative patents. And therefore, they withheld or they stood the challenge let's just say. So we feel real confident that we've got a patent and that will be innovative in the industry and therefore we ought to be getting our fair share of the business from this patent.

Nice. And where was the court case, where it's just being held again?

It's in federal court.

It's Federal District Court of Kansas and it's in -- City Kansas right in our backyard here.

Okay, right. Okay, good. All right. Thank you very much guys and keep up the good work and keep doing what you're doing. Thank you for your time.

Thank you.

Your next question comes from Bryan Lubitz with Aegis Capital.

Good morning, guys.

Good morning, Bryan.

How are you?

Doing really well.

Frank beat me to the punch. I want to discuss -- we'll get into the litigation I know you guys are very, very excited and enthusiastic about that. But I want to sort of start with the numbers just from the last quarter and look at certain things that you guys have reported and what we expect moving forward. Revenues are up 3%, gross margins are up about 3% as well, VVM sales were up 8%, margins are up as well and about 3%, international revenue up almost 7x and you guys did discuss that you hired a guy out of Europe, are those international sales? This is my first question, on those international sales from Europe or the South American distributor that you guys put out in press release about last quarter?

Well, Bryan this is Tom, I appreciate the question. It's a combination of both. I think we made an announcement, it's out in the press about Estonian order, Estonian police which is over in Europe as well as the South American distributor pilot program. Both of those things had a dramatic effect on our international revenues first quarter. But by no means is that our only opportunities in pipeline. There is -- we're seeing a lot of activities, a lot of projects that been stalled for going on years. Now seem to be starting to move again and I'm talking about that projects that are in Mexico and elsewhere in South America, Brazil, Colombia, Argentina, you name it there just seems to be more activity going on down there. And I think a little bit of that has to do with the strength of the U.S. dollar its not strong as it was and its not going up every day like it was. So I think there is some stability in that that that's led to more activity. Now hopefully that all culminates in revenue, sales and collections, but we're very excited about where international is going right now.

Okay. So now last quarter, we do about 36,000, this year we do about 340,000 which is the -- it's a significant jump, do we expect this trend to continue and more importantly what type of an impact do we expect over the course of 2016 for international sales to play in our bottom line?

Well, I mean Bryan that's so hard to nail down because I mean you could look at -- and I'm probably in conservative here. But you could easily look at $4 million to $6 million of stuff that we think is somewhat low hanging fruit on the international markets. But we've had that before. I mean we've actually had a $2 million purchase order in our hands but they could not fund it. And so for whatever reason and so those things that we've got in the works right now you just don't know, if they're going to come through. I mean its so much revolves around the financing and really, really revolves around the financial side. I don't know that we've ever really had political issues as much as the finance side. So I just hate to even speculate on that.

Okay. So now, Tom, you alluded to projects that's kind of installed with the dollar and you mentioned Mexico, are we talking about the Federalies, are they finally going to update their equipment with us, is that what we're looking at?

Well, Bryan, I think we even put a press release out a year or two ago. There is a PO outstanding for I can't recall it's like $1.6 million or so it's not been fully funded. So my hope is that that thing is moving forward and we've have heard reports that it is moving forward. But I've not seen money, haven't seen any request for new quotes or anything like that. But I'm optimistic that that, certainly that piece of business will start moving forward. And there is other pieces of business down in Mexico and elsewhere in Central and South America that had my attention now. And we've got a strong international sales group now and its getting stronger as we add the guy over in Europe and I expect to see better things for 2016. Now, I won't sit here and tell you we're going to see $4 million to $6 million in international revenues. But, I certainly see a pipeline that could produce that. But we've learned our lesson on the international revenues. We don't count on it. We don't put it in our plans. It happens when it happens and we're all happy when it happens.

So and that the kind of beat me to that because [indiscernible] put out a report the other day and basically placed a $6 PT said that Digital Ally will not be profitable this year. I'm assuming they are not taking into consideration any potential what the international sales as well?

Well, I don't know that I understand the numbers behind the estimates in that. But, I will tell you if we get $4 million to $6 million of revenue contributions from international its going to be hard not to be profitable.

Okay. That was my next question.

But we're not banking on that though.

Tom, what do we need to breakeven, what do we need for the quarter, is it $5.5 million a quarter, or is it $6 million a quarter, what's the threshold of the target that you guys are shooting for so that we can elevate a loss in the quarter?

Well, there is two pieces to that puzzle. One is the top line revenue, which is obviously very important. But the second piece of that is our gross margins. Our gross margins are low right now, they're improving and they're better than they have been and certainly better than fourth quarter 2015 when I think it was like 32% gross margin, we're now 42%. So that's obviously a good trend we wanted to continue. But quite frankly, we want that up in the 60% neighborhood. And if we get to 60% or anywhere close to that you're looking at a $5.5 million breakeven revenue wise, so if there is -- to that puzzle and we're working on both and I believe that the trends and we put in motion activities to reach both of those goals.

Okay. So you have those numbers in mind and we're obviously not that far away, but getting the margins corrected based upon the motherboard and the other issues we had that's the priority obviously to get that done and get that cycle over with?

Absolutely.

Okay. Do we have an idea of when that cycle should be done?

Well, in terms of the FirstVu and the issue we had with the connector upgrading that, that issue was done. Now that doesn't mean that there may not be something else out there that we're not aware of right now. But as it sits today we saw that issue. We had a little hangover in the first quarter because when we did the connector upgrade we brought product back in from the field and looked at it and there is a higher scrap loss and we anticipated when we looked at it. But I think starting in the second quarter you're going see -- you are going to continue to see upward trend. I'm not going to say we're going to get the 60% in the second quarter, but I feel fairly confident or very confident that will be better than the first quarter.

Okay. All right. Excellent. Now, I just have two question and I appreciate your time guys. Stan you had mentioned to me about a month ago or shot out an email in regards to grant money starting to be released, the force have been turned on. Are we starting to see that trickle down with the city councils with the municipalities where they are actually using grant money to secure orders? Or are we still far away from that? And do we have an idea if it hasn't started when we can start to see that extra money being released so that obviously it makes it easier for these municipalities to choose us?

Yes. So what we're -- obviously, we said that we monitor anything that's out there any kind of press states, anything regarding body cameras, in car video systems, speed detection. And we are seeing now more municipalities doing a press release that they have been awarded grant money and they go ahead and going into a little bit of a details and regards to what that grant money is going to be used for. So that seems to be that pipeline for us, the funding from the feds to the local municipalities and counties and stuff seems to be occurring now. We're seeing a lot more of that, so it has started.

You're optimistic that that's going to increase from here, or it's not a huge amount of grant money that's been released. We know what congress looking add numbers or figures to that number?

Well, its -- I mean I would say between all the ones that are out there collectively there is probably there as much as $2 billion that's going. But, it's not all going towards body cameras, but you are seeing a tremendous amount of funds being thrown towards body cameras.

Okay, all right.

It's a clear priority of grant money.

So, we are seeing a light at the end of the tunnel. We're expecting that this is going to start obviously again the force is going to start to get turned on.

Exactly.

All right. So last question I have for you and it's the only one that I want to touch on in regards to TASER. One is regards to a patent and you guys were recently issued with the smart weapon. Can you talk about that patent and what you expect from this patent?

So I'm not sure maybe you're talking about the 452 patent or the second one that was issued?

But, you told your smart weapon and automatically starts recording.

Yes. So, in short we have multiple patents around triggering events and that triggering event could be literally when they open up the door getting in and out of a police car. It could be pulling a smart weapon out of your holster. It could be the light bars coming on. So there is a tremendous amount of triggering events that activate or and/or utilize our 292 and the 452 patents. So, I think I know where you're going with your question and the answer is yes, our patent covers that. The smart weapon and non lethal -- it's pulled and has some form of signaling the device that activates a body camera. Yes, our patent covers that.

Okay. And last thing, and again, you guys have been very gracious. Tom you had mentioned that they had already filed for a dismissal some rejudgment on the patent part and that was denied which is great. However, you mentioned that they also have a summary judgment or dismissal motion out there in regards to the unfair business practices to bribery everything that we're seeing in LA Times and Orlando et cetera. Was they able to separate, are they trying to separate this case from patent infringement and unfair business practices?

They clearly would want to. I mean look one of them is a little bit of a damage in regards to the patent side and everything else. I don't mean a little bit I mean because some of the contracts that have got because of the patents that's a big number. But I'm telling you what, usually you get this bribery and some of the other unfair trade practices coming down on you. It had to be devastating. And I mean not only to them but I -- you may see a lot of early retirements from certain Chief of Police throughout this country.

Do we know what that number is Stan in terms of the patent so far with the revenue they've done?

We don't I mean what we know is what they post but again it's…

With an idea?

Yes. We have a rough idea. I mean, again they're claiming some big numbers, they say we got 26 of the largest municipalities now buying their stuff. I mean it's got to be in excess of $50 million bucks minimum.

And that we're looking for trouble damages for the willful infringement.

Correct.

Okay. All right. Well, listen guys, you guys were very, very gracious with giving me all the time and all the questions. I appreciate it. Let's hope these numbers continue to rise and I will speak with the both of you soon. Thank you for your time.

Thank you, Bryan.

All right.

And there is a question from [Ira Thomas] [ph], Private Investor.

Hey, guys. As a former trial lawyer for 22 years and very active at all levels including U.S. Supreme Court Choice. Hey, I'd like to downplay for a minute literally, totally ignore the Wall Street's aspect in terms of the value of this company because I know how long things can drag out and how the highest hopes can end up with nothing as a plaintiff lawyer. Just one question about that, why your lawyers work on the hourly basis at the post of contingency basis, which would be the typical way a lawsuit like this is handled?

I think that sort of the position that we took on this one. All the other litigation I've been involved in, I hate to say it I just felt like we almost had to do it because of the situation we're in. This is the first time that I've been involved with litigation that I almost feel like it's an investment because they've already challenged us outside of the court rooms in regards to the patent office. They've already have challenged us in regards to some of the press that they've done including, which you'll find out a little more as the same comes on. And as far as the discovery in regards to some of their personal attacks from the reps and the materials that were given to different department. So, this is the first time, I've ever I felt like this is one that -- if we did that we'd be giving them the low hanging fruit and trust me there has never been anything inexpensive about the attorneys that we've utilized in the past and this is one that I just don't feel like we need to sharing with them.

Yes. Well, hey, so I come made acquaintance with [Ryan Rockwell] [ph], just I gave him that as my opinion. I said they must have decided from a financial analytical standpoint that it may be better to pay on hourly basis than give them a third, if they win. The thing is, I'm like shocked when I hear some of the numbers of the fee so far. I think I've heard the word in million already that in fees, okay? So I mean I'm just like shocked, okay? It's like I said that was just curious, okay? But now let's go back to two years ago when this Digital Ally really came on to the scene back in the period around two years ago to this month, when it was flying from $2 to $30, I don't think anybody buying the stock or anybody that was filing it with a broker house or equity analyst whatever. I don't think anybody was factoring in any lawsuits with TASER at that point about any financial potentialities recovering money from TASER that was literally nothing in the picture, okay? Now, and then, I started buying the stock and accumulated substantial position -- I'm serious loss right now, okay? Back in the $12 to $22 range, okay? And then started listening to your conference calls like year ago, I will tell you let me just check right now, one positive thing about today is the last two conference calls like today literally the stock while its 50% of its value over the next week or two and that day was already down dollars two or three back in its 15, and then, the last one which started about eight. So at least hopefully this is all factored in right now because the stock today is at least holding, it's up $0.03 right now. But, what I'm saying is that people saw this as -- hey, you got always the police departments in this country and you had this -- the Missouri thing that's kicking it all. And what bothers me is, its not like we haven't seen incidences like this across the country in the last two years, where allegations -- police -- used excessive force and this is that. So, I mean I'm looking at this company as it had a value based on sales of this device, okay? And here we are two years later and all hear is about, the grant from the Federal government is delayed and this and that. I mean, is the market -- is it going to reach a point where people start buying these things or something this is going to pass two years later they might say hey you know what we're going two years since Missouri and we don't have these things may be there not is. I literally thought every police department in the country was going to be buying these things. And you could tell me all you wanted how expensive they don't have the money but come on cities got money for things that they need. There is the need for this thing.

So I mean I totally get what you're saying and everything. And I remember the stock running to where it ran. And again, in an early, early, earlier phase of my life when I was with Stifel Nicolaus as a broker and they also involved in some investment banking and stuff like that. I mean I hate to say it, but this thing clearly -- the price was not clearly out ran the realistic valuations because its not only like you're saying Ira. It wasn't not only the fact that a lot of these municipalities did not have the funding, but they didn't have procedures and policies in place on how this new equipment, new innovative equipment was going to be utilized. And so much has happened over the last two years to where -- and again, if you do like we do, we sit there and where we've got numerous search engines and sit there and look for anything body camera, in-car video on and on and on. And you'll see a lot of press releases about municipalities or states have passed policies or procedures in regards to body cameras and how they are to be used and when they're to be turned on and whether or not audio is allowed or not allowed redacting features that need to have the capability of doing and things along those lines. It really has all -- just now starting to come to the forefront. But, in the long -- I mean I'm telling you body cameras are going to be as common as the individual police officer's radio. They will be having virtually every police officer you're going to see with a body camera at some point in time. I truly believe that. And so but it was, it has been a procedural place and financial for all this to come about and it's coming. I think even TASER and all our competitors will be the first to sit there and say. They are seeing some real, real momentum occurring not just spinning wheels and making a lot of noise and smoking your tires, there are starting to be some momentum in that sector.

And our next question comes from William Gibson with ROTH Capital Partners.

Hi, Stan. I want to follow up just a little bit on the legal expenses, it was $280,000 in the quarter and I believe on the last call you gave us a number of expectations of $800,000 for the year. Is that, do you think that number is higher now or is it still in that range?

I still like that number, yes. I still fell pretty good about it. Bill, it's one of those things that you end up going and you spend a lot of money getting the thing fired up and the end of it seems to go through a little bit of a low to where you're waiting on responses and while you may have filed your response then you wait two weeks three weeks for their response, and then, you counter their response. And so it gets to be a little more choppy. So I think we're sort of in that choppy phase now. I'm not overly -- I just feel comfortable with that number. I think its probably where we're going to end up.

Bill, this is Tom. Let me elaborate just a little bit the -- $280,000 increase that was year-over-year. A big part of that increase was the Utility Associates litigation. And the reason that is discovery is expiring at the end of this month or maybe, I think actually before the end of this month. So there was a number of depositions and that going on in the first quarter that really drove a lot of litigation expense. I don't think, I think the Utility litigation was more of a driver in that increase than the TASER litigation. It will change next quarter as we finish up the discovery in May now then Utility are going to hibernation for a couple of months until we hit the cord. So, I'm sorry if I -- let everyone to believe that TASER was a driver in that, I really believe that the Utility litigation was a bigger driver than the TASER.

Okay. No, I can appreciate that. You talked to me the other competitors about licensing your technology or [indiscernible]?

So, basically we're on that as while this litigation is going on. We feel it's probably in our best interest and the company's best interest to not engage any kind of conversations like that. We have been approached but is that really a direction we want to go? If we would go that direction you sort of the same time set in press of those in regards to what your damages could be versus if you're the one that absolutely owns the technology. So we've been approached, but we have no ongoing talks or have looked at doing any licensing at this point.

Okay, thank you. And then, just one last question, I know what the -- in your prepared common shared real positive things to say about commercial, but it looks like it was down significantly year-over-year, what was behind that and what's going on?

We had a couple of things that would occur and one was supply that came into play. And so we were unable to get a few of the larger orders that we are hoping to come around be able to get the products installed and put into the marketplace. But its just sort of a timing how it felt Bill. We still feeling really strong about it, yes, it's just the timing issue.

Okay. Thank you.

Thank you.

Your next question comes from the line of Brian Rockowitz with Aegis Capital.

Hey, good morning Stan. Good morning, Tom. And I guess I should say good morning Ira thanks for mentioning me on the call. Thanks for taking the time today gentlemen. I'm a little on a different side, recently it was announced that the NYPD completed a 15 month pilot program, which included 54 officers and six pressings and they're now preparing a wider test. It will be approximately anticipated about 20 pressings or about a quarter of them and they're going to put a 20 cameras in each of those. I know in an article on CNBC that recently was published, they mentioned TASER and they did mention one of your competitors [Vivo] [ph], are you guys involved in that bidding for this contracts and if you are, you would have extended program now this wider test that they're going to be part of?

Yes. So again, I've got to be careful what we can share and cannot share in regards to that. But I will tell you that we were invited to -- as with all our vendors were invited to attend a pre-bid conference after that then they selected a handful of individuals companies to come in and do a in-person presentation in front of -- I think it was probably 12 to 15 people that were there at the point in time. And also that was a situation where we left product that they could evaluate, and then, their next phase was the phase in which they went out and asked for pricing and we were one of those and was also asked to submit pricing. So, at this point we have not heard anything new with regards to timing, pilots, bids anything that are there, I think sort of the balls in their court and we hope to hear something back fairly soon.

All right. Super. Also would you guys mind talking a little bit about the government status that you guys have, I know you guys are accepted vendor for government contracts?

Yes, Brian. We're an approved -- we have a GSA schedule, which basically gets us into the catalog, if you will the online catalog and we are an approved vendor for all federal purposes that includes military, defense, public agencies so on and so forth. A number of state agencies also pay back off of a GSA contract and we have made some pretty decent sales with the GSA contract and we're continuing to expand the number of products we have on the GSA contract. So we're happy with that and we are approved vendor there.

Okay. And on February 2nd, you guys amended your complaint against TASER that's when you added the 452 patent to it. And you also added new set of claims about the lawsuit where they conspire to keep you out of the marketplace and we've spoken about this in the past, but let me ask you a question because I'm not sure of the answer myself. I mean obviously if the bid rigging or anybody by that matter bid rigging is a bad thing. But all their pressings or all their situations where the police department can use or chose to use property that they've recovered from let's say a drug dealer and actually go around the bidding process and use that those funds for equipment for the pressing?

Yes. So Brian there are several ways of doing it. And yes imagine there is that but each city municipality agency let's say they have different codes of conduct that they have to abide by. Kansas being one that you have certain things that if you receive in state and/or Federal money you have to go out for certain bids, if its over let's sat $50,000. Cities will have those kind of guideline/bylaws that they're supposed to abide by as well. So, while there is a lot of areas that you could sit there and be a single source non-bid type of vendor and/or customer usually when you're talking about these kind of numbers and the -- where the money is coming from, those need to be more in a much more public bidding process. And so there is a tremendous amount of these very large municipalities that have for some reason and Baltimore, the one that just jumps in my head all the time, I just cannot fathom that there is not just tax payers there and just going nuts because our bid was less than $6 million just shy of $6 million. They accepted the bid from TASER that was $12.8 million and but when you got a chance to really, I mean they went through the motions. So clearly, it was going on because I can't fathom that there is two times the cost and don't get me wrong at $6 million we made great money on that contract. And to sit there in $12.8 except that, I can't wait for all these emails to start exchanging hands.

This is going to be done through the discovery phase obviously.

Absolutely.

Lawsuit?

Absolutely.

Okay. Also in that in the amended lawsuit, you guys do talk about treble damages. Last quarter TASER reported actually about a week ago that the Axon segment of their revenue was $9.7 million for the quarter, which was an increase for them. And I know when Bryan asked it earlier, when you talk about treble damages you're a $22 million company right now that's your market cap, what type of dollar amount would treble damages really mean to you guys?

Well -- I would tell you this. There is a real clear reason that we went out to look at having a preferred category stock put in place and authorize because you're correct. I mean if this plays out like it could its just a huge number, just a huge number and much greater than what -- in my opinion what the company is being valued at today on its own.

Okay. And that pretty much answers that question, I continue to talk.

Yes. But, in short, I mean if I sit there and I have someone come up to me and say hey we really like your lawsuit, I'd buy it from your for $22 million I'm not sure I'd be interested in selling it.

Well, now, I guess I won't be making any bids on that today gentlemen. But here is another thing I'd like to discuss, it was recently announced that the Chicago PD is deploying the X2 smart weapons along with the Axon body cameras. And obviously, their evidence.com platform with TASER, does that mean that Chicago is done -- is there -- if they've made the commitment and you guys no longer looking into the Chicago contracts?

I don't think -- honestly, I don't think there is a single thing that I would technically say is completed and/or done. Because some of the features and some of the representation that has been done to these municipalities clearly allows them the opportunity to say wait a minute and pull back their horns and stuff like that and just say let's reevaluate what's going on here. And some of them are going to need to because Brian as we've mentioned maybe in another calls, I mean its similar to buying, if you know something is stolen and you bought it, you basically bought stolen goods and you're just as guilty as the guy that stole it. So if you're sitting here and buying a product that is being challenged for patent infringement and you know this challenge is out there then you actually are putting yourself in that liability chain as well. And they could try to hide under all sorts of different areas, but I sit there and now looking at some of these municipalities that recently pull their bids, cancel their -- let's say cancel their contracts and are now going about at the proper way, who know how the income -- the outcome will come out. But, Orlando is a great example. And it was well publicized, how they were going down the road with TASER and they all of a sudden it was found out some of the unethical things that were occurring down there and they canceled the contract and are reevaluating how they're going to move forward with body cameras. So, I would not say Chicago is done by no means.

Sorry, I'm sorry.

Brian, I wanted to cut. There is a misperception I think out there that TASER is blitzing us and they are winning everything and we're not winning like so on and so forth and you mentioned that you looked at their quarterly report and their earnings release and obviously I have as well. Let me talk a little bit in comparison of TASER's Axon segment, which is a body-worn camera -- their camera division versus ours. If you look at it their product sales for the quarter was $4.8 million ours is $4.4, so they sold an extra 10% $400,000 not that much more now they did have $4.8 million in service revenue, which is our evidence.com area and we're working on ours and we have very little revenues as we speak today. But what we see that group or that revenue improving. So, we're basically selling as much product as they are, they're beating us with evidence.com right now and we're working on that and hopefully we'll resurrect that. But, if you look at their bottom line, their loss from operations was over $10 million in the Axon segment, $10 million ours is $2.3 million, which we weren't proud of, but obviously, we're doing a little better job of managing costs and -- in our business than the Axon segment.

We're clearly not flying a bunch of chief of police into Kansas City and putting them up down on the plaza.

Okay.

So, anyway I just wanted to address that misperception and let everybody know that we're getting our fair share or not a fair but we're getting our share of business and obviously we want to do better and we will do better.

And let me and then I'll wrap it up because I know we are taking a lot of your time today and if anybody else has questions I don't want to monopolize it. There was a press release on September 2nd that TASER put out when they originally claimed that the patent office has made -- this claim basically your patent. And the third paragraph of that they simply state how they have improved upon the Digital Ally pack. Obviously, the press release is saying that there was no patent, so they improved upon your technology. Later on December 10, you guys receive notice from the patent office that that your patents have been validated. So I think that's a pretty bold statement on September 2nd, if you're filing a patent infringement suit to be putting out what you did. And I'm not a lawyer nor a judge, but if I put the two product side by side, the lenses, the battery life all of the other parts of that, how do you guys compare or is there a fair way to compare because I'm not an engineer, the camera angles, is yours as wide as theirs or theirs is wider or yours wider, the battery life, if I have to download…

Brian, I'll cut short. We would love the opportunity to go side-by-side with them in any environment, any environment. We would greatly appreciate that and that's part of the lawsuit is the fact that we for some strange reason cannot get in front of these and have that head-to-head. I mean I may have stated this a little over year and a half or two years ago, they actually came here to Kansas City brought us and showed us, they brought their product, through brought their engineers from Seattle to show us their evidence.com and it was right before we were going to go to the IECP which is the big International Chief of Police Conference and showed us mainly evidence.com because I told them I said why don't we just hook up both products side-by-side and they knew good where we're going to kick their *** and so it wasn't even a situation where they wanted to hook up their product. So that didn't even occur. Secondly, when we got into the evidence.com, I said, well, I appreciate you guys coming here and giving us this opportunity to maybe partnering with you on that, but we actually have our own cloud service. And therefore, I don't see the value. And so then it was game on, and they aggressively, aggressively went out and getting people to sign these contracts and again you look at the product versus product. I'm very confident that we will win all day long. And I'm also very confident when you're looking at the cloud storage side of things that we've got a very, very reputable secured platform that will meet the demands of any municipalities out there. So, I get very, very emotional about this is because that is the whole incident that we're talking about, just go out for bid, play on an even playing field and let everybody come in and have that opportunity then let's really -- let the best product win. So, sorry to cut you short on that one Brian.

And your next question is from Ishfaque Faruk with WestPark Capital.

Hi, Stan and Tom.

Yes.

Okay, guys. Quickly on the international side, I think you guys mentioned previously that you expect not expect but like that $4 million to $6 million is a reasonable number may be for this year, but more realistically since you added a sales rep in the U.K., how much do you anticipate, I mean like just a rough number for the full year?

Boy, that's speculation. I will tell you just that the rep that we brought on we had him back here in Kansas for about three weeks and real in-depth training not only on the law enforcement side, but also the commercial side. And he is very excited to get back to get to work and on both areas. Over there the way the -- as far as the U.K. is broken up as not as many departments, obviously, we have here in the States. But, the commercial side there is a tremendous amount of contacts that he believes that our product would fit in and do very well with. So, he is just now hitting the streets and out there starting to talk to people and get some business drummed up. So, we'll just have to see, again, it's -- I just hate speculating on international.

Yes. This is Tom. I hope you didn't take the word we're projecting or forecasting $4 million to $6 million international revenue that we're certainly not. It would not surprise me, if we got there. But we're not projecting that and we're not managing the business expecting those type of international revenues. But obviously, the pipeline is there and it could yield it. But we prefer to work on cash, ones the cash was up then we count it.

All right, guys. Okay. On the commercial side, Tom, I'm pretty sure you mentioned a few times previously that you expect like roughly 50% of your revenues from 2017 onward from commercial, do you have any sense of what that would be in 2016? I think your first quarter commercial numbers were down a little bit.

Yes. We're looking at a double again this year. We doubled the last two years, so we're looking at a double, which I don't have it right in front of me, but it would get us to around $4 million to $5 million, I think in commercial revenue. But that trajectory on that commercial is very nice obviously because of small base that they're working off of. But in addition to that, we've got this new fleet view product is really being well received there is nothing really like it in the industry right now and customers are looking at that and that's more of a recurring service revenue structure which I like, its much more predictable and hopefully we can forecast commercial a little better than we do on the law at certain times.

Okay. I know that TASER lawsuit can jag out for a while, but do you have any like any sense on when you guys can expect ruling on that front?

So, I think you're going to have the ruling in regards to whether or not the courts are even going to dismiss the -- let's say the unfair trade practices portion of it here in the next 45 days or so. And once that has been finally addressed, then the discovery side of things and the depositions all the preparation for getting in front of a jury will begin. So, I think you're going to see some indications on how things are going regards to the case here probably in the next let's be a little more conservative say next 30 to 90 days. And then, there is going to be sort of a quiet period because we're out there collecting our information. And then, once we have all that collected we've done the depositions then hopefully early next year, we actually are going to get in front of the jury.

Okay. Do you have any sense on the revenue impact it might have after say dangerous stocks replicating your -- activation technology?

It's a huge number. It's just a huge number. I mean, again, all of this has been quantified and continue to being quantified. But it's a big number. And then, if you look at the damages on top of that it's much higher than our market cap.

Yes. We're asking for an injunction from them selling their product that violates our patent. We're not in a business for licensing this thing. So in reality since we both believe both Stan and I believe that this is quickly becoming standard for the industry, this could have a very significant impact on our revenue. But we've got a lot of hoops to jump through and a lot of legal hurdles and we're very confident about it, but its not going to happen overnight either.

All right. Thank you, guys.

Thanks Ish.

We have reached the end of the Q&A session. I will turn the call back to Stan Ross for closing remarks.

Well, thanks everybody for participating. And again, I hope we gave you some clear understanding of where we're at in regards to the litigation, where we're at in regards to our sales and our products. And how we're also very optimistic and excited about how 2016 is going to go forward and wrap up. So, if you do have any further questions, feel free to get Tom or I call at the corporate offices. Again, thank you all so much for your time today.

This concludes the Digital Ally first quarter 2016 operating results conference call. You may now disconnect your line.