Stanton Ross - Chief Executive Officer Thomas Heckman - Chief Financial Officer

Brian Kinstlinger - Maxim Group LLC Bryan Lubitz - Aegis Capital William Gibson - ROTH Capital Partners Frank Giacalone - Aegis Capital Ishfaque Faruk - WestPark Capital

Good morning and welcome to the Digital Ally’s Third 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 only 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 are discussed in our press releases we issued on Friday and in greater detail and our Quarterly Report on Form 10-Q for the three months ended September 30, 2016 under the caption risk factors. You may find this in our other SEC filings on our website 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. Thank you. Please go ahead.

Thank you. Thanks everybody for your time today. As mentioned Tom is here with me as well. Tom will do a recap of the third quarter numbers. I’ll then come back and do a little bit of insight on what we're seeing for as business for the remainder of the year and also 2017 and also given update on our current litigation which we have going on against Taser, WatchGuard and some of the other competitors that we have out there in the industry. So Tom, I’ll turn it over to you.

Okay. Thank you, Stan, and good morning to everyone and welcome to the call and I appreciate you joining us today. I want to make sure everyone's aware that we did file or Form 10-Q this morning with the SEC and it's available on the EDGAR website. So I encourage you to visit that website and look at our 10-Q for a more detailed and expansive analysis of the results for the third quarter. Given that I’ll be brief in my [technical difficultly] I did want to inform everyone that we did file or Form 10-Q this morning with the SEC and it is available on the EDGAR website and I do encourage everyone to take a look at that and it certainly does give a more expansive view of the results of the third quarter for Digital Ally. Given that I’ll be brief in my remarks I'll try to hit some of the high points, low points and some of the trends that I'm seeing in the financials or soon to be in the financials from that standpoint. The third quarter revenues were approximately $4.3 million that’s almost identical on a sequential basis to what we had for the Q2 2016. However, it was roughly $700,000 less than Q3 of 2015 a year-ago. And looking back at year-ago results in revenues what really affected us in that quarter was some large purchases on our State Police contracts. So if you take those out of there we’re almost identical to on a sequential basis to Q2 as well as a year-ago quarter in 2015. But I will say that what I’m seeing is the beginning of a transformation of our revenue streams and what I mean by that is we're moving more to a recurring service model, utilizing the cloud from both the law enforcement and commercial customer basis. We're trying to do that in terms of getting more consistent revenue, more predictable revenue and these are longer-term contracts generally three to five years in length and I think hopefully you guys have had a chance to look at some of our press releases not only today but in the recent months that indicate that these service contracts seem to be forthcoming. We're seeing a rapid expansion of the use of our FirstVU HD in the commercial markets and in other non-law enforcement applications. I think you saw that this morning and then we made a announcement of a large contract about a month ago or two months ago in that regard as well. So we're seeing usage and applications of our body worn camera outside of a law enforcement and that's very encouraging to us and we believe that will continue in terms of a trend. We're also seeing increased sales of packages in law enforcement and by packages I mean where we sell body worn cameras which is our FirstVU’s together with in-car systems all integrated by our VuLink technology and VuLink technology again is our patented technology that provides automatic triggers and automatic activation of the body worn camera and the in-car video system on a bilateral basis. We're seeing more and more of those type of packages being purchased in law enforcement. Really make no mistake the VuLink patent is becoming standard for the industry or least the auto activation it's contained in our VuLink patent. I would say roughly 90% to 95% of all RFPs that we receive now either require or at least ask about auto activation and our capabilities in that respect. So it's a very significant piece of our future revenue streams and for that reason I think you're aware that we have instituted lawsuits against two competitors Taser and WatchGuard that we believe are infringing on our patent rights there. We do believe that there are others in the industry that we are also looking at that are starting to step on our patent as well. In addition that we're seeing some significant traction in our commercial area specifically the FleetVu and asset tracking sales and again those are contractual in nature. They're generally three to five years in term and really produce a consistent stream of revenue for us and that's what I call mailbox money and I think it makes my life easier and hopefully it gives us a better ability to forecast future revenues. We are excited about that the commercial business area and we believe that we will be seeing good trends here in the fourth quarter and into 2017. From an international revenue basis we're seeing that to be particularly strong. Year-to-date revenues were 1,150,000 million for 2016 to date that exceeds the last two years combined full years combined for 2014 and 2015. So obviously we're seeing better demand and more sales in the international arena. We believe that demand is both in the commercial area as well as the law enforcement and we're hopeful to see that that trend continuing. One of the thing that we believe will affect future revenues that was just announced about three weeks ago was or DVM-800 HD. It is our first 1080p Full HD the capable in-car video system. We announced that just prior to the ICP Trade Show in October. We are seeing good demand for that. We are launching that in the market as we speak and we believe that will be a very positive trend for law enforcement market and revenue is generated from that. Just to give you an idea the 800 HD is full 1080p and we believe that's the only in-car video system offered on the market right now that provides full 1080p HD. Coupled with the fact that based on some technological improvements in the hardware and storage component of the DVM-800 HD, we are not seeing the amount of storage capacity requirements that we would otherwise see. It's generally about five to 10 times the amount of storage required for HD versus standard definition. Based on the compression technology, we are using this new HD model in-car system. We are only seeing maybe two or at most three times the need for storage. So it's certainly a very economical in-car system in terms of not only the upfront cost, but the storage aspect down the road. Although, revenues were disappointing for Q3 2016, we do believe we are seeing a turnaround and the beginning of some great trends that we hope will continue in the fourth quarter and on into 2017. Now moving on to the gross margins, we saw a vast improvement in the gross margin, when you look at Q3 2016 gross margin was at 47% on a sequential basis that compares to 29% in Q2 and a year ago quarter was 40%. So obviously we are seeing some very good improvement in gross margins which is welcome. What we attribute the improvement to is, obviously we had some product issues with our FirstVU both the connector upgrade program that happened earlier this year and late last year as well as the PCB board contamination issue that we found earlier this year. We believe we will rectify those issues and they are now behind us. In addition to that we are in the process of reorganizing our supply chain which we believe will yield good results in future quarters on our gross margins as well. From an SG&A expense standpoint we did see a substantial increase in Q3. That's primarily attributable to increased litigation expenses. We also had the golf tournament sponsorship hit us in Q3 because of that's when it occurred as well as some non-recurring compensation expense that happened in Q3. We believe these were all fairly extraordinarily high in Q3 and they will be minimized or reduced substantially in future quarters. The litigation expenses, they are coming to an end. On the utility matters, we go to court or settle. The court date has been pushed back to June of 2017 that all the depositions, all the discovery, all the work has really been done. So we are just approaching the trial date in June from that standpoint. The expenses of the utility litigation should be minimized very little from hereon until the trial date. We also looking to reduce our litigation expense related to the patent lawsuits which include both the Taser and WatchGuard litigation. We are doing some things with the attorneys on that we believe will yield a better more efficient litigation expense from that standpoint. On the sponsorship net expense that were occurred on the golf tournament. We are working to defray the costs of that into 2017 and again that will be Q3 2017 tournament therefore, we wouldn't see any expenses until a year from now basically. But in the meantime, we are doing some things to defray the cost and trying to attract other sponsors to take part of that burden off of us. So we expect to minimization of those costs as well. The compensation expenses as I discussed earlier were non-recurring in nature. Absent these unusually high SG&A expenses in Q3 2016 our actual SG&A expense would have been substantially improved in Q2 when compared Q2 2016 and a year ago 2015. So have these not been extraordinarily high the items that I mentioned we would have shown substantial improvement on a sequential basis well as compared to last year. Overall we were disappointed in our operating results Q3 2016 however we do believe that our revenue streams are being transformed in the more sustainable patterns and we're seeing rapid expansion into the commercial market with our first few body worn cameras as well as the FleetVu product for our fleet customers. So we see some great things happening as we speak and look for better results and Q4 as well as 2017. So at this point, I'll turn it back to Stan and I'm sure you guys will have some questions on the results of which I’ll addressed in the Q&A session.

Yes. Good job Thomas. I'll be real quick just a couple things and I totally agree with what Thomas say and far as the trends really seem to be going in the right direction. We're seeing more funds appear to be available for law enforcement where there's body cameras, in-cars systems, complete solutions. We also see that the nature of our existing customers which we have approximately 9,000 of the 18,000 departments out there utilizing our equipment in some fashion with the body cameras or in-car systems. And you know probably the surprise that is starting to the international market it continues to look pretty robust. And we have several opportunities in the pipeline that some that still have a real shot of hitting here in the fourth quarter and obviously some that you know will be most of the vision again I think we've been talking about this for some time and now you're starting to see it. I mean in the last quarter's sizable orders or contracts have been on the commercial side. We still see a trend building there to where we're not just dealing with law enforcement agencies and when they have available funds or grant money. The commercial divisions and opportunities are much greater and we have several paths that we've been pursuing that we believe that we're probably making great headway and becoming the leader in that sector. Obviously all know that we're very strong in the ambulance market taxicabs and lot of fleet vehicles that are out there. So we’ll continue to put a lot of effort into that arena the uniqueness of our company being able to tweak our product to meet their personal needs has been a real leg up for us on getting some of this business. So really excited about that. On the litigation recently we have been able to the courts have allowed us to start doing much more thorough will say discovery concerning the Taser corruption side of things. And so we have started and will continue to send our subpoenas to some of the customers that we believe participated in some unlawful acts in regards to along with Taser. We also will set there and start contacting you know employees, ex-employees and others will be receiving subpoenas as well to try to make sure that Taser will quit. As they would trade practices the way they are and also step over our technology concerning the patent side of things. Again we're very, very pleased with our position on that we have already seen a lot of the documentations that continue to have us encouraged by you know how this will play out for us. So we're having that show up on our results and I'm sure they will. So anyway why don’t we go and open this up for Q&A now.

Thank you. [Operator Instructions] And our first question comes from the line of Brian Kinstlinger with Maxim Group.

Great, thanks. Good morning. How are you?

Good morning, Brian.

Very good.

So just one numbers question, if I look at the - there's a lot of moving parts in OpEx. I think you had $5.3 million in the third quarter. It sounds like some things are going away. So can you just sort of give us what OpEx looks like in fourth quarter and going forward? I'm sure you'll grow from there, but where we – what’s our starting point?

Yes. This is Tom, Brian. The OpEx or this SG&A expenses were extraordinarily high for those three or four reasons we talked about in my prepared remarks. If you strip those out on a sequential basis we would have been a couple of hundred thousand less in SG&A expense and then a year ago actually $300,000 or $400,000 less. So I would say that we’ll continue to see that. Now large portion of the variable piece of SG&A expense is sales commissions. So hopefully revenues increase and that will increase the sales commission. So outside of the variable increase in sales commissions I would say a couple of hundred thousand less than what we had on a sequential basis or a year-ago, so right around $4 million or so.

Right. $4 million you are saying plus sales commissions then.

Yes. The variable piece of sales commissions on increased revenues.

Which brings us to the next piece you mentioned more normalized sales. I mean last year you had some issues obviously with the press release that came out from a competitor. This year you dealt with some production issues. So I'm just trying to understand what more normalize is that we talking $6 million, we're talking $7 million. I mean it's just a little bit on [indiscernible] given you had some challenges that have been in and out of your hand. So I’m just want to trying to get a better sense.

Yes. I mean - let's walk in fine line of almost giving guidance. I mean the biggest thing I think you can [indiscernible] look at some of our quarters where we have not had those kind of influences. You probably could see where we’re coming you know trying to get to and everything. The one thing though that I think that is going to be a challenge for model and that’s a little bit is the commercial sales. We think that the commercial sales growth that you're going to - run rate by the end of next year that you'll see the commercial surpass law. So that what we believe where the company's headed.

My last two questions, I’ll get back in the queue were on both of those pieces. First of all let's start with commercial maybe you can kind of give us a pipeline that you're looking at. I mean is it just shy of the opportunity of the next 12 months for us as you're bidding on opportunity.

Well again that that's bordering on forecasting a little bit, but in any that the commercial revenues I see on an upward trend. I don't know how steep that is but it is on an upward trend hopefully you saw the announcement this morning on the large commercial sale. The one we had a month and a half ago two months ago was again a commercial sale non-law enforcement. So we're seeing the expansion of not only the FleetVu and the in-car event recorder business, but the expansion of our body camera business into commercial uses, which is very exciting to us. We've got a great product there and that it lends itself to variety of applications and that's the beauty of our having our engineering team here, we can tailor the features and the body camera for whatever use a commercial customer might have been in store. So I see nothing but good things in terms of how steep that revenue increase will be. I can't tell you although I can see it happening as we speak.

Yes. Brian one of the things I mean apologize for having me so vague to you, but you know we did this and still feel it's important to continue to do it in certain markets. And I think I'm very comfortable in saying you know for instance in the ambulance business. We slowly set there and quietly went out there and established ourselves in that market and I feel now that we are clearly the number one in that industry. We have the majority of the top ambulance companies utilizing our in-car systems, our cloud storage, and case management that's available to them. And so some of these markets that we're in now we’re playing pretty close to our best, so that we could continue to get in there and dominate.

Understood. I know that makes sense. I get it. So let's talk about law enforcement – my last question and then I’ll get back in the queue. Obviously, it seems your competitive positioning has been hurt obviously by competitor statement, but maybe take us through what large city that had made some awards. What are they communicating to you either add award if they've briefed you or when you discuss the hands-free patent. Are they aware of it? Do they not care or just maybe give us a sense for what they're thinking is? Thank you.

Yes. That's a good question. As matter of fact I had a conversation earlier this morning with our attorneys just because I'd a feeling that some along this line would be obviously pop-up for us questioning. One of those things from the department's perspective their risk is somewhat minimal. If you look at the fact that you don't know that you really can go after them for any kind of damages. The only thing that you could do is for instance we utilized Taser and the auto activation devices once that they went ahead and bought that and we would end up happen to reap the rewards through the courts through Taser. But at the end of the day that municipality, Taser will no longer be allowed to support that product. And so I guess maybe if their product still stays in there and doesn't have any problems then it will be fine for a while, but that's the real risk they take. And I'm sure if they're smart they're going to have Taser indemnify them in regards to something happens early you guys agreed to buy it back or some like that. So it's one of those things that the big reward and the big well say payday for successful in our litigation and especially the patent infringement side will come from Taser directly. And it will also be one of those that the industry as well will be real clear and I noticed that you're buying or have bought a product that is no longer going to be serviced by Taser. And so you better go with those guys that have the technology and the rights to it. So they don't have as much at risk other than the fact that at the end of the day they may not be able to have that product serviced.

Understood. I’ll get back in queue with my other questions.

Thanks Brian.

Thank you. Your next question comes from the line of Bryan Lubitz with Aegis Capital.

Good morning, guys.

Good morning, Bryan.

All right. I want to kind of go on the tact of let's look at what's going on with the litigation with Taser, WatchGuard et cetera. Tom, you alluded to that you guys are kind of working on some different avenues with the attorneys to lower expenses moving forward. Is that something where you're switching – what you're paying for them in compensation? We're not holding back obviously in terms of subpoenas because that's moved forward. So where would you be able to cut expenses?

No, it's been more efficient if you will in the usage of the attorneys and their time and efforts. Believe me we're not slowing them down in terms of subpoenas, depositions, inquiries what have you. It's other ways that we're looking at that. More importantly on litigation expense, I think the biggest saving piece of that or biggest way to make that more efficient is on the utility matter. I mean we're fully briefed, it's in front of the judge, at this point we could hear summary judgment rulings any day now and that may end the deal. I mean if we are granted our summary judgment motion then it's pretty much a done deal, all expenses are off. If we don't, if this thing does go to trial, if the trial date is sometime in June of next year, so we're probably not going to see a lot of expenses in Q4 and Q1 in terms of the litigation or the expense related to the utility litigation. But the WatchGuard and Taser matters. They're virtually identical. I mean the patents that they're infringing are the same plus one for with WatchGuard that in addition of the ones Taser is so some of the work can be shared amongst that if you will and make that more efficient. So it's don't mistake that we're worse we're stopping or holding back on prosecuting the lawsuits for those guys.

Bryan, this is Stan. One thing in regards to you know realize that there are two different patterns in particularly that violation that were claiming against Taser, WatchGuard is actually three. WatchGuard - Taser for instance at a lot of the tradeshows and stuff like at a lot more secretive what they're up to here now they do quite a few things behind closed doors. So it's a little more challenging sometimes to get your arms around from Tom and I perspective of how there equipment properly works. WatchGuard made the mistake literally making a video and showing it to the world on how there works. And it's really evident on the areas that they're stepping on our patterns. So anyways we're very confident on both fronts - on the Taser front we've already started a lot of discovery and we have a lot of information that makes us feel confident and what we're doing. And in WatchGuard well the preliminary stuff is just get ready. The public stuff that they put out there is very damaging in there regards and makes us a confidence well.

Okay. So while we're still discussing the litigation part of it. These patents for both and two with Taser and three with WatchGuard. The two with Taser those are the two that in December of last year the USPTO up held the video correct?

Correct. Yes, they validated them.

Just wanted to make clear. Now that being said we - in your report here see that you guys had a favorable ruling. I'm required to discovery to commence on the business practices part. On the patent side Taser had moved if my memory is right to have the case dismissed and we’re denied. The judge has not yet ruled on the unfair business practices of whether or not Taser can have that thrown out or not? Am I correct?

Yes, you're correct on the patent side we're moving right along there with the motion to dismiss either wasn't filed or was ruled against on the patent piece that's moving forward regardless. The motion to dismiss is still outstanding on the corruption charges and unfair business charges. However, the most recent ruling was from the magistrate judge that allowed us pending the main judge, the main federal judge ruling on the motion to dismiss they allowed us to commence discovery. So that motion to dismissed still has not been ruled on it's ripe for ruling it should be ruled any time. I'm surprised it hasn't been, but in the meantime the magistrate judge has allowed us to go ahead and start discovery and we have we've served subpoenas on I think three cities at this point to get documents related to their discussions negotiations what have you with Taser.

Yes, there's a half dozen others that we're going after and individuals right as well.

Now I did some digging myself and I swore some of the information with the three cities that you've already sent out to. And that was sent out Tom am I write about two weeks ago they have 30 days to reply you much to get an extension.

Yes, I think they have 30 days from the day they are served and so which would be somewhat different when they went out.

Okay. So now that being said. If we start to see this discovery coming back and it's presented to the judge and or the magistrate and there is a ruling in regards to Taser’s summary judgment a dismissal motion for this part of the case and they're ruled against and we can commence. Is that something that we'll be able to see in the future is that something you guys could be [indiscernible]. I mean obviously that's something very positive for the company if we do wind up having another dismissal from them turned away.

Bryan that would be a big move in our favor. So we were absolutely make sure that everyone is aware of it if that's the way the courts come back. I mean basically are saying there's some teeth here to what Digital Ally has been claiming and we're going to move forward with it. And so that would be a big move will definitely let the world know about it.

Now how all these discovery requests you asking for financial documents and emails and bank records or is it limited to consulting conversations and once they actually in their name to.

Well, Bryan I don't know each and every request. But I would guess that it's very expansive. But I don't know specifically everything that's in there, I've seen, I've read it, it’s very long and it is in my estimation pretty expansive but from a legal perspective I can’t tell you.

Okay. And this will be my last one. I'll get back in queue. I want to give everyone a chance as well. The other day I wind up seeing something in regards to Seattle with their actual scores and showing the six guys that made it, you guys were one of them VIEVU and Taser and a couple of other names. And I was very perplexed after the fact because I see that even now Taser did not have the highest score VIEVU did and it's in their backyard. Taser still secure the contract. So what I'm questioning or what I'm wondering is, are you guys making a change in your shift to commercial based off of the fact that even if we have a better product even if the scores are higher and the fact that it, a relationship whether it's a stun gun or whatever it could wind up swaying. Is that the reason why you guys are moving more towards commercial? Is that really what the mix is going to be moving forward?

Bryan the original reasoning was to go that direction just because of the capital that's available and the commercial and consumer market versus what law enforcement has because as you may recall back to 2009 and 2010. I mean you were getting and the police officers laid off, let alone, thinking about getting new equipment. So it was mainly because of that. But I will tell you that there is some unusual politics seem to be going on around this industry and like you may have read there in New York where there Taser and VIEVU are talking about their lobbyists and the money they spent on lobbyists and again it's like, we still believe that you should have the best product, put it out there and let the products and the pricing and everything else speak for itself. The Seattle situation was sort of the unique deal we’re little bit unclear on how they win about their scoring and have requested them to explain that to us because our features are very in most all areas outperform a lot of our competition.

And yet they still gave it to Taser with not the highest score, so if I can button it up, to me if I’m looking from the outside and you guys are consistently facing whatever roadblocks in front of you relationship or sneer campaign, false press releases et cetera and Taser can still secure with having a lower score. To me I think that the shift at least from the outside looking in look smart because if a CEO from a company likes, if he can write a check tomorrow and he doesn't have to worry about going to a city council or politics or anything. Am I right?

Yes, right.

Bryan. This is Tom. Yes I think the lead time is much, much shorter generally there's not RFPs. I mean it's done on a purchase order basis and quite frankly when you're dealing with four profit agencies or four profit companies, you don't have all the crap. I mean they look at the best product and the best service and make a decision from that rather than all this other stuff that surrounds some of the law enforcement bidding.

Okay. Well I get back in the queue guys. Thank you very much.

Thank you Bryan.

Your next question comes from the line of William Gibson with ROTH Capital Partners.

Hi. On the contract you announced today and the move stand to more were recurring revenue. Are you being paid for the hardware upfront or you incurring that costs and make it up on a monthly basis.

So in this particular contract this is, we're making up more on a monthly basis. But there are contracts out there or packages that you will see that there will be some hardware cost associated with a contract as well. So it's you know what we try to do at the end the day is you know look at what we can do to assist the customer, what helps them and their needs. And the one thing about cloud storage and services that you provide if you do find yourself where you've been snookered in regards to a non-performance account. You could shut that cloud down fairly quick on them and then they come to the table pretty quick. Now, we've been very fortunate. We haven't had any of those issues to speak off, but Bill what you'll see in the future is it; it will be everything from strictly a lease situation to where they're going to – may just paying us monthly to where some will go ahead and do a more long-term deal where they're going to actually buy the contract and have a much smaller monthly fee.

Okay. Well, that makes sense. And then I want to – when you talk about commercial, I just wondered you said is not law enforcement so that gets – the body camera gets thrown into the commercial business?

Right. And again you have to realize I think approximately a third of our employees are engineers, so we're able to quickly tweak the product that meets their needs and features and also back office software designs. What's important to them? Is that their location? Are they spending three hours a day in this region as needed? What are some of the important features if we're able to configure our software to meet what their needs are?

Yes. Bill, this is Tom. The interesting thing I'll throw out there that the large contract we announced a month and a half, two months ago. Those are basically used by private security officers. The contract we announced today although there is a small piece of that having to do with private security or security type applications. These are for the employees of the enterprise, so it's really a shift in who is using it and how they're using it and why they're using it. And it's exciting to us to see the adoption or the adoption of our technology to those kind of uses because that's a huge potential addressable market for us.

Yes. Can you share the vertical, I am just curious on what kind of business everybody is walking around with a body camera?

Bill, we're going to be quiet on this for a while, really cannot knocking on those doors.

Well, how about the in-car cameras in the commercial business. Is that starting to accelerate or is it still tiny this year?

No, it's getting some traction as well. Again, quite excited about that. We've done a great job of implementing all the method data and global tracking, posted speed and a lot of driver behavior and training into the system level on the event recorder side of it in case there's an incident. It's getting quite a bit of traction and again the customers that we're seeing where we've installed units are seeing pretty remarkable decrease in accidents and complaints being filed, so we got a pretty good database of information when we're out there pitching other companies that makes a lot of sense just on an insurance side of things, that alone the fact that a liability side of things. So again, I think you will see some strong growth from the commercial side [technical difficulty] clear evidence of this, this quarter.

Okay, good. And then just one last question back to the litigation, so your expense savings so there's no shareware maybe the lawyers are working without billing and taking a percent of the payoff or risk there?

Yes. Bill, we're discussing everything, we're working this. Stan and I deal with this day in, day out and that's on the table although we haven't settled on anything yet, but absolutely we're looking at various ways to minimize and be more efficient and because we want to be there for the long run in this litigation because we believe there's going to be a happy ending for us.

Yes. And Bill that’s [technical difficulty] what are we looking at you know far as costs and time and you know how long this is really going to take to play out. And so there's a few real big hurdles that are becoming up here and I would say roughly the next 90 days. That will sort of could clearly dictate the direction of the swing.

Thank you.

Frank Giacalone with Aegis Capital.

Hey, guys.

Hi, Frank.

Hi, Frank.

Congratulations first of all on your contract keep up the good work and keep them coming guys. Good job.

Thank you.

Good. I see that your gross margins went from 28 initial up the 49.9 if I'm correct with that. My question is what’s your normal margins and where would you like him to be and what would margins be for you'd have them somewhere you guys would be breakeven or even profitable. Where is that breakpoint?

We believe 60% gross margins is attainable and we've actually exceeded that in the past. So there's no reason we can't hit 60%. And then furthermore and I think I mentioned in my remarks we're looking at some different [technical difficulty] dramatic effects on our gross margin to the positive side. So you know if we get to the serious 60% and I've seen. 60% plus if we're successful in some of the plans we have in our supply chain. I think 60% is low quite frankly with what we have on the drawing board. In terms of a breakeven gosh it's so hard with you know SG&A kind of blocks around and the pins on which business is generating that if it's a contract business and the service model or whether it's product sales and all that, but you know I've said in the past around $5 and $5.5 million was a good starting point. I think I stick by that if we get the $5 million and $5.5 million we're going to be very close if not positive EBITDA wise and perhaps net income wise.

Nice. Because the numbers that we’re going over that that seems about right. That's about where you will also be with can and the possibility which we can't wait to you guys get there and we can wait to the Taser litigation to move to the next step. Once we feel - once we hear the subpoenas taking effect and getting the information that we're hoping to hear. I'm very confident by a little bit more confident because you guys going through it somebody is looking out from the outside and I'm very confident that will come out really put a [so-called] upon these guys to make them move. So keep up the good work. Always a pleasure to hear you guys and can’t wait for next quarter. Good job.

Thank you. Frank.

Thank you. Your last question comes from the line of Ishfaque Faruk with WestPark Capital.

Hi. Quick question on the domestic revenues, your domestic revenues were quite down this quarter, but your international was fantastic. Is like the competitor’s press releases the only issue regarding the domestic revenues or is there something else?

No. There is couple of things. I think you're seeing the effects of us announcing the 800HD our high-definition in-car system and I think that had the effect of some of our customers saying well I'm going to wait and look at this thing. It sounds very good and if it's as good as I say, we'll move on it. So I think there was a delay in purchasing because of that. And then secondly I think some of this, some of this service work, we're moving people more to the cloud. Then we had previously in, so what happens then is you get the bookings, but you don't get the revenue until the months occur when they do the storage. So we’re looking at - it's been net out over 12, 36, 60 months that sort of thing. So I think it's a combination of that. We do see a pick up though in the package type business that we're doing where we package the FirstVU, the body worn camera and in the in-car systems with the patented VuLink, the auto activation system and when they're doing that it takes them longer to test it, pilot it, get comfortable with it, to make sure it works the way they think it is. So I think there's a combination of those three factors.

Okay. Yes, which leads to my second question regarding the software revenue, your software revenues were up significantly year-over-year, since you don't break it out separately what percentage of other revenues were from software?

The percentage of other revenues.

Yes.

Probably the majority of that, now there is a piece of that that is deferred revenue on warranty maintenance and extended warranties and that, but I'd say the majority of that is in fact service revenue.

The one of the things I will try to do on the next call is break out the reoccurring revenue. So that you can have a little sense of what we're looking at on a monthly basis from reoccurring that will help you model things. We will probably do that in our year end call, give you a little indication of where we're at and therefore you can – and at least maybe an average length of the contracts we now have in house and that will help you guys model a little bit.

Okay. I know you guys mentioned that your software revenues, the gross margins from them are really pretty high, if I'm not mistaken north of 80%. Are those margins in that line?

Yes. That's why I'm so pleased with the movement towards the cloud and to a service-based revenue stream.

Okay. Last question regarding the preliminary Taser discovery. What are some of your preliminary findings, I think you guys started on the discovery process. It's been a while. Do you have some updates on that?

Yes. Ish, I can't really get into the details about that also I can really continue to tell you is that we're very pleased with our findings and very confident in continuing our efforts to defend our patents.

All right. Thank you, guys.

Thanks Ish.

Thanks Ish. End of Q&A

Thank you. At this time I’d like to return the floor to management for closing remarks.

Again, I appreciate everybody's time today. I appreciate the questions, the interest in the Company and we will continue to do our best to keep you informed as major events occur whether it would be through contracts that we are successful in obtaining or through litigation as it continues to develop as well. So really appreciate everybody's interest. I don't believe will we have another call before the holiday season as become upon us. So enjoy it as well and we will be talking to you after the first year. Thank you all.

Thank you for your participation. This concludes today’s Digital Ally's third quarter 2016 operating results conference call. You may now disconnect.