Stan Ross - Chairman of the Board, President, Chief Executive Officer Tom Heckman - Chief Financial Officer, Vice President, Treasurer, Secretary

Brian Kinstlinger - Maxim Ishfaque Faruk - WestPark Capital Patrick McEvoy - ‎Canaccord Genuity Ira Thomas - Private Investor Bryan Lubitz - Aegis Capital

Good morning and welcome to the Digital Ally third quarter 2017 operating results conference call. All participants will be in a 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 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 risks and uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press releases we issued Tuesday evening and in greater detail in our Form 10-Q filed with the SEC under the caption Risk Factors. You may find this and our SEC filings on our website at www.digitalallyinc.com. Please note that 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.

Good morning everybody. Thanks for joining us today. We have quite a few areas to cover. I am going to touch on in the very beginning here our recent supply agreement that we signed with VieVU, which is a division of Safariland that I would like to elaborate a little bit on so you guys understand the significance of that. Also, we will talk about the reasoning that we retained ROTH Capital Partners to explore some strategic opportunities for us and how that came about. I will also give you an update on the litigation front and patent front as far as timing and elaborate on anticipated timing as well on when we expect to hear some rulings. And then Tom, I will it turn over to him so that he can handle the third quarter numbers. But let me start off with just saying that while I am excited about touching on these big events that have occurred for us since the last time we have talked, I do anticipate the news and the things that are going to be coming out of the Digital Ally camp between now and the next time we talk, which would be at the point where we would be a announcing our year-end numbers, to probably be one of the most active times that we will see. And that has a lot to do with stuff that's occurred, such as our supply agreement with VieVU. This is an agreement that we entered into after we were confident of the patent ruling that we received on the 452 patent, and we are very, very excited to partner up with these guys. They are very large. You may recognize VieVU as the ones that got the New York City contract. They recognize, and a matter of fact, we even stated publicly the value of our technology. Therefore, they also valued and respected the patents that were awarded as well and also were upheld in the Patent Office. So we entered into this agreement and the reason we are so excited about it is, VieVU is a great company. They have got a quality body camera and they have got a quality organization worldwide. We look at this as an opportunity not only to supply them with our VuLink product, but I can see us also partnering up with them on other opportunities as they do not have an in-car system. And if someone is looking for the complete package, we would be able to contribute to that side of the opportunity from that perspective, instead of just the auto activation device. So it's going to be exciting. We have already received the very first order of roughly 200 units that we expect try to get out here in the fourth quarter and as mentioned in the press release they are looking at approximately 10,000 units is what they will need to be acquiring from us to maintain the exclusivity over the next couple of years. They will have to do that each year. So it could really generate some real good revenue for us and additional opportunities. That being said, we announced our – let’s say our supply agreement right before the IACP, and that's the big International Association of Chiefs of Police Conference that virtually anybody and everybody shows up for it. It's clearly the largest law enforcement conference that we have every year. So we wanted to make sure and have the deal completed prior to that so that they could actually have our device in their booth and demonstrate it to their customers as they were walking by. That being said, recently and announced at the same time, there was an acquisition made of one of our competitors called COBAN. COBAN was acquired by a company that's not real familiar in the law side of things, but very active in school buses and other areas. So this was sort of their way of getting on into this particular sector. COBAN was represented by ROTH Capital Partners. Well, at the IACP, a lot of people were walking around wondering what is going on between us and VieVU, wondering how everything was going to stand with COBAN and some of the other companies that are out there. And there just seems to be a lot of buzz going on. And no more did I get back from the IACP and started receiving some phone calls of interest, and I won't go into all the details there, but they are anything from also trying to work with us and have a way to get involved in some ownership in our technologies or some of our patents to discussions that may include the complete purchase of the whole company. So it really was, you know, calls that covered a broad spectrum of opportunities. And so I am familiar with ROTH Capital. I know they represented COBAN. I know the CEO, the former CEO of COBAN, and he spoke very highly of them and how the situation worked out for them. So I visited with them, told what we were going on -- was happening. I disclosed this to our Board of Directors and felt that it was necessary to go ahead and actually retain them. So while the supply agreement was done in late October, the COBAN -- we went ahead and retained ROTH Capital on November 8. And so it's real early in the process, and so we probably won't elaborate a whole lot more on it other than I think because there were a lot of companies that are out there were not successful in the acquisition of COBAN, that maybe this was what really sparked it, that they still have a level of interest in getting involved. So that's probably how it all came about. That being said, as things do develop and they are worthy of sharing, we will definitely be sending out a press release and/or I guess we will have to have a call or something along those lines. All right. So now, let's talk a little about litigation and timing of events. After we got the successful ruling from the Patent Office, one of the requirements was us to get back in touch with the courts and tell them the outcome. And obviously the 452 was a very positive outcome to where the Patent Office would not even allow them the ability to get in front of the panel because they felt like they did not have a chance of proving the invalidity of the patent. So that being said, we contacted the courts. The court set up a time in which both parties were called in. We obviously started lobbying for the stay to be lifted so that we could start moving forward on the litigation and proving of damages of TASER, at least in this particular case, or Axon now as they go by violating our patents and we feel that they violated them and they have reaped a lot of benefits from them. So that call occurred. The judge gave us both 10 days and 10 pages to submit why the stay should be lifted and they submit why it should not. And then there was 10 days and 10 pages to rebuttal each other's filings. After that, that was actually filed on October 12, and so it's been just a little over 30 days since it's been in front of the judge. With that being said, we are optimistic that and I know that for a lot of people, 30 days seems like a long time, it sure does where we are sitting, but I think we are hopeful to hear something any day in regards to the ruling and in regards to the stay. Now if the stay doesn't get lifted, that's only because they may be able to try to wait until the panel addresses the 292 patent, but as we have mentioned in our previous call, it's our intention to go ahead and pull the 292 portion of the litigation out of the TASER litigation and just stay focused on the 452. And that way, we still believe that 90% of our damages will still come from the patents, from the 452 patent. So we are hopeful that occurs fairly soon. In regards to the 292 and the timing, that's coming up on us as well as far as the panel. Right now, TASER is supposed to reply, submit a reply to our opposition briefing that we submitted already to the Patent Office and then we get a chance to respond to that which will, their response will be due by November 28, our response is December 22 and then it is set for February 2 for oral arguments to occur. Now again, that's just on the 292 that we are talking about. It has nothing to do with the other patents. There is one other patent that's out there that we received that is the 950 patent. And the 950 patent is a patent that we have named in our lawsuit against WatchGuard. And for those of you that are not familiar with WatchGuard, they just filed an S1. They plan to go public. It looks like their numbers have been running at about, I am going to say, $90 million to $100 million run rate. They are a nice quality company. Anyways, all that being said, they have clearly been one of them two that has violated the patent. So we have both the 292, the 452 and the 950 patent named in that particular lawsuit. So they are trying to oppose the 950 patent and we anticipate hearing by December 6, whether or not they are going to get an opportunity to be in front of the panel or not. In other words, is it going to turn out to be like the 292 where the panel is going to listen to oral arguments or is it going to be like the 452 to where they are going to say, just not enough evidence that you have shot at overturning this, therefore we are throwing it out. Again, let me tell right now that we have got a lot of events that are going to be happening before we are able to have our next call with you all. So as for the timing of what we have going on on there and as soon as we have some indications of any of those events, we will be getting a press release. Tom, I am going to let you touch on the third quarter results and then we will do some Q&A.

Sure. Thank you Stan and welcome everyone. I appreciate you us this morning. I would like to remind you that we did file our Form 10-Q yesterday evening and it is a full discussion of the events of the third quarter and year-to-date and I encourage you to go ahead and look through that for a full discussion. I will be hitting some of the highlights here and discussing some of the major issues or events that occurred to us in the third quarter that I think would be appropriate to discuss. First of all, I guess the third quarter was a difficult quarter for us, no doubt about it. I think it was really overshadowed by four substantial matters or issues that affected not only the third quarter, but in my opinion will dictate the fourth quarter and potentially even 2018 where the company has and that the benefits of resolving these issues. These four issues, I am not going to more detail about each one of these, but the first one is really the AMR contract and the halt in shipments that occurred in the second quarter. that affected the third quarter. The patent litigation which Stan has already discussed a little bit and really my comments on is more towards the high litigation and legal cost that we are incurring. Third is the market disruption that Axon has created because of their one-year free giveaway campaign. I want to talk about the impact of that to our quarter and how we plan on dealing with that on a go forward basis. And then fourth, I think the monetization of our VuLink patent, how it's our strategy to do that and how successful we are with that will be a major contributor to our fourth quarter as well as 2018 operating results. So first of all, let's look more deeply at the AMR contract. As you might be aware, we were awarded that contract in January 2017. At that time, it was the largest commercial contract in our history. We did have at least one or two other law contracts that were larger than that. But certainly this was our largest commercial contract by far in our history. The contract was a three-year total deployment of 6,500 ambulances, which was at that time, the full fleet of AMR ambulances and covered about $8.3 million in revenue over those three years at a minimum. The 2017 deployment of that was approximately 1,550 vehicles and about little over $2 million in total revenue. The contract included a large component of service revenues. And by service revenues, I include the installation cost, which is primarily labor, the FleetVu monitoring which is a monthly pay as well as the ATUs, which is asset tracking units were involved in that contract and that would be a hardware sales upfront as well as service revenue on a monthly basis after that. We installed approximately 500 of those units year-to-date into June. But we did not get them fully connected. Some the ATUs were not available to us from our supplier. So we had to back order those. So the ATU piece did not, for most of those 500 units, get installed at that time. Unfortunately and as we previously reported to you, in early June there was an accident in Jupiter, Florida, involving one of AMRs ambulances that had one of our systems in it. It was a catastrophic accident caused by a drunk driver, no doubt about that. Eyewitnesses, the man that caused the accident was charged with vehicular manslaughter and one of an illegal alien on an immigration hold as well. So clearly, the cause of the accident was not AMR or in any way related to our product. Unfortunately, although we recorded almost $1.3 million incidences in the ARM ambulances over, we have the contract or had various portions of the contract for six years. Our camera did not record that incident, for whatever reason and you know we would only be guessing if we told you why it did not. It was a catastrophic accident. There was damage to the unit and we suspect that had something to do with it, if not the complete the reason for it. So anyway at that point, although we previously recorded so many videos without incident or very few incidents, AMR looked at it and halted the contract and the shipments at that time, understandably so. I mean it was a catastrophic event. Two paramedics died in that accident and they wanted to understand that more. And that was in early June and if you recall about that time we had two or three hurricanes come through and AMR had this FEMA contract. So they were undistracted with that. They also have the AMR service contract for the city of Las Vegas and we all know what happened in Las Vegas during that time period. And then thirdly AMR was sold by their parent to a group including KKR. So there was a lot of distraction, a lot of other events. So for a lot of reasons, there wasn't a lot of dialogue between the parties for quite some time. Then finally in late Q3, we were able to engage with them and we had a very frank discussion obviously and they stated their concerns. We stated ours. And quite frankly, coming from that event until recently, I was resolved with the fact that we probably have to involve attorneys and maybe a court case to enforce our open POs. but the situation has been fluid. In the last week or two, there has been a lot of dialogue, discussion, attempts at resolution and again it's a very fluid situation. I think and I am hopeful that we are headed towards a reasonable resolution of the situation to the extent where we can partially at least restart the contract here in the fourth quarter and then based upon how things go between now and then, then obviously in the second quarter or maybe even late first quarter be able to start the deliveries again under the contract, the open PO. So I am hopeful that happens. We have got a long way to go to get that papered up and all parties agreed. But at least there is dialogue going on and it's a positive dialogue at this point, although that obviously doesn't mean that things will get all resolved in the near term. But I am very encouraged by what's been happening in the last week or so. The halt to that contract, if we go through that, we had roughly $2 million of revenue expectations in 2017. We delivered almost a third of that. So our shortfall in revenue from that contract alone, the halting of that contract was in the $1.3 million, $1.4 million neighborhood. So it was a significant impact that landed squarely in the third quarter and obviously had a big impact on our revenues. And it was a big factor on our underrun on revenues. Now, we will tell you that the service piece of this also affected us because we weren't able to get the ATUs in place. So even our service revenues declined a little bit year-over-year, primarily because we did not get the service revenue off of the AMR contract. So it did have a very big effect on us in the third quarter. But we are very hopeful that we are on a path to resolution and think that get that thing started sometime in the fourth quarter or restart in the fourth quarter. The high legal expenses on the patent. I think Stan did a great job of describing where we are at. Unfortunately the legal expenses will continue at elevated levels. I don't see that slowing down, at least for the near-term or at least until earlier or even mid-2018. But I will reiterate that we won all the IPRs on the 452 patent which is the bulk of the damages involved in the Axon/TASER litigation. So we won the validity piece of this, at least in the view the Patent Office, which I think is controlling in this instance. So if we are able to get the court to move and lift the stay and move forward on the Axon litigation, I am very, very confident that we will have a very good outcome from that. Now that doesn't mean there won't be appeals and a lot of legal maneuvering between now and then. But by and large, the validity of the 452 patent has been established by the Patent Office and there is no two ways around that. So we have sued them for willful infringement, which carries treble damages. So you can add up your own damages in that regard. Let's go on to Axon, the disruption that's caused by the one-year free offer. If you guys aren't aware, earlier this year Axon came out with a one-year free trial, if you will, of their body cameras as well as their evidence.com system. Obviously, that was appealing to the U.S. domestic law enforcement market. It had a significant impact on our domestic U.S. sales. Our FirstVu body camera revenues dropped from 22% of total sales in the third quarter of 2016 to 12% of total sales in 2017. So I attribute that primarily to that, as well as some of misinformation going on in the market about our VuLink patent. So obviously we don't have a balance sheet to give away products such as Axon, but I hope you guys take a look at their financials as well on a quarterly basis. They lost a ton of money in the third quarter primarily because of this as well as other R&D efforts in the body camera area. Our strategy go forward to combat the Axon disruption. First of all, we compete daily in the international law market. Quite frankly, we have got as good or maybe even better of a distributor network internationally as does TASER. We have got some very, very good distributors out there and they are up able to get us in front of international law agencies and we feel confident that we will be able to get some wins internationally and be able to combat that. We also are utilizing body cameras in lateral markets. I think we have already discussed the cruise ship lines and also the medical and that's a natural for us because we do have such a dominant position in the ambulance market. It's a natural for us to go into the medical side as well. Also private security is a prime example of a market that we are very strong in and we are going to focus on that Axon really is not because of products not developed with the private security market in mind. Thirdly, we will fully prosecute and monetize our patent. In a perverse way, the giveaway of product that Axon is doing now is increasing our damages from the standpoint that when they are doing this, the promise is that they will be able to upgrade to auto activation. And that is squarely are our patents territory. So in a perverse way, they are giving away the product and hopefully it results in higher damages when and if we get in front of the jury in this matter. Okay. The next thing, we need to monetize the VuLink patent. And I think Stan discussed the VieVU contract, the exclusive distribution contract in detail before. That's one of our big moves from that standpoint. But secondly, we will continue to prosecute this patent litigation. The auto activation technology that's embodied in the VuLink patent and our VuLink product is really standard in the industry now. There is very few RFPs coming out from law agencies that do not inquire or require auto activation technology. So it's standard for the market. So the best thing we can do to monetize our VuLink patent is to continue to prosecute fully the patent litigation between us and Axon and us and WatchGuard and there will be others potentially on that list as well because it is pretty much a standard feature for the industry right now. On a go forward basis here, here is the revenue streams which we believe can be very, very substantial for us even in 2018. We do have direct sales of the VuLink. That's a fertile market for us. The indirect sales through the VieVU distribution channel, now again the minimum required units to maintain their exclusive distribution status is 10,000 units for calendar year 2018. That is an enormous source of revenue for us and substantial. And then obviously the infringement damage awards from both Axon and WatchGuard, we are hopeful that that happens in 2018 with the court situation and being able to predict court activities and certainly timelines is a very, very difficult subject. But hopefully, that comes to a head and is resolved in 2018. And obviously, we are hopeful of large damage awards because of the willful infringement both of those entities have perpetrated here. And then after the core acts on the infringement litigation, then afterwards we can grant additional licenses or actually gain injunctions from others selling auto activation. So we obviously have some very important and big tools in which to work with to monetize the VuLink patent after that. I just want to emphasize that the revenue stream is potentially very huge from this VuLink patent and we intend to fully monetize that. Okay. So the major issues we just talked about will have effects on the fourth quarter of 2017 as well as 2018. But we do understand, we still have to tend to our current business and move our business forward in a proper manner. In that regard, revenues. We have to increase our revenue. We were right at $3 million in revenues for the third quarter. Obviously that's not a breakeven level for us but if you look forward, if we can get the AMR contract restarted, that's a significant source of new revenues in the future, certainly in 2018, if not fourth quarter 2017. The revenue stream from the VuLink patents as well as the distribution agreement with VieVU, again we are looking at delivering roughly 200 units in the fourth quarter. So we will have a little bit of an impact in the fourth quarter, but 10,000 units in 2018 is the minimum that will have a substantial impact on revenues on a go forward basis. We continue to focus on growing our commercial markets and by that I mean also the service component of our revenues in the FleetVu monitoring software, the cloud-based monitoring software as well as the ATUs, asset tracking units. Our gross margins have been under pressure. We have had product issues in the past. We think those are behind us. What's hitting us now, I think more is the ups and downs in our revenues and it's hard to plan headcount and production rates when our revenues gyrate and move around between quarters. So what we are work trying to do at this point is to move more and more of our manufacturing out to third parties. So we can minimize our workforce from that standpoint. We will never be able to get it down to zero, but we can certainly be more efficient if we were able to move some of the more involved manufacturing to third parties. Again the service revenue component, as that increases that will have a big impact, favorable impact on our gross margins. It will certainly improve our gross margins since we have already developed the cloud-based software whether it be FleetVu or VuVault.com. So the service revenues will be at high margins in the future. So we hope that helps us with the gross margin aspects. All-in-all, Q3 was very difficult but we believe that if we are able to successfully deal with those four or five matters that we talked about earlier today in my session here, it will have a very favorable impact on Q4 and on into 2018. So I will turn this back over to Stan.

Yes. Thanks Tom. Some of the things that we have done, I probably want to touch on them, but even some of the things that we talked about as far as being able to move some of the heavier lifting for some of the manufacturing to re-qualify manufacturers that are here in the Midwest. We are looking at probably a reduction of SG&A expense of right about $3.5 million for 2018. So that will be a dramatic improvement that should help us as far as the 2018 and going forward there. So all right, let's go ahead and open this up for Q&A.

[Operator Instructions]. Your first question comes from the line of Brian Kinstlinger with Maxim.

Great. Thanks. My first question, you addressed that cost side of the business, but given where cash is, at the end of your press release you announced potentially raising more funds. So maybe just talk about that as your cash balance is quite low, and I don't assume you will be generating cash flow in the next couple of quarters?

Brian, are you talking about talking about in the press release in regards to ROTH Capital Partners?

Yes. And I think even at the end of the -- that one was one for sure. I think maybe even at the end of last night's press release, you may have said something similar. So I am just curious, plans of financing operations? Why are those two the alternatives and burn a little bit of money at the same time?

Got you. So again, we have been approached by numerous parties that have wanted to get involved in maybe assisting in capital, in capital such as that's needed to assist with litigation and other matters. So again right now, what we are doing is just continuing to keep blinders on and trying to do what we can do to improve the underlying business. And we will wait and see what ROTH comes back with and what options that they think we have to look at and explore.

Then I think you talked, Stan, in the past in April when it was first announced, Axon's move to 1-year free, it wouldn't have a big impact on sales because they were already essentially giving away body cameras in lieu of the recurring subscription. And I think you had mentioned also, you were moving a little bit away from law enforcement. So as you guys mentioned, this is a disappointment in 3Q, can you touch on the impacts? So maybe let’s take a look at what first quarter revenues from body cameras as a percentage were and second quarter’s and what's changed that made you think it's having more of an impact than maybe you originally would have thought?

Well, the percentage of revenue year-over-year went from 22%, down to 12%. So we lost almost half of the overall revenue mix year-over-year, and it's been a steady decline since they announced this one-year free giveaway, if you will. But again, that's the U.S. domestic market, law enforcement market. We are focusing more on the international law market and the domestic commercial or other uses of our body cameras, especially given the back office tailoring that we can do for specific industries, a la the cruise ship industry. We have also got several other products for specific uses in the mix that utilizes our FirstVu. So we are moving away from the domestic U.S. market as our primary source for FirstVu sales, body camera sales, and more into the domestic commercial marketing.

Yes. Brian, to give you an example, like obviously AMR was a great start for us with in-car systems, but you know there is clearly incidences and needs for what paramedics are doing outside of the vehicles when they are going into different locations and stuff like that, so we see the potential market there as well. And as I think we mentioned on the last call, while AMR was a great contract, we do have some unique pilots and other projects going on that are comparable or larger in size. So as I have stated in the past, we do see and do believe that our commercial division has a real shot of surpassing law enforcement in 2018.

So just to be clear, the 12% of revenue, is that U.S. sales of body cameras? Or is that total sales of body cameras?

That's 12% of our total revenues.

Total body cameras. So what was that number in the first quarter and the second quarter of this year?

I don't have that specifically in front of me, but it's been a steady decline since they’ve done that.

But that's my point. Is year-over-year is necessarily a view, I mean I am curious. Did it start happening in April or was the first quarter already off to a low start?

Well, I think you could tie some of it back to when the stay was announced, because again it continued to allow the industry to go out there and our competitors to go out there and state that, oh, you know, Digital Ally's patent isn't going to stand up, it doesn't have any meat to it. And so, I think that's really when we started seeing it, let alone part of their campaign. So it did start a little bit in the late first quarter of last year – or this year.

Okay. Can you comment on the price the VieVU is paying for each device? I mean, you mentioned the word huge twice. But even if I assume $100 per device, that's $1 million next year. So maybe that $100 price tag is way too low. But I am just trying to understand what this contribution might be for 10,000 devices?

So let me state it this way. We retail that out at $495, okay. Obviously, the quantities that they are buying, we greatly discounted that to them.

Okay. And then if you could take us through the thought process of giving an exclusive to VieVU, you mentioned in monetizing the patents potentially licensing it to others. But how would that work given VieVU has an exclusive agreement?

So what we are looking at is, is they have got an exclusive agreement when it pertains to the law enforcement side of things, okay. And if you are looking at the fact that it's 10,000 units and we start saying, okay, well, it's a pretty good number, but on top of that if we were able to maybe get 20%, 30% of our in-car systems associated with that number, it becomes a really big number. And again they are very large. I mean if you just look at the fact that they got the New York contract, that could be 40,000 to 50,000 units just right there as far as body camera. And most likely, they are going to be an auto activation device associated with every one of those body cameras.

Yes. Just as a matter background, VieVU as it sits today does not offer an in-car system. So we are hopeful that with them offering our VuLink with their body camera, a natural is for them to package our in-car systems with that offering. And quite often, RFPs come out as packages that include both body cameras and in-car systems. And you couple that with the fact that VieVU is owned by Safariland and I understand not a lot of people know who Safariland is, but they are huge. My understanding is that they are $2 billion.

Two-and-a-half times size TASER is my understanding.

Yes. They have a heavy presence in military and they have an international worldwide selling organization. So that's really the allure of looking at VieVU. They are obviously a very well-backed company financially and managerially being part of Safariland. They need in-car systems to compete for package contracts and then have an enormous worldwide sales organization, not only in an law enforcement but military and also commercial. So it was a natural fit for us that we thought made a lot of sense.

Okay. Last question I have got is, can you talk about the price paid for COBAN and what their annual revenue is so we see the valuation that they --

Yes. Brian. I tried to get that out of them. They would not give me that number. I tried. But yes, sorry.

Okay. Thanks.

Thank you Brian.

Your next question comes from the line of Ishfaque Faruk with WestPark Capital.

Hi. Good morning Stan and Tom.

Good morning Ish.

Okay. In terms of contract with VieVU, in the previous quarter you mentioned the price per unit and you gave a little bit of color. Is it going to be based on a price per unit? Or is it going to be based on a percentage of sales? What are the economics in terms of the contract needs?

It's clearly based upon units. They have to acquire 10,000 units.

And you mentioned that you are greatly discounting that. So is it like 20%, 30%, 40% discount to your current retail price? Or what's the --

Yes. I sure can hear you go. With all that said, we normally on single sale in a single unit, we retail it at $495. And we needed to discount it greatly so that they can put it in their mix, have a little wiggle room themselves to recover and make a little money. At the same time, really be in a position to sell the body cameras as well. So that's all I can really tell you at this point.

Okay. Well, in terms of your preliminary conversations with your M&A advisor, do you have a sense for which direction you guys are leading towards?

We do not. What I did is, a couple of the people that had contacted me, I shared with them and these are parties that there are already familiar with because they were part of the interest and process, let's say, that looked at COBAN. Since then and knowing what's going on and the timing, which the timings getting mirrored in regards to potential things that could be occurring on the litigation front, I think that is what really started sparking things to get moving. So what I have done is try to stay out of it at this point until there has been enough time for it to run its course. Like I said, we only retained them back November 8. So it has -- what are we looking at? Just over a week almost, about a week. So anyway, all the ones that have contact me directly, I have forwarded out to ROTH and I am sure we will have an update almost weekly on what's going on and what they are asking of us.

Okay. What's your current your near term view on your litigation? Do you have some sense on where you could get something more conclusive? Because it has been running, it has been getting stretched for like almost a year now, right?

Yes. I mean, correct. I mean, I think the last stay got put in place in March of this year. And the Patent Office came back and ruled in our favor. We have obviously got back in front of the courts. We both submitted our paperwork. And so I am anticipating that we are real close because I know the courts now, they didn't give us much of a timeline. They said, you get 10 days and 10 pages and then you have got 10 days and 10 pages for rebuttal. And so that was a rather quick turn that they are requesting of us. So I would hope that and as we requested for this to be expedited that is what's happening and they are going to look at it and rule to move forward rather quickly. We have already said, hey, we will pull the 292 out of that. We won't even consider the damages on the 292. And so it makes it a lot simpler and clear for the courts to just evaluate the 452 patent. So yes, I mean it could happen today. I just don't know. But it's been 30 days and I would hope something rather quickly.

Okay. In terms of the AMR contract, so you guys are still not up and running for that contract as of yet. But are you guys going to be, like you know in Q4, I do think that contract will start generating revenue again?

Well, this is Tom. I will tell you that this is a very fluid situation and up until about a week or so ago, I really expected that we would have to go to court to enforce the PO's that are outstanding. But there has been a lot of dialogue, a lot of constructive dialogue in the last seven to 10 days that encourage me that we can get this resolved amicably between the parties and that we can restart at least a portion of the contract in the fourth quarter. Now that being said, it takes two parties to agree and move forward. We certainly don't have that affirmative answer yet but the dialogue is very encouraging. Or at least the recent dialogue is very encouraging that they understand the importance of video in their ambulances and what we provide and we can get the thing going. Just as a side, we have had a six-year relationship or seven-year relationship with AMR and like I said, we recorded over 1.3 million videos of incidences and just last week there was a major collision with one of the ambulances that our system caught perfectly. So you know, it's unfortunate what happened out in Jupiter, Florida. We don't know what the cause of it was or what the real reason for the unit not to have recorded that incident. But I think they are looking at the larger picture. We are looking at the larger picture as well. And admit that willing parties can get to a real resolution.

Yes. It's Stan again. We could be speculating a little bit here but obviously they know that this unit is not a black box like it hitting an airplane and that particular incident was a very violent crash. But with the hurricanes, with their acquisition, there are probably a lot of moving parts for the delay but we have had a great relationship. We look to try to continue that relationship. And what Tom said, there is real fluid dialogue going on right now.

All right. Thank you guys.

Thank you.

Your next question comes from the line of Patrick McEvoy.

Yes. Hello.

Hi Patrick.

Hi. How are you doing today?

Doing real good. Yourself?

Yes, not bad. I just have two quick questions. One is, I don't know as though I heard anything from you guys in a while about the utility stuff. And if there was ever a resolution to what was going on with them?

Utility, the litigation?

Right.

I have seen something just the other day, I don't know if I can talk about the timing.

Yes. We have appealed that ruling from the federal district court judge and the oral arguments on that appeal is sometime in January 2018. So I want to say the 16th, but that may or may not be right. But the hearing, the appeal hearing is coming very, very soon in calendar year 2018.

Okay. So it is still an ongoing process.

Correct.

Yes.

Right. Okay. My other question is, Axon just announced like a week ago that they finally are installing their in-car fleet video systems and the press release mentions Fort Worth and Louisiana and New Orleans and that specifically mentions Axon's signal technology as well in the press release. Do you guys think this is going to have any major effect on the in-car stuff that you guys are --?

This is exactly why we are so frustrated. We have got a technology. We own a patent. We have got a patent that's been challenged in the Patent Office numerous times and we have been successful in defending it. And now we are just waiting on the courts to allow us the ability to, I guess, stand behind them. The majority of our new designs are going to be and are utilizing this patented technology. And until the courts, I hate to say it, wake up and address this, TASER and WatchGuard is just going to try to walk all over us. So then hope they get their hands slapped, in the meanwhile they have drummed up enough business that it doesn't hurt too bad. So we will make sure and do a masterful job of explaining the damages that have occurred and the damages that will be going forward because these contracts, most of them are like five years, but hate to say that, if someone has already got five years worth of video, they are probably going to go to another five years. So it's not just short term damages. So we will be pushing for a big number.

Does that mean that you could maybe push to say that you get an ongoing revenue from the contract that they have that were made before winning the litigation?

Exactly. So absolutely.

Yes. Patrick, the question of willful infringement, I think has already been answered. We know that they are willfully infringing and if that's found, whatever actual damages are generally trebled can be trebled in the award. So yes, I mean it's unfortunate that we have got to defend our patent to the Nth degree and allow this to occur. But we are powerless until the court acts. And we believe that the court will act soon and in our favor. And when that happens, I think the course has been set.

Right. Okay. Thank you.

Thank you.

Your next question comes from the line of Ira Thomas.

Hello.

Hi Ira.

Hi. How are you doing? You know, I am a long time investor. I was buying this three-plus years ago when the stock was moving up to $15 and $20 and buying it and hey, I may sound like I am an antagonist, but my voicing question is the last sure thing, I want obviously, I like stock at $15. But ever since I started listening to the calls, this is probably the 12th quarter in a row, it's like a tape recorder. It's everyone, same thing, we missed our predictions. We missed their sales thing in this. And I said to you three years ago, it's the only other time they took one of my calls, this is only the second time, even though I have listened to everyone and tried to get in. I told you that I was a litigator and I said to you, hey, it's nice as a, I am trying to think of superfluous, whatever an extra, an aside money from patents. But I told you my experience is, hey, let's not base the company on our host of patents. Let's worry about sales. And always heard cream rises to the top and this company has always touted itself as having the best product. So I go, I can tell other people and friends, buy this stock, they got the best product. I am taken to understand to worry but I also worry for what it is. And I listened to this for three years about TASER and Axon and what you are doing with the other company, if we have got the best product, why have the sales for 12, 13 straight quarters just continued to just like go away like nonexistent almost. What's out there and I hear the fact that again I have never understood the reason every quarter talking about the confusion, that shouldn't stop somebody from buying our product. It should stop them from buying someone else's because certainly the other companies are not claiming they have got the patent. They are just claiming that we don't have a patent that they can sell theirs. I have never understood how that's affecting our ability to sell the Digital Ally product, because there is confusion whether there is patent or not. Again, if our products are best, why haven't the salesman been able to sell this for the last three years?

Yes. There is a couple of ways to address that. One is, as you know earlier on, we got into a situation with TASER and it's very, very well documented in regards to the amount of police officers that have bid on their payroll or contributions or things along those lines that it just doesn't make sense. We have had situations where our sales reps would come back and say, they are just frustrated, TASER got the contract. Why did they get the contact? Don't know? But the chief loved it, the chief loved it, everyone said they loved it. We are moving forward on it. I absolutely felt we had it. And then all of a sudden from up above or from another angle, they decide to go with TASER and I can also show you where there are municipalities out there and you can do your own homework and see that there is a lot of complaints that have been out there by local departments and other, I want to say, people that didn't looking into the fairness of how some of the contracts were awarded. And so going from there, I give you an example where we had a bit of right at a little over $600,000 on a particular bid and TASER comes in that $1.4 million and it just doesn't make any sense. But some of the things that TASER is capable of doing that we are not at this point is they are throwing other items into the mix. You know they are throwing in some of their TASERs and their cartridges other things trying to, again look at their numbers. They are buying the business and hoping that at the end of the day that they get enough people signed up, their hand gets barely slapped that this strategy worked for them. So we still feel very, very confident we have got a very solid product. We provide a five-year warranty on the product, we are so confident in it. The specs with our product are very high quality to where we have got to be one of the leaders in the industry as far as the quality of product. So it has to just to be some of the, I don't know, I won't call it strong arming, but some of the things just don't make any financial sense at all why they went some of the routes with some of these department.

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

Good morning guys.

Good morning Bryan.

In regards to the 10,000 body cameras for Safariland, is that the largest contract you guys have ever had for body cameras?

Well, this is for the viewing. It is certainly the largest for viewing.

Yes. Certainly for viewing, for sure.

Okay. So when you say you retail it at $495, but obviously you guys discounted it heavily. It's not like we gave it away for free, like what TASER is doing. Can you give me an idea of what the retail is for the entire system, the in-car dash, the VuLink, the body cameras, the works?

So it would depend a little bit on which in-car system that you went with. But you know, we can set in their pack each a body camera, a nice in-car system like or DVM 800 and also the VuLink product. It can come in, depending on quantities, anywhere from, if the quantities are large, we can get down to around $4,000 and they will have a complete system with all the everything that they would need. But smaller quantities, they could see it as high as $4,700.

So between $4,000 and $4700. And typically when you package that together, what are your gross margins? Are you guys at 40%? Do you have 50%?

A package like that, we would hit 60%.

60%. Okay. And then obviously that's before heavily discounting it. So where I am going is, if you guys have signed up with Safariland and you have this exclusive contract, yet they don't have that other part in their array to sell, you guys feel confident that that's something that could be a potential moving forward.

Yes, absolutely. I mean these guys have been great to work with. They approached us over a year ago inquiring about our VuLink and our VuLink technology. And I don't know if I have ever told you this or said it on a call, but one of the principles there at VieVU, his wife is a patent attorney and they looked into it and they felt that it had a lot of strength behind it. And therefore they decided not to try to walk all over and run the risk like TASER and WatchGuard are doing.

Okay. So now in regards to the 10,000 units per year, your press release also states that it will be increasing each year. Is that based upon how they do in the first year? Or is that something that's already been put down in a contract? Do we know what that is going to be that increase?

Yes. We know what the increase is. It's a dollar amount.

In terms of the amount of units, does that increase or just the dollar amount we take home?

Dollar amount we take home.

Okay. Now in regards to obviously the litigation with TASER. This case, if you make it that from the first day they put out a press release stating that you guys had your patents invalidated, that they have been working on infringing from that point, am I right, have they sold about $240 million worth of revenue on these body cameras they are giving free?

Tom studied the numbers more than I but they claim to have booked over $600 million in potential business.

Maybe even more.

Yes.

Okay.

And remember Bryan that this thing was all started after we got our patent issued in, I think it was, 2014. Later that year, they came out and filed an IPR challenge against that patent. So it wouldn't be just from the time that we sued him or anything. It would be all we back to then that they knew they were willfully infringing because they tried to invalidate it back then. So yes. And that $600 million figure is their total of bookings, they call it, which is the total length of the contract, the hardware cost, the service cost that they are charging and that was, I think, in the last quarter. I am sure it's maybe $100 million more now.

And I think I said this before on the call that when they look at the way they look at damages, they look at the all encompasses of a package. So in other words, if they won a $5 million package and auto activation that was part of that or the potential upgrade to that was part of it, then that whole $5 million that gets looked at as far as damages.

Well, okay. So that being said, as you guys know I have been on these calls for a long time. I know I was upset and I know Maxim and WestPark may be a little upset because they didn't get the deal ROTH got. That being said, $600 million and I am trying to help them in asking for the revenue and the damages, et cetera., $600 million, let's say your average royalty contract in the electronic space is 20%. Let's just call it for what it is, let's go even more conservative and say 10%. You guys are looking at before treble damages of roughly $60 million, if they were to compute it that way in terms of potential damages TASERs way before treble damages. Does that sound right?

You ran your numbers correctly. And I would sit there and say that in the industry, it can easily be as high as 35%.

Okay.

So the number is all over the board.

I don't want to step on you. But I also want to make sure that I don't get cut off from the operator. So those numbers, well, whatever it be, it is roughly four times your market cap of where you are on a very conservative basis. Now, WatchGuard just filed for an IPO. And am I right in assuming that when they released their revenues, they did a lot more in revenue than we had expected?

Yes. They have built quite a little company. So like you said, this year they are on a run rate of somewhere around $90 million to maybe $100 million. And I think last year, they showed on their books, I think it was right at $70 million. So again, there you go back to just start adding up there. And that's what they are showing as revenue. That's not showing or talking about what they may have booked in ongoing services.

So Stan, you are looking at what? Over $100 million in damages before treble damages? And just for everyone that doesn't know what treble damage is, it's three times the damage amount, correct?

It's a big number, Bryan.

All right. So that being said and this would be my last question. Obviously, a bunch of guys or companies were in on the COBAN deal that didn't get what they were looking for at outbid, whatever and a handful of them or however many of them are contacting Digital for potential buyout or exploring strategic opportunities. Taking into account that you have potentially $100 million in money minimum coming your way, I think you are tracking a lot more, do you guys have a number in mind that you are thinking about? Will you guys, if they are bidding for you, that you drop that number that you would look for if they were to come knocking?

Yes. We haven't discussed. It's just too early. We haven't discussed anything along those lines and haven't gotten any feedback from ROTH yet on what everyone's thinking yet.

Yes. It's has only been a week.

Obviously.

All right. Well, listen, good luck to you guys. I hope everything works out with ROTH and we will be eagerly awaiting the results

Thanks Bryan.

Thank you.

There are currently no further questions in queue. I will turn the call back over to presenters for closing remarks.

Well, again, thanks everybody for your time this morning and again we are very excited about what's going to be taking place over the next, let's call it, 120 days before we have our next call unless obviously a settlement of major material develops, we would probably reschedule something. But just keep watching. As soon as we learn status of things, we will make sure and let everyone know. And again, we will continue to be out there working very hard for you all. So thank you.

Again, thank you for your participation. This conclude today's call. You may now disconnect.