Ladies and gentlemen, thank you for standing by, and welcome to the 2019 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words believe, expect, anticipate, intend, estimate, may, should, could, will, plan, future, continue and other expressions that are predictions of or indicated future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecast of future events can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. Digital Ally will undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I would now like to hand the conference over to your speaker for today, Stan Ross, CEO. Thank you. Please go ahead.

Stephanie, thank you. Thanks everybody for joining us today. Tom Heckman, our CFO is on the call as well today. And I’ll turn the call over to him here in a minute. But wanted to make sure that, obviously, everyone knows that this is our third quarter call, and we had a press release out there and I believe we’ll have the 10-Q filed later today or early tomorrow. So anyways, I did want to point out obviously the exciting reoccurring revenue growth that we had. And that also sort of spurred a second press release that we ran this morning as well, concerning continued expansion of a partnership we have with zTrip in regards to our in-car system on our DVM-250s. The reason I point that out and also wanted to make sure that that press release was out in the open and to the public is because we also, well, for the first time in many years, going to be giving guidance. And that will be one of the things that I will touch on quite a bit here. Not only what we’ve accomplished so far this year. But what the fourth quarter and also what 2020 looks like including our litigation track, our partnerships and sales as well. So right now, let’s do a little recap, and then we’ll talk about what we foresee in the future.

Thank you, Stan, and welcome to everybody. I appreciate you joining us today. I do want to refer you to the Form 10-Q that we just filed with the SEC. I’ll be brief in my remarks, but please do visit the SEC’s EDGAR site and review the full filing for additional information. I guess, overall, the third quarter was an important turning point for the company. I think last quarter, I talked a little bit about bottoming out or we were seeing a bottom in revenues and that. And we’re seeing some very, very good trend lines approaching us and hitting us. So – and I’m pleased to report that the third quarter really did prove that those trend lines are moving in our direction and improving our business results. Most importantly, the launch of the EVO-HD, which is launched in June of this year, right at the end of the second quarter happened more in the third quarter than the second quarter, obviously. I will remind you that that DVM-800 was our previous law enforcement product that it was out there. And that thing was introduced in like 2014, 2015 timeframe. So that’s 4, 5 year old technology. So we were challenged on the revenue lines, because our competitors had released newer products with newer features as would be expected. But I’m happy to report that with the EVO-HD, we’ve leapfrogged back into the lead in technology. The EVO-HD has had some amazing results and is being evaluated by a number of different agencies and I’m very excited by what we’re seeing there. Most importantly, the reliability is there. We did design this with our own engineering. So we started from scratch, built it on a chipset that we picked and are very proud of the end product. It’s very efficient from the servicing and troubleshooting standpoint, because it is fully connected pretty much all the time. So we can dial in or remote in, view whatever our issues occurring or not occurring, and fix it from our seats here in Kansas City rather than having to go out on site. So that’s a very important improvement. And I think we will see very good results in our SG&A, because of the improved efficiency in our troubleshooting and reliability there. Again, as I said before, the early returns are very encouraging. It’s being evaluated by a number of agencies, including state police agencies, which – because it is new technology, they’re going to take their time and evaluate it, and what we’re hearing is very good result so far. One of the important improvements that is coming to the EVO-HD is hybrid cloud solutions, that’s expected to come out in early 2020. That seems to be a very important and a very wanted upgrade for especially state police agencies, because of their remote locations and their decentralized operations. So that hybrid cloud solution will be important for us and really is a good selling point in terms of that product overall. I guess the bottom-line is that EVO-HD is everything we thought it would be. And we hope that customers will see that and we’re hearing that they are so far, but we are going through an evaluation period, with the product. So, total revenues actually were the best since the second quarter 2018. So revenues are starting to tick up. They are the best in over a year and the EVO-HD I think will increase that – continue that trend line into the future. The big news though is that service revenues are continuing to increase. Service revenues total almost $2 million year to date versus $1.6 million in the prior year. That’s a 25% increase. And more importantly, the margins that are generated by service revenues were 82% year to date in 2019 versus 79% year to date 2018. So, you can see the important of service revenues and we’re – and the reason that we’re focusing on that. Clearly, our strategy is working, as we’re seeing it in the results of our service revenues. You might have noticed earlier this quarter, the Royal Caribbean cruise lines re-upped their service programs. So that looks good for the future. And today, we did announce the 300 unit commercial order with zTrip, which has fleet-view connectivity, so that will also increase our service revenues. I will also tell you that the EVO-HD as it’s being deployed in the field, since it is fully connected, it is cloud based. We think that that will also accelerate our service revenues in the future. So the trend lines are good and that’s one of the reasons that Stan and the Board were able to provide guidance of at least $13.5 million in total revenues for 2020. So we see the trend lines there and we see the improvement and are comfortable with the guidance at $13.5 million. I do want to mention, though, in the short-term, there may be a challenge presented by the Ford interceptors that are being – that are currently being delayed with Ford Motor Company. The interceptors of the Police version, obviously, there is a delay that’s caused delivery delays in the field, which results in delays in our movement of product as well. So it will be a shift, if it does not cure by the end of the quarter – by the end of 2019. It will just be a shift into the Q1 2020 quarter. But I do want to warn you that fourth quarter revenues maybe affected by that, if Ford is unable to deliver those interceptors. If you look at the total SG&A costs, they remain under control sequentially. Q3 2019, total SG&A was $3.5 million compared to $4.3 million in the second quarter 2019. That excludes the WatchGuard $6 million settlement. But – so you see about $800,000 decline from the prior quarter. Q1 2019 was also $4.3 million and Q4 2018 was $5.3 million. So the trend line is very good on SG&A. The large drivers, the predominant drivers in SG&A is really our patent litigation fees, which have been somewhat abated, because of the status of the Axon litigation and the settlement of the WatchGuard litigation. Axon, obviously, is in appeal. The Appellate Court has it docketed. We’re supposed to file final briefs by the end of this month. And we’re expecting oral arguments in mid- to late-January. So things are moving forward, but since it is in appeal, the litigation fees have been abated somewhat in 2019. The other driver is our R&D expenses. We did launch EVO-HD as I mentioned earlier in June of this year. So we’re seeing a slight decline in R&D expenses in Q3, we think that will accelerate in Q4 and Q1 of 2020. But we do believe that there will be some derivative products from the EVO-HD that may lend itself to the commercial area. So the R&D won’t return to 2018 levels until we get through that product launch in the derivative products. So that’s look forward in that. If you look at the balance sheet. We ended the quarter with $1.3 million of cash, $3.7 million of positive working capital. We did issue $2.5 million of convertible debt during the quarter. And by the end of the quarter almost $700,000 had already been converted. So things are moving from that standpoint. Overall, we are confident that we have a winner in EVO-HD, which will help us regain market share and help us in the revenue trends that we’re hoping to see in 2020. With that, I’ll let give it back to Stan.

Yeah. Fantastic, Tom. I appreciate it. Yeah, I’m going to just touch on, again, a little bit on the guidance and everything else. I know, Tom, throughout the $13.5 million, and I think, actually, what we’re saying there is, we believe we’re going to exceed the $13.5 million. And let me tell you, how we came about looking at – coming up, first of all with that number, and then how we believe that we have the ability to improve on that number. Obviously, with the trend that we have already set with the reoccurring revenue in the subscription agreements that we already have in place, that gave us a real good base to go on in regards to what we know is going to – what we’re going to be generating. And what we really did not throw in there is the additional reoccurring revenue that we’d be generating from new product sales such as from the EVO and other products in the DVM-250 and such. So again that was sort of the plus side of the $13.5 million. The other thing is, we have a business development division. And as you all know, that we’ve had some great relationships, great partnerships with everyone’s from MetLife Stadium to NASCAR to our relationship with Rahal Letterman Lanigan Racing. We’re in a lot of different segments and where we’re finding video solutions is a big need. And what we do have an amazing engineering team, we’re finding ourselves able to adapt to what their needs are when they’re coming with us. So we have a small team, but they’re talking at the highest levels in regards to potential business development with agencies and/or companies that have big fleets that are out there or have big needs for video solutions, whether that’d be with body cameras or an in-car system. So that too has not really been calculated in our $13.5 million. So if any part of the business development side does contribute in 2020 that again would be part of the plus side of what we’re talking about. We also have a couple of new products there we’d look to be introducing in 2020. As you all know, we have received several patents, additional patents that are in areas such as breathalyzers. The one in particular that received is very exciting, because it’s a patent that works with our existing video solutions both on body cameras and in-car systems. And so it becomes a much stronger evidence gathering or gathering the truth in regards to being able to document whether or not someone was actually under the influence. So excited about that product and also excited about our wireless TASER patent. I think, what you’ll see over the next few weeks is continued announcements in regards to sales associated with Digital Ally. You will probably see some announcements concerning partnerships, partnerships being everything from the sales side of things to product development and licensing agreements. And then you also are going to be able to see – have an insight on the time and delivery of those products, again, gets back to the plus side of the $13.5 million that we’ve thrown out there. So we have a high level confidence in our $13.5 million exceeding that. And clearly, if we continue the trends that we’re seeing right now, I think, we’ll do that. Now the one thing, I did not do and that is touch on the timing of the company getting back to profitability, whether it be a positive EBITDA or cash flow or – and that’s really because of the timing associated around the litigation. We should be able to touch on that fairly soon. But as Tom mentioned, we will be filing later this month, our response to TASER/Axon’s filing that they did on our appeal. We will then have oral arguments probably mid- to late-January, and we’ll – as soon as we know an actual date, we’ll make sure everybody is aware of it. And then, they have – after that oral arguments, we will probably about 90 days is what it normally takes to come down with a ruling. So sometime, we’re very hopeful in the second quarter. We even know one way or the other how we’re going to proceed with our litigation surrounding our patent. And when I talk about that, the reason I say how we’re going to proceed is that one of the arguments that were out there is Axon believes that they’re not the ones truly violating the patent, that it’s the end-user. So sort of my opinion that what they’re doing is throwing their customer under the bus, saying, well, we just build these products, we’re not the ones put them all together, which would possibly violate the patent. So in my opinion, they say they’re standing by their customer, but they just put in legal documents that they believe that their – the end users is the actual one that possibly could be violating it. So we’ll see what the appeals court says. And then we’ll go from there and know how to continue to monetize and protect our IP. So a lot of exciting things to be looking forward to, and again, as I mentioned, I think, you will see a lot of things coming to the forefront within the next few weeks, next few months, and clearly in the next couple of quarters with us having some real insight to the rulings on our litigation and a lot of the other things we’ve be working on. Anyway, Stephanie, I think, we’re probably ready to go ahead and open this up for Q&A, if you want to see if there’s some questions out there.

[Operator Instructions] Your first question is from the line of [Donald Disiplu] [ph], a private investor.

Mr. Ross, can you hear me?

We can hear you.

Okay. I was wondering who owns the Digital Ally company? Is it the Board of Directors or the individual stockholders?

It’s obviously the shareholders.

Okay. Then you have an obligation to listen to any suggestions from the shareholders?

We absolutely do. And often, Donald, we end up getting questions that are sent in, whether it’d be through an e-mail form or through writing, and take a look at them and try to assess where they’re coming from.

Okay, in regard to patent number 9841259 issued December 12, 2017, the subject is wireless conducted electroshock weapon; description, a wireless direct-contact projectile from a launcher to administer the shock to the subject. Question, what stage of development or testing is this futuristic weapon in?

So, yeah, a great question. As I mentioned earlier in my comments, the patents that we’ve had that have been issued to us and the early let’s say development or concepts that we’ve been able to come up with, obviously, need to get further down the road. And so, the company has been actively talking to proper parties that might be able to assist us or expedite the development of some of these patents that we have in our portfolio, so that we could get to the marketplace a lot quicker. Donald, as you know, I mean, what we’ve got is what we’ve got as far as our limited bandwidth in regards to engineers, capital, so and so forth. And there are much larger companies out there, that when you go to them and you explain to them, look, this is a $250 million a year industry that one player really dominates. But here we have a patent that with a little bit of engineering and effort could allow us to enter into that arena and have a significant impact on it. So, at this point, we have been having talks with parties. And again, as I mentioned in my earlier statements, I hope that we will be announcing a partnership or in relationships with developing this particular product, surrounded by this patent and additional ones.

My suggestion to the Board of Directors is to have our attorneys contact Axon to see if they are interested in buying the patent to this weapon. That will make the Axon TASER an obsolete useless piece of equipment. Digital Ally will ask a reasonable amount in exchange for a document in which Axon will acknowledge infringing on Digital Ally body cameras and will pay an agreed upon out-of-court damage settlement, which will not contain triple damages. Let me repeat, will not contain triple damages and further agree to pay reasonable royalties based on the formula WatchGuard and Digital Ally developed during WatchGuard sales figures. Failure by Axon to agree to this proposal will result in Digital Ally selling the patent to other interested parties open to the proposal submitted to Axon, or further development and testing. I foresee a constellation coming regarding body-worn cameras and related equipment in this industry. Within 3 years, there will only be 3 dominant companies left, depending on patents tested in a court of law. Digital Ally patents are worth at least $300 million based on sales, court awards and a steady stream of royalties. The Board of Directors are required to publically acknowledge all offers and reject those that do not meet the minimum $30 per share. If I was on the Board of Directors and was able to implement all my suggestions, I would have the stock price over $100 before splitting. This would take about 4 years. I have one more suggestion. Develop a camera that…

Don, I’m sorry, we had – we’re on a time-limit here and we had to go ahead and move on to some other questions. But I will tell you this that we will definitely take your suggestions that you’ve brought to this call and go ahead and share that with the directors. And anything else that you would have along those lines that you’d like to send to us, I’d be glad to submit to them as well. So thank you for giving the call in.

Your next question is from Bryan Lubitz with Aegis.

Good morning, guys.

Good morning, Bryan.

Good morning, Bryan.

So first off, congrats on beating The Street’s expectations for revenue. And obviously, it’s pretty exciting to finally get guidance from you guys. I don’t remember at any point that I’ve been involved with the stock that you guys have given guidance. Stan, you had said earlier that $13.5 million is where you stand now without adding any additional contracts, is that correct?

Well, we feel very confident at $13.5 million, we’d just say the core business that we’re currently – that we have and we are chasing.

Okay. So what I want to discuss first is the contract here with zTrip. zTrip has roughly 5,000 vehicles nationwide, is that correct?

That is correct.

Okay. So they’ve made an order today for 300 and they’re looking to update 125. I read their press release where the CEO spoke pretty glowingly about you guys and your relationship, and over, I think it was an 8-month time period. They reduced claims by as much as 80%. That looks positive. Now my question is, if they were to go out there and order, say, 3,000 units. Number 1, could you guys fulfill that order right away? And number 2 – sorry, Stan, but number 2, what do you think is the reason why they haven’t outfitted more of their fleet as of yet, if you guys were able to reduce claims by as much as 80% for them.

I – good question. So 2 things, Bryan. zTrip and Bill George, who’s their CEO, not only have they been an unbelievable customer, but they also been great in regards to their industry. As you know with the Ubers and Lyfts and stuff that are out there, safety is absolutely paramount in the car business, whatever you want to call it, taxi business, car sharing business or whatever. And he has glowingly spoke about the positive relationship that we’ve had and the impact this had on his companies at conferences. And so, he is – and obviously, just less than a month ago, in which we were named in his talks. So we’re seeing others in this industry, he wants his industry to be looked upon as a safe and very viable, much like World Caribbean cruise lines did as well, starting to introduce us to their cruise lines, because they want it to be looked at as a family-friendly environment. And by having less claims and false reports out there, it gives us a much clearer picture of what they’re doing. So back to your question on 2,000 units, I think, all of us have to realize that would be a situation that we would ramp up to but ramp up to together. And so once they said, okay, look, let’s – here’s our schedule for 2020, let’s say. And that means we’re going to outfit different municipalities with this equipment. We could ramp up to meet that need.

Okay.

We have 2 suppliers that supply – that can supply us box builds for the 250. So obviously, we could get the hardware in relatively quickly and part of the issue would become installation and getting our people out in the field to install these things. So I mean, we can get the hardware in quickly. We’d have to ramp up a little bit on the personnel to get the installs done. But yes, we could handle, I’m confident we could handle a 2,000 unit order.

Super. So let me ask just with that – staying with that, did they order the reoccurring business model was well where they’re uploading to the cloud with you guys?

They did. Yeah, they did as a matter of fact. Yeah, and that so – the upgrade that they did down in was at Florida?

Yeah.

Yeah. That was a upgrade in software and a reoccurring revenue model.

Super. So obviously, that they add to the amount of units, the amount of reoccurring revenue, you guys, will be bringing in. That’s kind of what you’re factoring some of your guidance for the $13.5 million next year as well?

That’s on the plus side, and that’s where we get back to talking to you about the EVO. The EVO system also is a cloud-based type of service that you utilize with them. So it too will add to that number. Correct.

All right. So now since you brought up EVO, you guys had mentioned preorder sales earlier in the year were ahead of expectations. And Stan, you had been on Bloomberg Television not too long ago as well as in the last call and you had mentioned the major auto part supplier with the fleet of roughly 15,000 vehicles nationwide that you guys were in a pilot program with. My first question is, is that pilot program for the new EVO product or the DVM? And my second is, how far along are you with that contract, is that something that you guys feel you’re going to secure soon?

So it’s more on the line – that particular pilot is more along the line of the DVM-250, okay. So that’s how that pilots going. It’s still going. They are still very pleased. And again, Bryan, a lot of these companies, and it gives us as an advantage that we have with them in the engineering team that do, is they tend to have a little tweak that they would like to have the products capability of doing. And we try to meet that need, give them a chance to evaluate it, and then just continue to push forward to getting the sale. So it’s more in the 250 FleetVu family than the EVO family. Now we’ll tell you, though, and this came as a little bit of a surprise, we do plan on having an EVO commercial product. But I’ve been a little bit surprise on a few companies that have suggested that they would be comfortable with the current EVO model that’s – it just has a lot of lot of features that I was a little bit surprised that they would have a level of interest. But when – I’m not going to show my hand on what company it was, but it clearly made sense, because of the capabilities that they wanted throughout the state.

Okay. You guys had a great quarter, you beat the analyst expectations, I’m just curious how much of the EVO factored into the $2.9 million that you guys did with revenue?

I mean, I think it was just – I think everything contributed. I mean we had contributions across the board.

Yeah. The primary drivers are commercial product sales and services. The EVO, it’s such a step forward in technology in that it takes them a while to evaluate it, and approve it, especially for a big – if you take a state police agency, they’re not going to make that decision overnight and change their infrastructure to accommodate that. So EVO did have some impact, but the larger impact was our commercial product as well as reoccurring service revenue.

d of off-base from sales and it’s in another direction. Obviously, we all know about the case against Axon. About a month or so ago, The Wall Street Journal – excuse me – Washington Post as well as New York Times was running an article about the Judge that proceeded in your case, Judge Murguia, and being susceptible to extortion, corruption, being publicly admonished, being sided obviously for missing court time, et cetera. What are your guys’ thoughts or your feelings in regards to those reports about the Judge that presided over your case and how it can kind of help you or how it will play into your appeal?

Yeah, I think, I guess, I’m going to dance around this one, Bryan. But the bottom line I could tell you is that we’ve seen delay after delay through the 3 years, which are – I think it would be 4 years coming in January that we’ve had our litigation filed. As you recall, in January of this year, we were supposed to have a court date assigned to us. And not only was Digital Ally well represented, but Axon/TASER was well represented in that courtroom, only to be told that he hasn’t gotten around to it yet. So then June comes around and he’s clearly – has possibly get some heat that this thing’s got to get off your docket. And so therefore, when you see and what we’ve stated in the past that he took – he hung his hat where he hung his hat, and didn’t even look at some of the other material evidence that was there. It was just very disheartening, because there are a lot of people that are affected by delays and not thoroughly looking over all the evidence. So I’m really going to just sort of dance around that one right now. And so, I’ve seen the same article, I read it, it hit the Kan City papers, it hit a lot of the national papers. But, yeah, we – I don’t know that any of us were surprised.

All right, well, guys, good quarter and good luck for the upcoming forecast. Hopefully, you guys hit them and exceed, and we’ll talk soon. Thank you for your time.

Thank you, Bryan.

Your next question comes from the line of [Patrick Gatard] [ph], a private investor.

Good morning. How are you guys doing?

Good, good, Patrick. How are you?

Pretty good. I was wondering, have you guys attempted to approach Uber or Lyft about installing the cameras and [stopping] [ph] into their vehicles?

We have and that’s – yeah, almost over – well over a year ago. And we’ve talked to them. And what you’ll see is there are some people out there that have some very inexpensive cameras that are out there. But nobody that has a real, what you want to say, a company-wide solution yet. And so, we’ve made preliminary contacts with both parties. And have shared with them what we believe would be a way of, maybe given the end-user a little more comfort, knowing that there is a system in there that keeps them a little more honest. And this is very similar to what zTrip is in. I mean, if you got big brother looking over your shoulder, you’re going to behave a little better. And those that are in the vehicle are going to behave a little better. So we think it’s a great opportunity, a great solution for some of the things that they are foreseeing. And we will continue to try to figure out a way to come up with a program and hardware that is affordable, that could possibly be a good business solution for them for some of the problems they’re having.

Okay, thank you very much.

Thank you.

Well, I’ll tell you – Stephanie, I’ll tell you, we’re right at the time. We’re – and I don’t see any more questions in the queue. I do want to thank everybody again for participating. And again, I also want to thank my – all our employees and our Board for allowing us to give you some insight on what we’d look like, the future holds for us all. Please keep watching. We will keep doing the best we can to inform you of the progress we’re making on all fronts. And look forward to our next call. So thank you very much.

Thank you. This concludes today’s conference. You may now disconnect.