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Edited Transcript of DGLY earnings conference call or presentation 15-May-19 3:15pm GMT

Q1 2019 Digital Ally Inc Earnings Call

Overland Park May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Digital Ally Inc earnings conference call or presentation Wednesday, May 15, 2019 at 3:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stanton E. Ross

Digital Ally, Inc. - Chairman, President & CEO

* Thomas J. Heckman

Digital Ally, Inc. - CFO, VP, Treasurer & Secretary

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Conference Call Participants

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* Bryan Preston Lubitz

Aegis Capital Corporation, Research Division - VP of Investments

* Nathan S. Weinstein

Aegis Capital Corporation, Research Division - Analyst

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Presentation

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Operator [1]

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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 indicate 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 will now turn the call over to Mr. Stan Ross, CEO of Digital Ally. Please go ahead.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [2]

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Thanks, Tiffany. Thanks, everybody, for joining us today for our 2019 first quarter call. I have with me today Tom Heckman, who will go over the numbers here shortly, and we will look at trying to address a number of issues, but probably the one that's on most people's mind and we will gladly elaborate on was the successful negotiations that we had with one of the companies that we have alleged patent infringement with that had entered into a very nice settlement agreement for us. We'll spend quite a bit of time on that as that particular settlement agreement has, I think, a very nice -- has positioned us very nicely for what we anticipate to play out for the remainder of this year and maybe going into early next year and well into the future.

So -- but with that being said, I'd like to introduce you all to Tom Heckman, the company's CFO, and allow him to elaborate on our numbers.

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [3]

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Thank you, Stan, and welcome, everyone. I appreciate you joining us today.

I do want to remind you that we did file our Form 10-Q with the SEC this morning, and I would hopefully refer you to that document for a more complete discussion of the quarter and what's going on with us. I don't intend to go through line by line with the numbers and that today. I know that the WatchGuard settlement is really overshadowing this meeting and the thoughts of a lot of investors, but I do want to point out a few good trends that I see in the first quarter numbers.

First of all, our revenue numbers have bottomed out and have gone up. Ever since we announced the launch of the EVO, our revenue numbers, certainly on the products side, have been challenged. People are waiting for that new product. And fortunately, that new product is going very well. We're in beta test with it, and we do believe that we will launch it commercially, certainly by the third quarter of this year, if not late second quarter. So we're very happy with that. We've weathered the storm, if you will, on the revenue side -- on the product revenue side, and we're starting to see both sequential over Q4 2018 and as well as year-over-year first quarter 2018 we're seeing a small but a very noticeable increase in revenues from that standpoint.

And even more importantly, the revenue composition is encouraging for us. It's moving more to a service-based revenue model, which is recurring, which is very important. If you look at the gross margins on the service side, it reached 83% in the first quarter of 2019 versus 77% in the year-ago quarter. So obviously, that's very important to us with those high-margin dollars and high-margin revenues. We want to encourage that, and we're seeing a very nice uptick in that.

We do believe that will continue because we're in a renewal cycle on some of our service contracts, and our renewal rates are very high, very good. I'm very happy with them to-date. And hopefully, they maintain that, and we continue to see the growth on the service side that we've already experienced year-to-date.

The other thing I know we talked about is the EVO-HD. It's in beta test, and a number of units -- number of customers or potential customers were reporting good results there. The features that we've previously announced are in that -- in the EVO model, and I think that our customers will certainly enjoy the features and the reliability of this new platform that we're coming out with.

If you look at the SG&A expenses, we -- they did increase about $1.2 million year-over-year. But if you look at the composition of that, first of all, the research and development costs only went up about $20,000. And understand that we've developed a whole new platform, the EVO-HD, and still maintained very good levels of R&D expenditures, only a $20,000 increase over the prior year.

Stock-based composition (sic) [compensation] increased, which is noncash obviously, increased about $230,000 year-over-year. As we've gone to a more of a stock comp-based raise system with our employees, we did do a grant that went down to many levels that we haven't gone to before in terms of our employee base. So that, you're seeing an uptick in the stock-based composition (sic) compensation from that standpoint.

The general and administrative amounts increased about $850,000 year-over-year. That is almost predominantly litigation based. It's both legal fees and settlement fees in that number, and we'll talk a little bit about what to expect on an ongoing basis a little later in this discussion.

If you look at the rest of 2019, obviously, we're excited about the EVO launch. That should improve revenues, certainly starting in third quarter and then fourth quarter of 2019. And hopefully, we'll get it out sometime in the second quarter. Service revenues continue to improve. And again, our renewal rates are coming up. Our renewal cycle is coming up, so we think that, that will continue.

Litigation costs should abate somewhat. Now that we've settled the WatchGuard litigation, that certainly won't be an ongoing cost. We settled the PGA dispute, so we won't have any ongoing costs there. And the Axon matter, Axon/Taser matter is now fully briefed in front of the judge, and we're just awaiting rulings from the judge. So we believe that those costs will start to decline as well. Although they are high, year-to-date, I think for the remainder of the year, they'll be much more under control from that standpoint.

If you look at the second quarter, now that we have the WatchGuard settlement, one thing that we will record in the second quarter is a $6 million gain from the settlement of that litigation. That will be an important factor in our 10-Q and what to expect for in the second quarter.

The unknown thing is what effect that will have on our obligation to BKI. Remember, we did do a litigation proceeds agreement with BKI. Those proceeds will be paid to BKI and reduce the obligation that we owe them. We do have that evaluated by a valuation firm in terms of what the remaining -- or remaining obligation is to BKI. And hopefully, that will be reduced and will -- the full $6 million of income will come through at the bottom line. So that's something excited that we're looking forward to in 2019.

Okay. Let's look a little bit at the WatchGuard settlement now. Understand that there is confidentiality provisions in that settlement document, so there's just things we cannot share and talk about as much as we'd like to. We're very happy with economics of that settlement on our books and where it's going. It's basically a 3-year license agreement for WatchGuard.

And after 3 years, if they have not discontinued selling that product with those infringing features in there, then we can go back to litigation with them if we need to. But hopefully, that's not necessary, and we can -- if they're not able to pull all that equipment off the market, then we'll negotiate another royalty from that point forward.

It will lower our legal expenses, obviously, like we just talked about. It also kind of gives us a template as to what we can do with others in the industry. Now bear in mind that auto-activation, which is the basic premise of the patents that we have that we've asserted against both Axon and WatchGuard, is the auto-activation. It is a standard for the industry. I would say -- and I don't have the specific numbers, but a predominant majority of RFPs that come out now either ask about or require auto-activations as a feature in responding to those bids.

So you -- we have not looked at others in the industry in detail, but I would think that those would be -- we would look at those and then use that template that we've used with WatchGuard to do the settlement to approach them about doing a similar license. So anyway, that's exciting. We should be able to monetize the patent from here forward using that template with the smaller players and the other ones outside of Axon.

Now Axon, obviously, the market leader in this area. We believe that our situation with them is much enhanced now, and we're looking forward to the judge's rulings that he has in front of him right now.

So with that, I will turn it back to Stan. I know you guys are probably wanting to talk more in detail about the WatchGuard settlement and where we're headed with monetizing our patents.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [4]

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Yes. Thanks, Tom. And a lot of that, that Tom was talking about in regards to this WatchGuard settlement, it was interesting yesterday that the amount of calls I got from people saying, well, how are you going to pay $6 million in damages. I'm like, "What are you talking about? We're the ones that won." Two others that thought that this was the big litigation that we've been talking about. And as you all know that, Axon, using our August date of last year, we're looking to them in excess of $200 million in damages. And obviously, those damages continue to grow before we get in front of a judge and jury here in Kansas.

So this was just, as Tom said, sort of the -- oh, the template of one of the many industry players that we can go talk to. And I will let you know that the economics involved with this transaction, we would not have done if we felt that there was any way, shape, or form that these would have hurt us in regards to the valuations that we are looking at pursuing after as far as Axon is concerned.

So just to give you an idea of what this could mean to the company and the industry. I met with our bid department yesterday and talked to them a little bit about who all's out there and who all's bidding on RFPs that deal with auto-activation and how many companies are out there to say they can meet these demands. And so there's a good additional 15 to 20 different companies that are out there that claim that their products have auto-activation and are out there doing bids.

So our -- what I want to say -- our checklist of people to be able to reach out and talk to and say, look, it's obvious we have no reservations or concerns or weak-kneed to where we won't come after you and enforce our patents if you violate them.

So we will start looking at all the parties that are out there. Again, the significance of this is look at it 2 ways. One is the fact that earlier, you've seen us sign an agreement with a company called VIEVU. VIEVU is a body camera company that had the contract in New York, Miami, I think they had Phoenix. Matter of fact, as you know, Axon came along and bought them.

But VIEVU sat there and looked at our patent, the strength of our patent, even had patent personnel look at it, and they're the ones that first came to us and said, "We believe your patent is strong. We do not want to sit there and run the risk of violating it. We'd rather go ahead and work out a licensing agreement or a distribution agreement, and you just sell us a product and we'll buy it from you." So there's #1, very, very reputable, very, very successful in winning some very large municipality contracts.

Now you've got WatchGuard. Again, another player, very well respected in our industry, good people, but they, too, recognize that this doesn't need to go any further. It's not going to probably turn out well. Let's just work out a licensing agreement and give us enough time to try to modify our equipment and/or design this particular feature out of our current products that are out there. So $6 million on a 3.5-year deal is going to fly by. And if they are unsuccessful and/or the industry does not like the modifications or not having the capability of auto-activation, then I'm sure they'll be coming back and will want to talk about extending the license for some sort of fee.

But meanwhile, people in our industry, we have companies that are much larger than the WatchGuards of the world. I mean, Motorola is out there. Panasonic is out there. L3 is out there. There are numerous companies that are out there that we will be contacting. And I'm sure after what all they've seen, especially with VIEVU and WatchGuard coming to the table, that we will be able to visit with them, utilizing this template so that we don't anything to jeopardize the economics of our Axon interest, and that should start to come together immediately. I would imagine that these people will start being contacted early next week, so we're very excited about the recognition that we're getting and the acknowledgment that we're getting from being able to resolve this matter. And I will applaud WatchGuard for actually recognizing it and negotiating in good faith to come to the resolution that we did. So very excited about that.

Touching on the new product, the EVO product. We do anticipate this launch in late in the second quarter, and I don't think it'll have any kind of major impact in the second quarter. But our official launch date is June 24. And as Tom mentioned, we do have products out there already. It's several different potential customers doing beta tests, and we're seeing really, really good results, really good significant, what I'll say, feedback, and we've actually had departments already placing orders because of what they've seen in regards to some of our presentations that we've done.

So glad to see that we feel like we've gotten to a real good level as far as our current revenues, excited about the additional revenues through licenses and/or royalty agreements that we will be pursuing immediately and can't wait for the launch of the EVO product here next month.

So with that being said, I'll go ahead and open the floor for any Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Nathan Weinstein with Aegis Capital.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [2]

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Okay. Great. So just a few questions here. Firstly, one, just thinking about the income statement and just to be clear on what you said, the $6 million settlement with WatchGuard, would that run through the income statement?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [3]

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Yes. No. We're in discussions with our auditors on exactly how to present it. But as I understand it and based on my understanding of the gap in that area, it will come through probably as a credit in the SG&A expenses as a litigation settlement. So won't be revenue, but it'll be a counter-SG&A expense of $6 million.

Now the offset to that, though, Nathan, is that the $6 million will go to pay down the litigation proceeds agreement with BKI. That's on the books for roughly $9,280,000 at the end of the first quarter. So that $6 million we assume will go and pay that down, and then unless the valuation firm believes that because of the settlement occurring that it's much more likely that we will be settling for more dollars against Axon and others in the industry and paying more dollars to BKI in settlement. Believe me, we'd like to do that. These things are going well on the monetization. So the unknown piece of it is what effects it will have on the valuation of the obligation.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [4]

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Okay. Yes. So I actually just want to switch gears. I'm sure you'll get more questions on litigation. And I actually just want to talk about the market and product. So firstly, on the EVO-HD, are you guys looking at a 2Q /3Q launch? And with -- typically with a new product, do you see an initial stocking bump like as it goes out to the channel? And then like how long does it take to kind of get your sales force and channel partners up to speed on a new product?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [5]

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So we've been, I would say, laying the groundwork for the EVO-HD for several months now. I mean, I'm real confident that our sales team is up to speed and ready to hit the ground running. We also believe that we have done a pretty good job of our time line in regards to what we have seen in the past as far as certain agencies that are at a point where they want to upgrade their product. They've already given us some indications if EVO was going to be ready, we'd love to talk to you about it. If it's not, we'd like to still talk about the DVM-800 or some of the other products. So I think we've got a pretty smooth -- or hopefully very smooth transition into the EVO. And again, like I said, you should see some decent impact in the third quarter and clearly the fourth quarter, knowing what I know that the production runs are and delivery schedule is.

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [6]

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Yes. Nathan, what I would add to that is remember that we really have not introduced a new platform such as EVO-HD since I think 2012 or '13 is when we came out of the 800 HD model -- or the 800 model. So this is exciting for us. It is exciting for our salesmen, and we think it's exciting for our customers to see this new technology, this whole new platform and the advanced features that it's going to bring with it.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [7]

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Yes. And the cool thing, Nathan, again, and I'll quick -- elaborate on this. But the product actually had its first real public, I guess, presentation when -- it was either the Washington state or Seattle in that they had basically conducted their own tradeshow, and they invited -- there was between 8 and 10 different vendors in there in which we were one of them, and we actually took our EVO product there. And it was a small room that they put everybody in so you could hear what others were saying and you got a good understanding of seeing what other products were out there.

This is clearly a very unique product with capabilities that I have yet to see in the industry. I've always tried to pride ourselves on being innovative and groundbreaking with new technologies, much like our VuLink or auto-activation devices. And I think we have, again, cleared that hurdle and are going to be disruptive in the industry when it comes to who has the best in-car system. But the uniqueness about this is the EVO actually runs on over into our commercial and our body cameras. So it is a very, very unique and I would say groundbreaking or leading-edge design that's going to hit the market.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [8]

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Okay. Thanks both for the explanation, and it must be nice to have a warm reception on a beta product like this. So we'll be watching to see what happens with it as you move towards a full launch. Just one more question from me. We know that the police departments are smart. They're watching what's going on. Have they shown any interest in potentially switching away from products and services that have perhaps been shown to be patent-infringing such that they have a greater inbound call volume to you guys for your products which obviously have the patents?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [9]

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So as you know and you can read, but again, Axon is going to swear they don't infringe on the patent because they don't believe the patent should exist, and they only tried that half a dozen times or more to get the patents invalidated and which were unsuccessful. So now they've got to convince a judge and jury that they're still smarter than the patent office, and the patent office should have never issued these, even though they made all their attempts. That being said, they have been beating their drums and been going with that type of stance for years now.

And WatchGuard is very respected, I mean, a very respected company. I mean, I like to -- look, they're a very good competitor. They got a good product out there. You can't really say much bad about them. Unfortunately, they crossed the line in regards to the auto-activation patent, but they, too, may have been drinking the Kool-Aid that Axon was serving to the point that they were buying into it as well.

The industry should clearly, clearly wake up after they see that the fact that VIEVU and WatchGuard have recognized that Digital Ally is the rightful owner of auto-activations. So I would be really surprised if this doesn't wake up the industry, and we do start seeing -- much like you're seeing or you said is that people that want auto-activation are going to go ahead and give Digital Ally a much stronger look than they have in the past and start less believing in the BS that Axon's throwing around.

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Operator [10]

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

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [11]

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A couple things I want to get to right away. In terms of you guys mentioning other people in the industry and up to 15 different companies right now, have you already been contacted by guys -- Panasonic Motorola, et cetera -- in advance of this settlement with WatchGuard to gauge interest? Or is this something you guys just feel a week from now, knowing the industry, you're going to able to capitalize off of?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [12]

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So, Bryan, the -- I can tell you this. There's a couple things. Several of them we put on notice way back, boy, 2 years -- 2, 3 years ago, we put them on notice that we believe that they're violating our technology. So a lot of them already know about this.

But as far as the level of interest from the suppliers, last month, Greg Dyer was at a body camera conference, and it was a conference in which they had guest speakers up there. And one of the scenarios was that they had a speaker sick or cancel one -- I'm not sure what happened. So they asked Greg Dryer to get up there as one of the speakers in the panel. And so he got up there, and they all gave a little presentation, and then someone from the audience asked about auto-activation and our lawsuit against Axon and WatchGuard. Greg took the high road and said, look, I don't think that's appropriate to address at this point in time because that's not what this conference is all about. But if you'd like to talk to me, come back to our booth and I'll elaborate on it.

That person sits down. A gal from Panasonic stands up. They point to let her talk, she basically said, "Look, we know about this, the lawsuit. It is for real. We're all watching to see what the outcome is going to be." I mean, she didn't have a question. She just answered Greg's comment, what he was asked.

So 2 things. Lot of them have already put on notice, one. Two, I don't know that there's too many suppliers, manufacturers out there that are not aware of this, and it won't take -- they're not -- this is not going to be new news to them when they get the phone call.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [13]

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All right. So to piggyback off of that. Taser's got a market cap -- or Axon, if you will, has a market cap of under $4 billion. And both Motorola and Panasonic are market caps over $20 billion. Why is it that you think they haven't really jumped into the fray to bid for these contracts or to put a product out there, et cetera?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [14]

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So you have to look at it this way. I mean, if you're looking at it from just a black-and-white perspective, there is yet to be judge that's actually came down with a gavel and said, Axon, you're violating this patent, and you know you are and then coming up with damages. I mean, that hasn't happened. What's happened -- and this is typical, is enough evidence has surfaced in regards to the -- let's say, the litigation against WatchGuard that you know how it's going to play out, and it is not going to play out well. So you decide let's go ahead and do the right thing and enter into a licensing agreement. That's how that's played out.

Taser -- or Axon, whatever you want to call them, they may fight this to the end, and they may have to pay in a big, big, big way. You just don't know. But I'm telling you that there are others out there that will look at this and look at the risk/reward. And I don't believe they're going to be -- respond like Axon is responding.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [15]

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Okay. And one other thing, Stan. I know who Greg Dryer is. I don't know if many other people do. Can you just say his title, please?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [16]

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Yes. I'm sorry about that. Greg is the Vice President of our law enforcement division. So...

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [17]

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Awesome. All right. Now a couple of other things, just to tie in with that. So WatchGuard, you guys settled for $6 million as a lump-sum payment, and you're licensing the agreement to them. However, they're private. So on The Street here, we really aren't privy to their retail sales numbers in terms of what they infringed upon. And you guys keep talking about using this agreement as a template. We're going after Taser for 20% in royalties, even though they've won against PhaZZer for 40%. When you say you wouldn't sign a deal with WatchGuard that would hurt what we're doing in PhaZZer, are you attributing that royalty percentage in as well?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [18]

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Without going into the details, I mean, you just have to understand that there is a little bit difference between the companies in regards to the fact that WatchGuard is more of a hardware company. They don't have the big subscription agreements and everything. They're not the razor and the blade type of package. They actually have their auto-activation designed into their product, so it's a little different scenario there. But the economics, if you look at them and we looked at how many units they may have sold and how many we anticipate them selling, we're very comfortable with the $6 million figure we were able to get for a 3.5-year contract.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [19]

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Are you able to share with what their product actually costs per unit?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [20]

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I don't know. They package it. Again, like a lot of us, I mean, you throw in a bunch of other stuff, so what do they really consider the hardware costs. But it -- I don't know that for a fact, Bryan..

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [21]

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Yes. And, Bryan, I'll reiterate that this is for a 3-year agreement, basically, and they either have to pull the product -- the infringing product off the market at the end of 3 years or have a new workaround or whatever. And if they don't, then we can refile and go back after them. But more logically, we'll just negotiate a royalty agreement. If you do that, $2 million a year for a 3-year contract.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [22]

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Yes. And that's just one of them. And again, you got to -- look at it this way, too, Bryan. If it was so easy to design around this, we've been having this fight for well over 3 years. I mean, Taser challenged us, I think, back in...

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [23]

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2016.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [24]

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We filed in '16.

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [25]

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Oh, sorry.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [26]

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So the challenge is I think in '15, and we filed -- once we won in the patent office, I think we filed against them in '16. So there's been gobs plenty of time to sit there. If it was able to be done easily, they would have attempted to do it. It's not as easy to get around as people may think.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [27]

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With that being said, you guys have gotten VIEVU to sign a licensing agreement with you. You've gotten WatchGuard to sign a licensing agreement with you. Are these agreements something that you plan on -- I'm sure that the judge already has the VIEVU. But is this WatchGuard agreement something you plan on sending to the judge, being that he hasn't filed for summary judgment yet?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [28]

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I don't know what the status will be on that. We haven't really had a chance to talk to counsel about it as far as the next steps. We're really -- I want to say that the deal that we completed with WatchGuard was completed -- it would have been -- honestly, I think papers were going back and forth at 11:50 Monday night. And so again, we haven't had a lot of time to sit there and talk to counsel. We know what -- we know that -- obviously we're going to start contacting people, but we don't know what their thoughts are in regards to this information getting in front of the judge, the channel and the Axon deal.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [29]

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Okay. And in the past, Axon has bought VIEVU. Are you worried that they -- because let's face it. Everyone is speculating on whether they should just buy you outright? Are you worried of them trying to buy WatchGuard to then again get access to your patents? Or do you have a provision in your deal that if WatchGuard is acquired by Axon or another competitor that they can't use your product?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [30]

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All I could tell you is when Axon bought VIEVU, we were able to discontinue our relationship with VIEVU.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [31]

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Okay. So my thinking is that they would try a workaround again any way to get their hands on your tech. As you said, it's been 3 years and no one's been able to get a workaround yet. So -- all right. But realistically, you're looking at this deal as a template. This is what you guys expect to kind of sign across the board with other competitors in the future.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [32]

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Yes. Something along those -- it's just going to be plug-and-play type of numbers, how many units they're selling. Again, you got to realize we're still going to be going after damages for those that are out there that have been violating it. So there will be damages, and then there will be an ongoing license, royalty, whatever you want to call it. And so we will be getting in touch with these industry players right away, and we will continue to be very diligent in regards to not upsetting the economics that support our ability to go after the $200-plus million that we have identified against Axon.

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Bryan Preston Lubitz, Aegis Capital Corporation, Research Division - VP of Investments [33]

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Okay. Well, that's all I have. Guys, thank you very much, and congrats on the quarter and the margins going up. And I guess if you guys strip out the SG&A, you're pretty much close to breaking a profit. Correct?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [34]

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Yes, absolutely. And we see some great trends on the revenue side, Bryan. The new EVO product, I think, is going to have a big impact, and the trends in the service side are outstanding. We've got a lot of things going on, on the commercial side that I think will extend the trend on the service revenues that will make everybody happy.

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Operator [35]

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Your next question comes from the line of [Donald DeFilippo], private investor.

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Unidentified Participant, [36]

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You know me from previous conversations. On April 1, 2019, the conference call, you were quoted as saying, "We're looking at over $200 million that we're going after Axon for, and there is nothing out there on the WatchGuard front, but it is a large number as well, not to that extent, but very big number." Now many of us who own Digital Ally for quite a while are a little bit disappointed. Now we feel, in light of your statements, that the court award or settlement would be roughly $30 million to $35 million or approximately 1/10 of the expected Axon award. With a $30 million settlement, I was going to suggest that Digital Ally assign development engineers to work on a facial recognition feature built into our cameras that would include the criminal database from the Department of Homeland Security. This database could be local, state or national, depending on each police jurisdiction. If it requires a license, royalty or any other payment, it would be worth it to alert the police officer of any possible danger and also alert others due to the auto-activation feature. Now WatchGuard has been granted this license. Did they have to pay our legal fees? And if so, how much?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [37]

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Yes. No. When you're involved in a patent litigation, legal fees don't come into play, so that's one. But probably the more -- to address your artificial intelligence that you're referring to as far as facial recognition and other artificial technology that's out there, we're clearly headed down that path. And again, when -- what you'll see with the -- our new EVO product and the platform that it's capable of and the processing power that it has, facial recognition and many other features, such as, in the commercial division, when someone may not be wearing their safety belt. In other words, they've connected it behind them to where the device isn't being going off as if it's unconnected, but they clearly can see that, even going as far as seeing if they have a cell phone up to their face that they're talking on the phone versus hands-free that may be required by a company.

So there's a lot of artificial intelligence that is coming into our industry. We're very active in that. We're also very active in regards to looking at other ways, features that would allow us to utilize Amazon's web service as far as the cloud management and storage and search engines that they have. So the technology side, you're right. We are throwing still a lot of capital at it, and even if we did have the kind of win that you elaborate to -- again, I want to stress this to people. Again, it's a $6 million deal for 3.5 years. I think we've got another -- I think our patents are good for another 15 years. So the patent value is very strong for us in this industry for some time to come, and we hope to be able to really monetize all that. Thanks for your question. Appreciate it.

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Operator [38]

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The next question comes from the line of [Mark Kulbari], investor.

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Unidentified Participant, [39]

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I was on the call -- conference call last time as well. First -- I have a couple of questions, the first one being in your press release on the settlement with WatchGuard, you had mentioned that you'd like to elaborate on the strategic alternatives that the Board has recently initiated. Can you please elaborate on that, please?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [40]

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Say that one more time? I want to make sure I'm...

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Unidentified Participant, [41]

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Yes. You mentioned in your press release on the settlement with WatchGuard that you'd like to elaborate on the strategic alternatives that the Board has initiated recently. We all know from the previous conversations that we've been having that strategic alternatives...

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [42]

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I got you. Yes. Our strategic -- yes. Okay. So we still have actively been fielding calls people that have shown levels of interest, and I think a lot of them have still been sort of wanting to see what the outcome of these latest, what I want to say, the cases, both with Axon and WatchGuard, how they play out. So we're still there. We're still fielding calls. We're still receptive, obviously, on behalf of our shareholders of entertaining different strategic opportunities. But I think the focus still needs to be pushing forward monetizing our IP portfolio and also the continued development of our new products. If someone gives us a call and it's more than kicking tires, we're prepared to listen.

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Unidentified Participant, [43]

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Okay. Second question is regarding this WatchGuard settlement. Has there ever been a thought that might have been brought about during the settlement as a negotiation with WatchGuard about a reverse IPO where WatchGuard would buy you guys out and then become public? Because as we all know, they have been looking at trying to go out and become a public company. And they had pulled that out earlier this year.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [44]

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I think through this whole process, we explored all options that were out there and what parties both thought would be best for them. So I don't want to get into any of the details of any particular direction that we were thinking about going, but we did explore all options.

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Unidentified Participant, [45]

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Okay. Last one would be in the most recent conference call that Axon's earnings call related 10-Q filing, they had gone into a little bit more detail about the case that is currently being fought with Digital Ally, where they seem to be obviously confident that they have not infringed on any patents and stuff. Now in the context of what their stance is and with the history that WatchGuard had previously said that they would comply with what Axon's time lines were and what Axon's stance is and the fact that they have actually done a 180-degree turnaround apparently and decided to settle with you guys. So how does this all play out eventually? I mean, obviously time will tell. But this should definitely be sending an alarm to Axon given the fact that WatchGuard has decided to go ahead and settle, whereas previously, they were saying that they're going to follow Axon's time lines?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [46]

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I agree with you. I don't know how to answer that rather than I agree with you. I mean, it's -- I don't understand it. Again, the company that they acquired obviously did not want to run the risk of violating our patents, therefore, entered into an agreement with us. So -- and now you have another very respected company in our industry that has entered into a licensing agreement. So I'm sure they've got people on this call listening, and I'm sure that these discussions will be at -- that they should be having internally and with their group, but I agree with you. I mean, these are smart companies, both VIEVU and WatchGuard. And like I said, WatchGuard, I have a lot of respect for them as a competitor in our industry. And I think that the licensing agreement was the right way to go, and obviously, they did, too.

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Unidentified Participant, [47]

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Right. And I think like one of the analysts was saying earlier the market caps of either Motorola or Panasonic -- or Axon, for that matter, is extremely large compared to what Digital Ally's is. And so have they approached you guys and trying to just buy you guys out so that way I think there is none of this patent litigation that they'll have to deal with?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [48]

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I think Axon's still wanting to see -- wants to be on the road a little further before they would possibly -- and who knows with them. I mean, you just don't know what kind of stance they may take. And then obviously, the others, like you said, I mean, this just occurred. So the others will be obviously very possibly saying, okay, now there's, again, a second endorsement surrounding our technology with the fact that we entered into an agreement that they may take a harder look at us as well.

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Unidentified Participant, [49]

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So last question. So this whole concept of auto-activation, right, I think if it were so inseparable from a requirement that most police departments are now requiring. And if it's the technology that Digital Ally has patents for, this should be a no-brainer, right. Is there any other kind of an auto-activation technology that can be presented where other companies can not actually have to pay you guys the royalties or the infringements and still be able to actually get this done, auto-activation. I know you've mentioned that it's not as easy, and that's why they haven't been able to do it yet. But would there be a circumvention of the auto-activation itself that would still give them that capability?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [50]

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No. All of the -- I don't know if I want to call them workarounds, but all of the things that, in my wildest imagination can come up with, do not still give them a true auto-activation feature. I mean, what, I guess, turn on your unit all the time, just have it running 24/7. I don't know if that's a real good answer. I mean, it still doesn't -- I mean, granted your units on all the time, but battery life, equipment life and let alone the other times that you'd better -- hope you turned it off. So I don't know. I just have not run across anyone else that has anything similar that would give them these features.

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Unidentified Participant, [51]

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Okay. Lastly, are you guys up for sale or not?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [52]

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We're publicly held, so I guess we're always up for sale.

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Operator [53]

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Your next question comes from the line of [Jerry Faulkner] with [RJ Faulkner & Co].

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Unidentified Analyst, [54]

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Can you hear me okay?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [55]

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Yes. We've got you.

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Unidentified Analyst, [56]

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Okay. A question for -- I guess a question for Tom. Tom on this $6 million upfront royalty that you're paying -- I mean, they're going to pay you, are those funds going to be available for you 100% for your operations? Are you going to have to share some of that payment with the company that loaned you money some time ago on the lawsuits?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [57]

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Yes. Very good question. Yes. The agreement is that settlements and royalties and what have you that are generated by the patents and suit do go to BKI to pay down their obligation first. So the obligation at the end of March 31 was $9,279,000. So obviously, that $6 million will be going to BKI.

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Unidentified Analyst, [58]

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Okay, okay. So could we -- given that your cash balance, I think, at the end of the first quarter was below $3 million, that would suggest, I guess, that we're probably looking at some sort of a capital raise in the next few months.

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [59]

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Jerry, we -- again, the bulk of -- the burn has been surrounding a lot of this litigation. And so where we're at now, we obviously will be -- we've pretty much completed what we need to do in regards to WatchGuard and all the majority of the discovery, expert witnesses, all the things necessary for us to get ready to go to court with Axon have been accomplished as well. So we see those numbers dropping dramatically. Meanwhile, as Bryan said earlier, I mean, if you sit there and look at getting that sort of out of the equation, we're right there close to the cash flow positive. So...

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Unidentified Analyst, [60]

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Congratulations on that development.

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Operator [61]

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Your next question comes from the line of [Patrick Adderd], stockholder.

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Unidentified Shareholder, [62]

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The question I have on debt -- on the litigation there, the $9.27 million there, how much of that do you have an idea what's spent in litigation costs with WatchGuard? And also after the 3 years is up with WatchGuard, are you going to incur litigation expenses again? Or do you think a settlement will just automatically be made?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [63]

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So a couple things. We utilize both -- the law firm that we utilize handles both cases, and I don't know that we have that detail in front of us on how much was spent towards WatchGuard and how much was spent towards Axon. And then much like it stated in the press release, the -- they have basically 3.5 years to implement a change in their products, either modify it to take it out or if they figure out a way to do something around it. But they cannot continue to move it forward and doing what we believe would be infringing on our patents. So we would have the door wide open to go back into the courtroom with them if they continue to do so.

The significance to this would be if they did continue to try to utilize the license past what -- the 3.5 years, and again, it was shown that they were violating the patents. It would be willful. So the damages would be tripled because they clearly know about it. They clearly have an understanding of it. So it's quite a risk that I don't know that they would take.

They've approached us on an agreement -- licensing agreement in a time line. And I don't work there, but I've been in the industry enough to know that the pipeline of products that we've already established for the next 6, 9, year, is already in our pipeline as far as components and stuff I get. And also know that you don't design a product overnight that doesn't have a few hiccups. So it's more of a year to 18 months before you really have a product out there that's solid that you can launch. So the 3.5 years will go by rather quickly, even if they just started today on being able to do a workaround.

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Unidentified Shareholder, [64]

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I see. But since they did not admit any guilt of infringement, so that means that we have to go through the litigation costs again and start all over again in the future?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [65]

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Yes. You wouldn't have to start all over, but you're right. They didn't admit any guilt, and they just went ahead and decided to enter into a licensing agreement. And then I guess we all just sit there and say, well, if I'm not violating it, why'd I go that route? But anyways, they are not admitting to any guilt. And at this point, we're fine and very happy with the contract we have with them.

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Operator [66]

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Your next question comes from the line of [Sam Schwartz] from [Caliber Management].

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Unidentified Analyst, [67]

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I'm pleased you made this settlement. I'm wondering, having listened and talked to Axon's personnel and a couple of their financial analysts, they really pooh-pooh this overall case in spite of the many successful appeals on your part and defenses, I should say. So I'm wondering now that you have a significant settlement -- maybe not significant, but at least a settlement, why -- or have you, better said, contacted the media and/or reached out to some of Axon's financial analysts to explain in detail what has occurred here, the prospects for EVO, the potential damages based on some sort of a formulation and maybe even an investigatory story if you reached out to like Barron's who is always looking for these kinds of stories. And that would then get Axon's and/or Motorola's attention that you are professionally going to pursue this to a meaningful result?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [68]

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So I appreciate those comments and just trying to give you a little bit of an idea of a time line. Like I said, Monday night at 11:50, we sort of finalized everything. And then of course, we had our quarterly call and stuff coming up here for today and trying to -- make sure we got everything prepared for that. But I will be presenting at LD Micro here first part of June. We clearly intend to do everything we can to make the industry aware and the financial community aware of what has occurred. And much like you said, the more publicity we can get out of it and tell our story, the better it ought to do for us. And I absolutely plan on exploring all of it .

I would add that Taser/Axon is pretty much battle-weary. I mean, they face litigation on their conducting electrical weapons every day. Just read their litigation section in their 10-Ks and Qs, so they're used to staring at these big of numbers. So good or bad, they're used to this, and they're playing a game like they would. I think that the analysts and that do the same thing to a certain degree that they've always faced these kind of suits and all that, and somehow, someway, they get through them. I'm sure there's insurance involved and all that sort of stuff, but this is a different animal for them. They've always been on the other side as a plaintiff in patent suits that I've seen for the most part, and they've been successful on those. Look at what they enforced against PhaZZer, like a 40% royalty against a company that infringed on their conducted electrical weapons. So this is putting a shoe on the other foot, so they're not used to this type of litigation. And I think it's similar for their analysts and people that are following them from an investor standpoint.

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Unidentified Analyst, [69]

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I still strongly suggest that you reach out. You'll find an audience that is willing to write a David-Goliath story and do so to the New York Times. This won't be fake news.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [70]

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I appreciate it, and I assure you I'll be reaching out to the media.

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Unidentified Analyst, [71]

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It needs to be said, and that will strengthen your position greatly. And if one of their analysts catches this story and reaches out and says what's this all about and why aren't you guys just settling this for -- with the balance sheet that you have and/or even make an offer that they can't refuse, meaning you, and put this behind you, and let's move on. Right? That's how corporate -- big companies work. But you have to take the initiative. Now that you have this, I know it's been a long, painful, tiring, exhausting experience as all litigation is. All right?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [72]

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We will. We absolutely will. We hear you loud and clear.

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Operator [73]

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Your next question comes from the line of [Will Goldberg] with [Goldberg Partners].

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Unidentified Analyst, [74]

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Can you hear me?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [75]

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We got you, [Will.]

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Unidentified Analyst, [76]

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Okay. I have 2 questions here. My [reception] is spotty, so my apologies if someone asked these questions already. The first is earlier this week there was -- WatchGuard filed that they weren't able to get in touch with your lawyers. There was some miscommunication. They have extension. At the end of the day, when they were settling for $6 million, it seemed there a pretty clear-cut issue. Could -- are you guys able to provide some color what exactly was happening in those conversations?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [77]

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So we were -- again, we were all in Kansas City and even talking to our attorneys and stuff, so I don't know what their thoughts or thinking were there. So I really don't have any input on that. I just -- I know that documents started flying around later -- late that night, and so we were done.

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Unidentified Analyst, [78]

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But the settlement agreement say nothing fundamentally changed between now or I guess before Sunday and after Sunday. Correct?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [79]

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Oh, correct. Yes. I mean, no. It was -- look, one of the things, and I -- we even got there at the last where we're arguing a little bit about each other's quotes in the press release. And I finally said, look, neither one of us say anything. Just make it black and white. Here's the pertinent bullet points, and there you go, and just leave it at that. So we had -- I wouldn't say any of the real deal terms changed for quite a while. I mean, it was -- we've had that. There were just sort of the devil in the details. That's basically where it was.

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Unidentified Analyst, [80]

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Okay. The second question is, I think, Stan, the last conference call you had mentioned at one point, you didn't give a number for WatchGuard, but you sounded very optimistic. And after speaking about Axon, you said something how the WatchGuard number was significant. So I'm assuming that, had you guys gone to trial, you would have gone or you would have been seeking something way more than $6 million. Maybe that's incorrect. Certainly, since they're a private company, we don't know exactly what the revenue stream is. But what I'm looking for is I want to understand why exactly you guys decided to settle at all, certainly for that number. But the last call, so you had said that things were moving ahead. So rather quickly, you would expect to maybe in the next 6 months to get to a conclusion of that. So anyways, the $6 million that you're getting is going to BKI. It sounds like in the meantime that's not actually a usable fund. So what exactly was the greatness of in fact deciding to settle right now as opposed to just taking it to the courts?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [81]

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Yes. So I think I'm understanding it. A couple things that we liked about it. The fact that we've got a clear-cut deadline of someone at least, in our beliefs, again, everything is alleged infringe until the judge says infringe. But anyways, we've got a clear cut, in our opinion, situation, someone is no longer going to be utilizing our technology, and they have to walk away here in 3.5 years or meet us back at the table again to continue these negotiations, which, obviously, again, I think our patent has well over 15 years of life to it. So that's one.

Two, we believe that the economics of this fell in and supported the position that we have against Axon, which is the $200-plus million bogey that you're chasing. So we felt it gave us 2 things: One, it put a situation where competitors clearly going to get out of our way in regards to what we believe is using -- utilizing our technology; and then two, the fact that it sort of paints the tape, as you would say, in our industry in regards to establishing and supporting the valuations towards Axon.

I'm pretty confident that if we ended up continuing to go down the path of -- and again, this is a problem. You just don't have all that information yet because discovery had not been completed and stuff like that. But I think that we wouldn't have been -- both sides, I think, would have been a lot angrier at each other if this would have continued much longer because there would have been a tremendous amount of expense that both parties would have had to face.

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Unidentified Analyst, [82]

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Okay. I know that the settlement is done now. So I guess one other follow-up on that point is that, given the fact that -- in your mind, was there any sort of discount being given just to get the money in the bank? And also have their again meeting as a company that was willing to settle with you (inaudible) other companies. I'm trying to get a sense of whether or not -- or to what degree you guys gave them a discount in terms of the royalty rates basically it comes down to, I guess, $1.5 million per year. So I'm just trying to get a sense of...

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [83]

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Yes. And I don't mean to interrupt you. It's really hard for me to comment on that because, I mean, obviously, I haven't had access to all their numbers and everything else. A lot of this was attorney's eyes only, and we have a lot of confidence in our patent attorneys. And they've had -- if you read the Kansas City papers, you'll see some very, very high-profile wins that they've had, but we're very confident in them and their abilities. And when they gave us the indication that, from everything that they know, can see and believe that this is a very fair deal for both sides, nobody's going to feel good about it, which is the way it's supposed to be. But it's a good deal, and it doesn't do a thing to hurt us in regards to Axon. So we just weren't into discovery enough to where I could have even -- if I -- even if I was allowed, I'd be able to really elaborate on that.

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Unidentified Analyst, [84]

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Okay, okay. The final question is that money that goes to BKI, does that change -- assuming you guys go to court and are successful in your litigation against Axon, so does that money, that $6 million that you're paying, you mentioned $9 million plus that you owe them, does that mean that the -- whatever the wins you get from the litigation, does a greater percentage of that go to you? Or is that amount set regardless of the $6 million?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [85]

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Yes. So we capped it. I mean, we didn't do a percentage with BKI. We did a flat cap. And so this would go towards the overall number. And therefore, it's actually -- if the number is greater, we will have already paid down $6 million of it. So it's not on a percentage basis.

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Operator [86]

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And your next question comes from the line of [James McGuire], investor.

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Unidentified Participant, [87]

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Can you hear me?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [88]

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We got you, James.

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Unidentified Participant, [89]

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Great. Some real quick pointed questions. What is the auto-activation time expiration date or year, the one that we've -- that you're presumably going after Axon and just settled with WatchGuard?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [90]

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Yes. I think those patents run almost 20 years, so we've probably got a good -- well over 15 years, I would believe. I don't have the exact date in front of me, but I think there's a good 15 years still behind them.

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Unidentified Participant, [91]

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That's fair. Great. Second question. I've heard thrown around a number of 20% royalty license agreement. Can you confirm that? Or is that something you can't discuss?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [92]

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So the 20% that everyone is referring to is the number that's thrown out there in the Axon agreement.

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Unidentified Participant, [93]

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And that's not necessarily the WatchGuard?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [94]

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WatchGuard, there is no numbers that have been talked about as far as on a percentage or royalties or anything on those lines.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [95]

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Let me clarify a little bit. There's no agreement with Axon. That was the financial impact that was filed with the court in terms of determining damages. So we have no agreement with Axon. If we had it, we'd be talking about it. But that's what we believe the damages to be and our financial expert believes the damages to be

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [96]

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And that's -- the damages are at -- were -- as of August, came in at $204 million roughly with an ongoing royalty of the 20%, yes, because of the travel damages.

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Unidentified Participant, [97]

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So I guess that leads to a follow-up question on which is then so the WatchGuard percentage royalty, which I guess cannot be discussed because of confidentiality reasons. But can that play a role in the Axon one? So let's say if it's less than the 20%, can Axon say, well, hey, they gave 12% to WatchGuard or whatever and then modify their future liability based on precedence.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [98]

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Yes. So you -- we're on the same page in regards to -- that's something that I've talked about and had wondered as well. But again, I'm not privy to a lot of the stuff that the attorney's eyes only were able to see. Alls I could tell you is that our counsel was very pleased with if this does become knowledged or is asked about maybe, again, attorney's eyes only in the courtroom, that it didn't have an impact on us. We felt very -- they felt very good about it. When I say we, Tom and I just didn't get access to. So I couldn't do a back-of-the-envelope even number for you.

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Unidentified Participant, [99]

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Got it. And then, Stan, my last question, the $6 million being sent to BKI to fulfill the obligation for the -- the last February, the litigation agreement, is that -- was that a onetime loan? Was that like a revolving line of credit? Is any more cash available? Because I'm kind of concerned with the burn rate and the -- well, I'm just -- I think Axon's position was to kind of wait you guys out and hope you went bankrupt. And so when BKI infused you with cash, that really got everyone excited because there's a lot of -- you don't put $10 million on to something unless you've really done your homework. And so now that the -- there's $9 million presumably of a $10 million already spoken for, do you have more ability to get additional financing should you need it, should this litigation go longer than expected, which it seems like it always seems to go longer than expected?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [100]

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I'll tell you BKI is obviously very pleased with us and -- but even before this occurred, they wanted to make sure and have the ability to come to us if we did look for additional litigation financing, let's say. So I think we've got -- I've made a comment earlier. So I think we've got a friendly banker there if we wouldn't see that we would need to go to them for additional capital for our litigation purposes.

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Unidentified Participant, [101]

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So it's almost like they have a right of first refusal is what you're saying? Or you're saying you'd feel comfortable going back to them if you need more money because, let's say, this gets pushed another year with Axon? Hopefully not.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [102]

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Yes. I think it's just more of a first look. They have a right to participate type of deal

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Operator [103]

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There are no further questions in queue.

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Stanton E. Ross, Digital Ally, Inc. - Chairman, President & CEO [104]

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Fantastic. Thanks, everybody, for joining us today. And again, we couldn't be more pleased with the quarterly results, the outcome as far as the settlement with WatchGuard, and we look forward to an exciting remainder to the 2019 year. And I'm sure we'll be all talking here in about 90 days, if not sooner. Thank you now.

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Operator [105]

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Thank you for participating. You may now disconnect.