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Edited Transcript of DGLY earnings conference call or presentation 14-Nov-18 4:15pm GMT

Q3 2018 Digital Ally Inc Earnings Call

Overland Park Jan 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Digital Ally Inc earnings conference call or presentation Wednesday, November 14, 2018 at 4:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stanton E. Ross

Digital Ally, Inc. - Chairman, CEO & President

* Thomas J. Heckman

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

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Conference Call Participants

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* Bryan Lubitz

* Ishfaque Ahmed Faruk

WestPark Capital, Inc., Research Division - Technology, Media and Telecom Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. At this time, I'd like to welcome everyone to the Digital Ally 2018 Third Quarter Results Conference Call. (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 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 to not 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 continue -- 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.

Now I'd like to turn the call over to Stan Ross, CEO and Chairman. Sir, you may begin.

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

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Thanks, Holly. Thanks, everybody, for joining us today. I have with me Tom Heckman, the company's CFO.

What we're going to do, Tom is going to do a little recap of our quarterly numbers and some of the transactions that we've had take place during the quarter. And I will come back on and address the current status of our litigation in regards to the patent infringement we have against -- case against Axon. Then we'll go ahead and open it back up for a Q&A session.

So Tom, let's keep this thing moving.

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

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

I do want to refer you to the SEC website, the EDGAR website. We did file our Form 10-Q this morning. So hopefully, you guys would have a chance to look at that, and it's a much deeper dive into the numbers and what's going on with the company in the 10-Q itself. I'll limit myself to some of the significant developments and operational trends in my remarks here.

So I guess, first of all, what I'd like to say is that the third quarter was very, very important from a strategic standpoint and some of the developments that happened during the quarter that really didn't show up in the numbers per se but are very important on a go-forward basis and certainly into 2019. Couple of things. First of all, we did repay all our interest-bearing debt during the quarter. You guys probably remember that we've done several financings in the last year or 2 primarily on a short-term basis and what I call as somewhat toxic debt that have features that require derivative accounting and so on and so forth. So one of our big priorities was to get that all paid off and get to a more normal level of funding and to where we don't have this -- the fluctuations in the balance sheet and the P&L, primarily in the P&L, from quarter-to-quarter based on derivatives and primarily noncash events.

So we did get all our interest-bearing debt paid off. It did have an effect below the line, and from a standpoint of that, in Q3 alone, we had below-the-line charges related to this debt that we paid off at $2.65 million, so very significant to the quarter. And then Q3 year-to-date, the 9 months ended September 30, 2018, we had below-the-line charges amounting to $4.5 million. So you can see the importance of getting that toxic debt off the books, and we were able to do that during the quarter. It should really help us into 2019 with our P&L and funding.

One of the reasons -- or the funding that we used to pay off the debt was the BKI proceeds investment obligation, which amounted to about $10 million of new funding. It is an obligation, but it is -- has no structured payments until there is "proceeds" from the litigation that's outstanding, both the Axon and the WatchGuard litigation that's been ongoing for some time. So really nothing happens cash flow-wise until there is a jury award or some type of settlement that brings proceeds cash into the company. And at that time, then we do have to repay BKI.

But there is no structured repayments, not necessarily a maturity date at all, so this really release the quarter-to-quarter, year-to-year obligations from structured debt. They do get a specified return based on how long it is before they get their proceeds and payments out. So it is an obligation that has to be repaid, but there -- it's not structured and it's down the road.

Towards the end of the quarter, we also completed a $7.3 million underwritten public offering, which was used to bolster working capital and cash position. And you might notice that at the end of the quarter, our cash balances were $7.6 million. So it's nice to have that kind of liquidity sitting on our balance sheet at the end of the quarter.

As a result of that underwritten public offering, we were able to satisfy the NASDAQ deficiency letter that we disclosed earlier in the year that required us to have at least $2.5 million in net equity. As you can tell from looking at the balance sheet, we're now at $3.4 million. So we achieved that minimum, and we're going to be monitoring that and hopefully keeping that under control on a go-forward basis.

During the quarter, we continue to make significant progress across the board in all litigation. If you look at Axon, they continue to lose across the board at the patent board as well as the Federal District Court. In the Federal District Court, you -- hopefully, you were able to see the Markman order that was issued in July of 2018. There were basically 3 disputed points. The judge sided with Digital Ally on all 3 points, and that's a very significant event in the court action.

Basically, at the same time, they issued a scheduling order that requires pretrial conference on January 16, 2019. So that's approaching very rapidly. Fact discovery already closed on October 8. There is a court-mandated mediation that happens later in November, and right now, the experts are submitting all their testimony and evidence to the court. So things are moving quite rapidly in the Federal District Court.

And also recently, I will also note that the Federal District Court refused to allow Axon to insert a certain new invalidity defense into the trial. It was a last minute, last ditch effort by Axon because basically all their other defenses have been defeated or looked at by the patent board and dismissed on its face. So they were trying to put in a new invalidity defense, and the Federal District Court judge denied that. So basically, Axon has what they have in their defense. And quite frankly, it's been -- or at least in our view, it's been already handled by the patent board in their rulings.

So things are marching towards trial. I guess, what I'd like to say is that in a patent matter, if you're the defendant, you don't always have to win, you just don't let it end at a certain time. That's been what Axon has been trying to do. But right now, with the pretrial conference dated in January of 2019, this thing is quickly moving towards trial, which is good.

In the WatchGuard case, it continues to move towards trial as well. As you might recall, many of the rulings that happened on the Axon Federal District Court case as well as the patent board have similar effect on the WatchGuard case. In fact, the fact discovery now closes in WatchGuard on the 17th of December of 2018, and the pretrial conference is scheduled for April 9 of 2019. So Axon, the pretrial conference is in January and WatchGuard is in April. So both of those cases are quickly moving towards trial.

Overall, we're very pleased with the developments in both cases. And again, our goals for these patent lawsuits in 2019 is, number one, stop the sale of infringing products by Axon and WatchGuard. What we're moving forward is an injunction that will stop that, any new sales of that. And then, of course, the jury-awarded damages will hopefully reward us for the product -- the infringing product that's already been sold out on the market. So -- but that's our main goal, and we see that happening in 2019.

One interesting comment I'll also say is that the law enforcement community seems to be taking note of the status of the patent litigation. In RFPs -- recent RFPs, we've seen more requirements for disclosure of patent infringement suits against products that are being offered in RFPs. And in fact, several cases, the RFPs have been delayed or put on hold until the outcome of the patent lawsuits happen. So clearly, the law enforcement community sees the value of our patent and where this case is going, and hopefully, it ends nicely for us.

From an operational standpoint, in the third quarter 2018, revenues continue to be challenged primarily due to the price competition. It's really hard to compete against free, which we've had to do. And we've also had to compete against our own product, our own inventions with the VuLink. So that has hurt our revenues.

We did carry about $265,000 of backlog into the fourth quarter. So had we shipped that, we would have had a quarter-over-quarter increase in revenues, but unfortunately that backlog didn't allow us to do that and then also, the delays caused by just clearing up the patent. There appears to be a delay in actions by the law enforcement customers until they know and get clarification on the patent suit.

From the SG&A expense side, as you recall, we undertook a large move to decrease SG&A expenses towards the end of last year and early this year. In that regard, if you exclude noncash charges including compensation, we were $1.3 million less in total SG&A than the prior year quarter 3 amounts. And then year-to-date, we were $3.4 million less than the prior year. So obviously, the SG&A strategy is working, and we're well on our way to meeting our goal of $5 million of year-over-year cost reductions 2017 to 2018.

From an overall standpoint, we see improvements in 2019, primarily in the law area because of the patent rulings and moving towards trial, and there'd be clarification to our customers of where everybody stands in terms of that patent. Our commercial revenues are improving and continue to move into new territory and new channels that take a little bit of time to develop, but we're very excited about some of the pilots that we have ongoing out there and some of the moves we have into new lateral markets. So overall, we've really cleaned up our balance sheet and our liquidity position. And with that, we can sustain our operations and funding the patent litigation through trial and hopefully, award of damages.

So with that, Stan, I'll turn it back to you.

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

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Yes. Thanks a lot, Tom. And I want to just reiterate a little bit of -- little bit in concerning what our industry is looking at and address, much like what Tom said, some of the reasons that we're seeing some departments wait and see what happens concerning our patent litigation because you got a couple of things going on.

One, timing-wise, we should have completed everything that the court has required us to do by the end of January. And if you look at the fact that they have issued several attempts to introduce new art that they believe would affect the invalidity of our patents and look at the fact that in September, we actually had an additional patent that's in the auto-activation family issued, so again, here's a situation that as they continue to even try to produce new art that we again clearly present to the patent office, our technology continues to have patents issued surrounding auto activation. So at the end of January, we will have clearly went through the mediation which is scheduled for the 29. We will have our pretrial, which is January 16, which, at that point in time, we are anticipating that the judge will set an actual trial date. But at the end of January -- let's say the first week of February, we'll be in a position and we feel real strongly that the evidence just continues to pile up in our favor that we can actually file for summary judgment, if we so choose.

And this summary judgment is just what Tom sort of was touching on. It's an injunction. I mean, the patented products and the process that they've been doing would put a lot of Axon's customers in the lurk in regards to the fact that if their contracts state that they've got to upgrade the technology, if they've got to service the technology, if they have to just -- obviously, they would not be able to continue to sell the products that are violating our patents. So they are putting in not only themselves but their customers in a unique situation that could really, really backfire on them. And so therefore, there has been some delay to see what happens.

I know that we've all -- and there's a lot of calls out there and e-mails and everyone is all excited about the damages. Don't get me wrong, those are big numbers. I mean big numbers. I've stressed this time and time again. And again, with Axon coming out with their numbers just the other day, again, they were good numbers. They point out how much business they've booked. I point out the fact that they also were successful on a patent litigation infringement case, in which they got a 40% royalty.

You look at the damages, and they're just -- they're very, very large. If you look at their sales versus -- I don't care if you use 40%, I don't care what number you really use, it's a very large number. But the key is what it does in regards to the industry. The industry as a whole, it will be woken up in regards to who's the rightful owners of auto activation, and it would be Digital Ally.

So there's a lot riding on this. We know there's a lot of riding on it. But when you've been challenged approximately 8 times in the patent office surrounding our technology, when you've been challenged, again, on invalidity in the courtroom and it continued to rule on our favor, the remaining little bit of art, prior art that's even out that they may try to attempt again to submit to a court is minimal. And with the additional patents being issued just as recently as September, it's been looked at.

So we're very optimistic about 2019. We're very thankful that a lot of law enforcement is starting to request, is your product -- not whether or not it violates, but has it even been alleged to be in violation, even if it's being alleged to be in violation because they want to know. And I would tell you -- I mean, if you're the one making multimillion-dollar decisions out there, you better make sure that you've done your homework and know who owns what technology.

So sort of exciting time for us with the industry becoming much more aware, us being in a position the first week of February to actually, potentially, if we choose to, file for summary judgment. That can be devastating right then and there, and a lot quicker than everyone anticipates as far as waiting for a trial. And I know everyone says, "Well, they'll appeal it" and so on and so forth. I'm sure they will, but the industry will know who the rightful owners is, and they will let their words -- their voice be heard.

So I think, Holly, we'll go ahead and open this up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is going to come from the line of Bryan Lubitz, Aegis Capital.

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Bryan Lubitz, [2]

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I want to touch on, first, the quarter in terms of the numbers, and then I want to get into litigation, just to make sure I'm clear on what you guys are discussing. First and foremost, the storage revenue and the warranty business seems to be up significantly, 47% and 18% year-over-year. As compared to the quarter, it's roughly 15% at a revenue mix. Where do you guys anticipate that number going in the future? Because it's jumped almost 50% from where it was last year.

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

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Yes. Bryan, this is Tom. Yes, we're very pleased with the movement over towards the recurring revenue piece of the business, and quite frankly, we're very excited about some of the projects we have on the commercial side and not to mention, the law enforcement side. And honestly, I hate to even project or talk about where that thing is going in 2019, but we have some very significant pilots out there that could make multiples of the current revenue stream that we have in recurring revenue. So that is a high point of the quarter and year-to-date, and it is a focus of management. And I think everybody's going to be pleased with where that number goes in 2019.

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Bryan Lubitz, [4]

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So with that being said, the storage revenue, you guys, gross margins, it's a very high number on that part of the business. What is the gross margins on the warranty part?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [5]

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Well, the warranty part runs -- the margin is around 60% -- 50% to 60%, and quite frankly, that's a very predictable number because we sell the extended warranties and we have a very good handle on what our warranty costs are. So -- but our margins are quite healthy in that area.

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Bryan Lubitz, [6]

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Okay. So sticking with the margins. Obviously, you guys had a lot of cost-cutting. SG&A expenses decreased 7 figures. Gross margins went up 17%. Typically, we've been running, for the last couple of years, in the 50% range. Are you guys in the 60 -- the upper 60s for the whole amount now?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [7]

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Are you talking about the gross margin level at 60%?

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Bryan Lubitz, [8]

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Yes.

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [9]

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Yes, yes. That's our long-term goal, is to get to the 60% level. Again, that's after reserves and warranty costs and all that kind of stuff. But 60% is a good goal for us. We've beat that in the past. We've been as high as 70%, 72% in one quarter, as I recall. So 60% is a net number. It's a good goal for us, and quite frankly, I'm hoping to beat that in 2019.

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Bryan Lubitz, [10]

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Well, yes. So you guys say that your gross margins in this quarter went up 17%. What were the gross margins this quarter?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [11]

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I'd have to look for that. It's about 57% or so. But quite frankly, that's after all the deductions, reserves, warranty and all that stuff. But on new product sales, we should at least hit 60% on a go-forward basis.

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Bryan Lubitz, [12]

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Okay. So now you guys -- you've cut a lot of costs, and your margins are going up. Your revenue is almost identical to last year. I mean, you're talking about in the ballpark of $1 million. Is the loss of the EPS mostly attributed to the fact of the additional 2.5 million shares compared to where you were last year?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [13]

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Well, the below-the-line charges have really played heck with our quarterly and year-to-date bottom line figures. So yes, that -- it's a combination of more shares outstanding with some of the dilutive issuances that we've had, coupled with the amount of nonrecurring below-the-line noncash charges related to the toxic debt and warrants and stuff that have been cleaned up, as I said earlier in the call.

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Bryan Lubitz, [14]

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And last one on the earnings and the share amount. What is the current outstanding and float amounts for the stock?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [15]

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Well, we're right at 10 million or so in shares outstanding. I could give you the exact number. Hang on a second. 10,424,000 is the exact shares outstanding, and that's after the underwritten public offering. That's a very recent number.

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Bryan Lubitz, [16]

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And now in the float?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [17]

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Yes. There's probably 70% of that in the float. I don't know the exact number. So there's probably 7 million or so in the float.

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Bryan Lubitz, [18]

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All right, all right. So now just switching gears to the litigation. First and foremost, Stan, as you had said earlier, that number is pretty big. And then we've talked about the potential on the last and other conference calls in regards to what they've sold, upwards of $800 million. And even if you guys take $0.10 on $1 and look at their royalty rate, that number, again, and especially if you attach trouble damages is over $100 million. Do you have any clue why at all these companies like WatchGuard or Taser or -- they're not even disclosing this with their quarterly conference calls or discussing it at all?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [19]

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No, I don't. I mean, it's a little surprising to me because I know that anything that's somewhat a material event or a material -- potential of a material charge along the way, you clearly need to be disclosing that to your shareholders. And if -- based upon the numbers that are out there and based upon some of the royalties that they've had success getting, we stand to have a very, very large damage claim. And so why they didn't, I do not know. I think if they're unsuccessful in this and the number is as large as we believe it could be, they'll just have to address that with their own shareholders. I'm sure they won't be very happy.

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Bryan Lubitz, [20]

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Okay. Now that being said, less than 5% in these cases, I believe, is the number that actually go to court. You guys are in a mediation at the end of the month, on the 29th, correct?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [21]

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Well, it's this month, so a couple of weeks.

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Bryan Lubitz, [22]

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This month?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [23]

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Yes.

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Bryan Lubitz, [24]

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Okay. So prior to this mediation, have you got any sense of the other side in terms of whether they are willing to take this to trial? Or is this something that we should expect at least another 6 to 9 months at the minimum being caught up in the courts?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [25]

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We haven't gotten that far at all, but I will tell you we dislike each other quite a bit. Let's put it that way. And some of the tactics that we believe that they have launched against us, it's going to have to be a very forgiving, what do I say, proposal that we would even consider. So -- but no, we haven't even gotten that far. I mean, right now, as you can tell, even on the very last day, they're still trying to try to come up with something that they can hang their hat on in regards to the invalidity, in other words say that the patent shouldn't have been issued. And they haven't had the -- haven't had any success to date. So let's see what happens here in -- I think it's the 29th. So we're really close to when that's going to happen. And then on the 16th, that would be pretty interesting too because we do believe that the judge has continued -- because it took so long and they played all of their games in the patent office, the judge recognizes that and will probably continue a very fast pace of getting us to trial. So we're pretty pleased on this.

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Bryan Lubitz, [26]

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Okay. That being said, Stan, you guys are open to negotiations if they come to the table in good faith in the end of this month. Am I right in assuming that?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [27]

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Yes. We have to be. I mean, we're -- there are fiduciary responsibilities to you all in trying to look at what's the best for the company and the shareholders, so absolutely. We don't have a closed mind. And if they do come with something, it'll be something that will be advised by our attorneys, by our board and maybe even our expert witnesses. I don't know how that all plays out. But this isn't going to be a situation that Rick and I don't get along, so therefore, we're never going to be able to come to a resolution. It's not like that at all. I mean, look, if they come with a fair proposal that puts us in a position that's great for the shareholders, we're going to clearly consider it, and so we'll go with an open mind into the meetings.

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Bryan Lubitz, [28]

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Okay. And just lastly, just touching on those figures, and I'm not expecting you guys to put anything out there. But am I right in assuming that they've already sold over $800 million worth of the product? And even at $0.10 on $1 there, you're looking at an $80 million bottom line?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [29]

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So Bryan, if you look at their numbers and the things that they've been talking about, I don't know that they've sold in regards to $800 million, but they have booked. And so what we're talking about there is they've got a 5-year contract that they're going to get compensation for, for the next 4 years or whatever. It's on the books. And so therefore, they got that even by what we believe was the wrong means, by utilizing our technology. And therefore, those contracts probably are in excess of that number. So -- because they just mentioned they already got $100 million reoccurring revenue that they're now looking at. So let alone hardware costs, reoccurring revenue, the things that come into valuations in regards to the patent litigation case, it's probably even a bigger number than that.

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Bryan Lubitz, [30]

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So now lastly, this is without trouble damages? They won a royalty of 40% against PhaZZer. I'm going very conservative and saying 10%. Thereafter, would you guys have a -- if you set a deal or wind up -- found awarded in your favor a royalty rate moving forward, is that something that would be off of a baseline of what they've won in past cases? Is that something that's negotiated? Or is that something that's handed down by the judge?

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Stanton E. Ross, Digital Ally, Inc. - Chairman, CEO & President [31]

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Well, I think the damages would be pretty much coming down from the judge, and I believe he would sit there and say a royalty too going forward. So again, we could look at that. Here is the thing, Bryan, and again, I got to stress this, that this technology is being requested by the industry. And there's a lot of people, believe it or not, pulling for Axon/Taser to be successful because of the fact that they're going to have to come to us as well. Matter of fact, even if you look at some of WatchGuard's early defense, it's like, "Well, we'll accept whatever ruling Axon gets, like on the Markman's hearing." That beat them right where it hurt real nice. So anyways, the longer it is -- this is a technology, a product that will play out very favorably in this industry for some years to come. I mean, again, I've said this time and time again. It's one thing for a department not to have the capital to buy a body camera. It's another thing if they actually bought a body camera and for some reason, they did not turn it on and there was an incident. And now you got to get in front of a very, very angry crowd, jury and face the lawsuits that stem from that so -- as far as the department. So anyways auto activation is clearly a feature that is almost a requirement nowadays.

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [32]

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Bryan, this is Tom. I would add just a couple things. We've always said that the outcome of this case will dictate the competitive landscape for the future of body cameras. And I firmly believe that, and I think Stan does as well. And the second thing, Taser or Axon, I guess what they call themselves now, really has never been in this kind of position that I'm aware of. And I've looked back and I don't recall ever seeing them as a defendant in a patent litigation suit. They've always been the aggressor, the plaintiff and trying to protect their shock weapon patent. So this is a new shoe for them that they're not comfortable with apparently, and they're feeling their way as well. So I guess what I'd like to say, at the end of the day, patents mean something. Patents are costly and should be enforced. Taser used that to build their conducted weapon business, and they continue to use that. If you look, they've won 3 or 4, 5 patent cases, put companies out of business that infringed on their conducted weapon patents. We expect the same. We have a valid patent. The patent board has ruled on it repeatedly. And at the end of the day, we want to protect our patent, and hopefully, it hurts the competitors as much as Taser's hurt the competitors in their conducted weapon business.

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Operator [33]

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Our next question will come from the line of Ishfaque Faruk, WestPark Capital.

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Ishfaque Ahmed Faruk, WestPark Capital, Inc., Research Division - Technology, Media and Telecom Analyst [34]

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A quick question from me with regards to Taser. Taser's revenues on the recurring software revenue side, it's growing like crazy. I'm like why isn't DGLY's revenues growing on a similar level at least?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [35]

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Well, Ish, that's a great question. They have their Evidence.com back office, and that's what's growing their recurring revenues. Now remember, they are currently in half -- over the last 1.5 years or so, offered a trial subscription where they give hardware away and one free year of Evidence.com. So I can do a lot of things, Stan can do a lot of things, our salesmen can do a lot of things, but competing against 0 and free is very difficult. So once -- and again, once you have them on the line and using the product, it's very, very sticky, and they do not move. And they -- it's got to be something very, very attractive to move once you've got their business in terms of a back office. So that's kind of what we're fighting, Ish. They've got the business primarily because they're giving their product away, their hardware away, and then they did give 1 year free subscription with Evidence.com. And once you have them, you got them. And then they start charging extra, I guess, in year 2. So that's kind of what we're up against.

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Ishfaque Ahmed Faruk, WestPark Capital, Inc., Research Division - Technology, Media and Telecom Analyst [36]

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Okay. And is this, the hardware -- the 1 year free software because of the free hardware, is that going to -- is that a model you think you guys will adopt at DGLY? Or when do you -- how do you do it?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [37]

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We may -- a lot's going to depend on the next 60 days on what we do. And as I stated earlier, if we may decide -- we obviously are well, well capitalized now. We obviously could put together some programs like that. We also feel like we may be in a position first week of February to just flat go for a summary judgment and look for an injunction and really get arms around this. So there's going to be a few decisions that are going to be made over the next 60 days that really will play out a lot more in 2019. And we'll be glad to probably best to address that on the next call after we get through with -- clearly have a good indication where we're at through the press releases and as such over the next 60 days.

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Ishfaque Ahmed Faruk, WestPark Capital, Inc., Research Division - Technology, Media and Telecom Analyst [38]

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Okay. And my last question. And is this software revenues going to be part of the litigation against Axon or not?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [39]

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Yes. The way they do it, Ish, is that -- you look at the fact that they're selling packages or they're giving away packages. I mean -- and so what they do, the way it's -- patent damages are looked at, it's like a car. If you bought a car and you bought it because you love, let's say, the all-wheel drive capabilities, which is, let's say, patented, and someone comes and says, "Well, that's only a $2,000 feature." No, it's not a $2,000 feature, it was a car sale. It was a $50,000 car sale. So they look at the bigger picture in regards to the package. So if they got, let's say, a $5 million contract and it had all these hardware, software, everything, services provided, they'll look at that lump-sum number when they're doing their evaluation. So I would say a very, very large percentage of that is probably going to be something that the expert witnesses are looking at and will be utilizing in their damages.

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Operator [40]

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(Operator Instructions) Our next question comes from the line of [Patrick Attorn], private investor.

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Unidentified Participant, [41]

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Have you guys kind of played in putting in some type of poison pill to prevent Axon or even WatchGuard or other companies from taking you over to avoid paying out the litigation results?

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Thomas J. Heckman, Digital Ally, Inc. - CFO, VP, Treasurer & Secretary [42]

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Yes. This is Tom. I'll address that. We actually tried to put in a blank check preferred stock feature, which could be used for poison pill, by the way, back in -- at the annual meeting this year. And it was -- it got an overwhelming majority of those that voted, but we did not get a quorum for that kind of issue to pass. In the annual meeting, you have to have 50% of all shares outstanding, not just 50% of those that voted. And we weren't able to reach the quorum level to get that thing passed. So we sure wish we have that in our arsenal. We don't have that. We have some other issues that we can use in this regard, but we don't have a benefit of a blank check preferred out there.

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Operator [43]

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And currently, we have no further questions in the queue. I'll turn the conference call back over to Stan Ross and Tom Heckman for closing comments.

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

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Thanks, everybody, for taking your time out today to listen to our call. As you can see, things are getting a lot clear and are getting a lot closer to some resolutions on not only the litigation side, but also in regards to some of the significant improvements we made in regards to our numbers. And we're very hopeful that 2019 is going to be just a very exciting year for us. And we appreciate everybody's interest in the company.

So if there's anything we can do, feel free to give us a call here at the company. We'll try to address your questions then. Holly, thanks for your help as well today.

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Operator [45]

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And once again, we'd like to thank everyone for dialing in for today's Digital Ally conference call. You may now disconnect.