Good afternoon, and welcome to the Digital Ally Incorporated Second Quarter 2013 Operating Results Conference Call. All participants will be in listen-only mode. There will be an opportunity to ask questions at the end of today’s presentation. (Operator Instructions) Earlier today, Digital Ally Inc. issued a press release that included certain cautionary language with respect to forward-looking statements. The company would ask you to review the language in the press release regarding forward-looking statements as they are equally applicable to any forward-looking statements made during this conference call. (Operator Instructions) Please note this conference is being recorded. Now, I would like to turn the conference over to Stan Ross, CEO. Mr. Ross.

Thank you very much. Thanks everybody for joining us today for our second quarter operating results. I have with me today, Tom Heckman, who is the company’s CFO. Tom will be going over the details of the numbers. As you can see, we have to continued to make a lot of progress on a lot of the fronts in regards to Digital, and obviously, if you have seen some of the most recent press releases, you also see that we got a fairly good start to the third quarter as we mentioned in the press release as far as operating results. I am not trying to steal the thunder, but we will elaborate on why we are optimistic about the third quarter. And we, for the first time in many years actually given guidance in regards to what we believe the operations can generate here in the third. So, anyways, there is one thing I do want to touch on and we will elaborate on quite a bit is I believe it is on the 23rd we issued a press release concerning some patents that were awarded to the company. These are patents that we filed back in April of ‘08 and they covered our main product lines, mainly the in-car video system that was totally encapsulated in the rearview mirror, with also some additional features that we had and the abilities that we had with that particular model. So, while we were as many of you may know that have been shareholders for a while back in, I guess, it was March of ‘06 when we started shipping product, we rolled off nine consecutive record quarters, and it had a lot to do with the bizarring and the quality of the products we were generating at the time. And…

Thank you, Stan, and welcome to everyone and thank you for joining on us today. First of all, I got a myth that I had a commitment that surface yesterday that calls us to have to delay the conference call today and I really apologize for that as certainly I couldn’t get out of and either to do and was company related it wasn’t personal, so I appreciate everybody understanding that and moving the timing of the call back a little bit so I could participate in it. Overall, first of all, we did file our 10-Q this morning. It is a full analysis, the operations of the company balance sheet and P&L wise and also very extensive management discussion analysis and has a lot of good data in there. I don’t plan on going through all of that, my god, but I will try and hit some of the high points and some things, interesting things at least as I see it that happened in the quarter and in the first half of the year. So, I’ll just provide a summary and then we’ll turn it back to Stan and we’ll go to a Q&A and answer you guys we will have some additional questions for us. So, first of all I just want to say that the second quarter 2013 was a very good quarter for us in virtually all aspects when you compare to the 2012 quarter, revenues improved 10% to $5.1 million, gross margins improved to 60% from 54%, SG&A expense improved by 9% although a year earlier included a $650,000 litigation charge in 2012, so there is a little bit of apples-and-oranges type comparison there. Our operating income improved almost $900,000, our net income improved over $1 million and EBITDA improved by $225,000. So, anyway…

Good, thank you, Tom. I appreciate it. I think what we will do is go ahead and open up the phones to the Q&A session, and then we can close with some final comments.

Okay. (Operator Instructions) And currently sir, I am showing no questions in the queue.

Well, I think Tom did an excellent job of trying to explain everything. I do see a few people hopping in the queue.

Okay, thank you. Our first question will come from George Whiteside of SWS Financial Services. Please go ahead.

Stan and Tom, congratulations on a great quarter, and I know you are going to strive to improve upon it in the future, but certainly it represents excellent progress. Just an accounting question, I noticed that on your balance sheet, you have intangible assets and I am sure it’s been there for sometime. I presume that this was created by an acquisition at some point in the past, is that a reasonable assumption?

Well, yes and no, George. The majority of that intangible asset is the legal cost for us supplying for and prosecuting our patent and trademark out there. And in fact what you do is the accounting is our legal fees and all the fees necessary to file and protect a patent or capitalize and you amortize them as soon as the patents are awarded. So, since these two patents were awarded in June, we will start amortizing a piece of that in July. So, that’s really the cost of getting the patents and trademarks that we have in place now.

Well, thank you for that explanation. And I think it’s great or the reason for it, I know you don’t like to have legal cost, but the fact that it produced something that is positive for the company is excellent. My second item is I noticed regarding taxes that you have a balance sheet item, where you have taxes payable with your NOL, I thought you would not have any tax liability for a considerable period of time and that your earnings for years to come will essentially be without taxes?

Yes, George you are absolutely right. The NOL I think is around 7 million or 7 million plus. And that does offset pretty much all of our federal taxable income in most of the state. What this refers to is some of the newer states what we have filed in. Every year, we are filing additional states. And those states don’t recognize previous NOLs, so that’s basically that. That’s really state income tax liabilities that we have on the books. They are pretty minor, couple of 5,000 or so, but we do have to pay a portion of those state taxes because of the newer states that were involved in.

My next question involves your patents, Stan had indicated that you have challenged some competitors who began using some of your “technology” and now that there has been an award, will that allow you to perhaps get some type of settlement fee, license, etcetera?

Yes, George, this is Stan. I mean, I think there is two avenues, those that you put on notice that they were a violation, you actually can go after them in regards to damages that may have occurred from that point going forward. I mean, that’s one of those things you put them on notice. The ones that are continuing or have a product that’s similar to ours that want to and if we elect to allow them to continue down that path, they need to be talking to us concerning some type of royalty to continue to draw that way or otherwise they need to be taking their product off the market or in the situation we will definitely call them on the carpet and have the coach to do so. And they were strong, I mean, I know of one or two in particular worthy competitors that are out there that will not like these moves at all.

Good, thank you.

Thank you, George.

And our next question will come from Jeffrey Scott of Scott Asset Management. Please go ahead.

Good afternoon.

Good afternoon Jeffrey.

First question on the state contracts that you are buying for the contracts are not all or not, are they?

Some are Jeff, I don’t know the one that I am aware of right now is an exclusive the other one I don’t think is. So, I think there is one on one, but we have got 14 or 15 state contracts, 15 state contracts probably about half and a half were if you have the state contract, you are proved to sell within that state, but there maybe three or four other ones. And there is about a half of them that are truly exclusive state contracts. And it’s usually if they are exclusive state contracts, it’s exclusive with the state patrol, if you will for that that state.

And Jeff, some of them to those, they go as far as when they are doing, they are getting back to the specs, the one in particular that we are waiting on basically talks about the features that they would like to see, but then the last is that, it must be encapsulated in a rearview mirror. So, yes, definitely with today’s patents, I think we may be the only player.

Okay. I like to drill down on the revenue number a little bit. The other revenue that would be repair and service, correct.

Well, it is repair and service and we also sell parts to our, but it’s primarily repairs and service.

Okay. What was the total of the commercial sales, the non-police sales this quarter?

I would have to do a little bit of digging here, but it had to be in the $250,000 neighborhood. I can get you exact number.

Okay. So, what we are looking at is about $4.5 million of police revenue?

Correct.

Right. And how many salesmen do you now have onboard. Is it 20?

It’s right at 18 for us out in the field and then we have four in house sales coordinators for support.

Okay. How many of those 18 would have been above $150,000 in sales, I mean $4.5 million divided by 18 is $250,000 each?

And you are asking me how many would be above $150,000?

Yeah, I would like to say $100,000 or $150,000 whatever kind of you want, yes, I don’t have that number.

I don’t – we have don’t have specific numbers in front of us Jeffrey but I would say that the vast majority of them were over $150,000.

The thing about it is I mean we obviously had one of the (indiscernible) that had an unbelievable quarter, but the rest of them were just pretty steady as you go.

Okay, alright at $150,000 I mean 10% commission is $15,000 per quarter and $60,000 a year that’s not a great living. Is that enough to keep them happy, are they happy, I mean are you happy that kind of level?

Well, we have a structure in place that most of them need to we would like to see them easily come into the – to get into – let me back up you getting to the power band earnings they need to get into that $1.5 million mark for the year. They may make some very good money. So, the way it’s structured they are plugging away there, and if they start to get little momentum they will see it at year end, but every year, they got to pick it up again. So, go ahead.

You are saying they need to get to a $1.5 million but if you take $4.5 million for the quarter divided by 18 sales people that’s only $250,000 for the quarter hence four is $1 million on an annual rate and that’s on average, so there have to be a fair number of people that are going to be some distance away from a $1.5 million?

That is true, that is true. In some territories, I mean California is bare, I mean they just don’t have a lot of money out there. The certain regions that are going to be a lot tougher than others that we already have established state contracts in, so it varies. It sounds like you are still struggling with trying to get the productivity out of the sales force that you should expect. I think I have given the productivity out of the sales force. I don’t know that the opportunities are equal throughout the territories would be how I would be more address it. I mean I know these guys are after beating the bushes and calling upon people and showing our products I mean we they go into the trade shows and certain areas just have access to more money than others. At the same time, you got to stay in (indiscernible).

June 30th, it was right on $1.8 million.

$1.8 million. Okay, (indiscernible) on sale though the end of September, correct?

Yeah, we did – I don’t know if it’s in the September, but it was a summer sale roughly 2000 a piece.

Yeah, what is your expected level of inventory by the end of September? Is that going to be moving out?

Yeah, they are moving out I would tell you that. Although we got a lot to move, obviously there is several contracts Jeffrey that we are getting on and we have sharpened our pencil and we have very high hopes of getting those. If those occur we could see a substantial reduction, but again it’s hard to predict if and when those contracts will award if we win them. And then quite frankly some of them were even international and good knows the sales cycles on those things.

This is beginning to sound a little bit like a broken record because you said the same thing at last quarter international sales was supposed to be right around the corner end of first quarter, the first few sales were going to – was supposed to happen in the next week means this is why turning the contract 90 days in a lot of ways, is it not?

Well, again as Tom has mentioned and as has been real evidence, the international stuff is just no one like to spend the timeline on that, because it is so unpredictable on how that will happen. Domestic sales, we are seeing a steady increase in the sales. The price has been attractive in comparison to our competition. So, we are making a strong effort to move these products. All-in-all done, I mean, even….

Sort of closed down.

Yes, and then you’ve got even the contract that we have with them expires in February in either case. So, there is a few more if, but as you know, we have some litigation going on there, but we just can’t elaborate on the whole lot.

Okay I’ll drop out for somebody else. Thank you.

Thank you.

(Operator Instructions)

It looks like we are good. Well, I would like to thank everyone for tuning in today. I mean, obviously, you can hear the enthusiasm, you can look at the numbers, you can hear and see that the new products seems to be a tremendous amount of interest around those as we start to roll them out and that the new IP value that we received through our patents continue to enhance the value for our shareholders. And matter of fact, we will be attending on Friday, the FSX Conference in Fort Lauderdale, Florida, which Tom and I will be presenting on behalf of Digital Ally. So, we look forward to being able to talk to everyone next quarter. And we appreciate your time today.

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