Kustom Entertainment, Inc. (KUST) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Digital Ally Incorporated First Quarter 2015 Operating Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Last night, Digital Ally Incorporated 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. Please note this event is being recorded. I would now like to turn the conference over to Stan Ross, CEO. Please go ahead, sir.

Thanks, Chad. Thanks everybody for joining us today. I have got Tom Heckman, the company’s CFO with me today. We are going to have Tom do a little recap of the first quarter operational results and then we will get into a little more discussion on how and why we still are feeling very confident about our guidance that we gave in regards to $25 million top line number and also our operating numbers for 2015. As you guys know our business, they have a lot of insight into the pipeline and we are quite excited about what we have got ahead of us for the remainder of the year. So, Tom, please go ahead.

Sure, Stan and good morning to everyone. I appreciate you joining us today. I do want to let you know that we did file our Form 10-Q earlier this morning and I refer you all to that document. It is a very in-depth analysis of the financial results for the quarter. And what I will do is keep my comments very brief today. I know there is lot of questions. In fact, I have gotten a lot of questions already about what went on in the first quarter. So, I will keep my comments brief and hit some of the highpoints and leave a lot of time for Q&A session. First of all, I guess as the first quarter overall was some mixed operating results, it certainly wasn’t what we expected and it does point out that we do have some work to do for the balance of the year. But if you look at our revenues increase 10% over the – roughly 10% over the prior year, it was a little bit down from the fourth quarter 2014, but a full 10% or roughly 10% of those last year’s numbers. So, that’s a good indicator, but it certainly wasn’t what we expected with all the activity that was going on. We did see the first few increased to roughly 21% of our overall revenues in the first quarter versus 4% in the prior year quarter. So, certainly, we are seeing the impact of the first few on our revenues and that focus I think will become more and more pronounced throughout the year since there is a lot of attention in that area. Overall, our in-car sales systems though flattened out in the first quarter and I think there is couple of reasons for that. Our customers seem to be pausing a bit in their buying practices and their cycle to address a couple of internal issues. I would say internal, but it’s involved some of the critical processes that are out there. In-car video RFPs have slowed down or at least the decision cycle has slowed down, because most of the focus has been on in-car, I am sorry, on body-worn camera. So, they have replaced or refocused towards the body-worn cameras and they are fully engaged in developing standard policies and procedures and starting pilot processes on the first few or on the body-worn camera area. And I think for that reason, there was a little less focus on the in-car video system area and it resulted in a flat sales on the BBM or the visual video mirror line. Also, our customers are dealing with the new grant program, I think hereby sort of the new grant programs from federal sources, but there are some of the state level as well that have been announced, but really the details and owing to the devils and the details on those things had not really been announced and clarified. So, a lot of our customers are pausing to take a look at that and certainly they would rather meet the qualifications of brands, both federal and state and get some matching grants at least versus buying the systems totally on their own funded dollars. So, you can understand why that would pause some of our customers, like we certainly have seen that. Some states are also introducing their own mandatory bills regarding the usage of both in-car and body-worn cameras. Those things are working their ways through the legislature. Some have already emerged I think this is New Hampshire and New Jersey or somewhere it’s already pass that. There is a lot of other states that are in certain process of considering and maybe even passing similar bills. And that would obviously have a large impact on the buying practices of the – of our customers certainly from a domestic standpoint. Certainly, our customers are pausing for that reason, but our sales pipeline continues to grow, it’s very high domestically. And we believe that as these areas get clarified in terms of funding and where they are going with body-worn cameras versus in-car video systems or combinations of two. We will see those and the pipeline speed up and we believe that is a good omen for the balance of 2015. In reality and looking at quarter – in our second quarter revenues to-date were about roughly half way through the quarter and our revenues are running substantially ahead of the prior year. So we believe that the sales cycle is beginning to unfold and we are seeing some good results from this. So we are happy with where we sit at and in terms of revenues in Q2. International sales were meager in the first quarter roughly $40,000 and that’s in the right home with that obviously. But what we are seeing there is an increase in body-worn camera pilot orders, our pilot projects. We have a number I would say probably in 15 to 20 different pilot projects that are underway internationally that could turn into substantial commitments and orders down the road. But again the international arena is very hard to project and very difficult from a timing perspective to understand when that’s going to happen. But I would see, it’s very good activity in international sales pipeline and I expect the remainder of the year to show some pretty good growth in the international area. One area that’s really becoming a hot area for us is the commercial fleet revenue business. I am not sure how many of you guys have looked at or understand the new FleetVU cloud management tool that we recently introduced to the marketplace. It’s really a revolutionary tool that combines assets tracking, video coverage of the events such as crashes and such. And data management and data analytical software and really what that does is allows fleet operators that have substantial numbers of vehicles some in thousands and some in tens of thousands of units to monitor their drivers’ behavior and their assets how they are being deployed. From an overall standpoint it’s a very, very powerful tool, it’s revolutionary for that area. I believe that we will see some substantial orders in the near future and hopefully we will be announcing those. So I really believe that the commercial fleet area is going to – generally some good revenues for the balance of 2015. Gross margins were very disappointing during the first quarter, 39% is what we have versus 59% in the prior year a full 20% decline. There were several temporary and hopefully non-recurring issues that we have dealt with in the first quarter that I think had a direct impact and in fact I know ahead of direct impact and substantial impact on the gross margin. First of all, we did introduce a split shift in our production, area of production assembly area, basically doubling our staffing in that area. So we had substantial costs in terms of hiring and training those people and they are now trained and in place and we are – we have increased substantially our capacity to assemble and produce all our products and in particular our body-worn cameras. So that was somewhat of a non-recurring cost in the first quarter. Secondly, we had a structural issue in our PCB boards that we had – that caused a lot of rework and quite frankly scrap costs that hit us in the first quarter. Again that issue has been dealt with, fixed. It did cause substantial decline in our gross margin in Q1 but it is corrected and should not recur. We also increased our inventory reserves by roughly $200,000, a little less than $200,000 during the quarter that was in relation to writing off some older PCB boards for some of our legacy products. And we don’t believe that will be recurring even. So, the gross margin area we think we can reach the 60% gross margin, which we have preached in the past, that, that is our goal. We believe that would have to some Q1 was temporary and for the balance of the year that will approach our goal of 60%. Our SG&A cost increased 26% from prior year, very large increase, but if you look at the category of increases there, we almost doubled our support level personnel in the area of sales and technical support. That is a significant expense in both training and personal costs obviously on a go-forward basis, but we needed those support people because of the increase in the T&E pilot projects that we had out there and also the existing customer support levels. So, that really is a good omen in my view that we need those support people to handle increased business that we expect in the future and currently have. If you look at non-operating expenses increased substantially during the quarter, in fact, it really – we are really were for rest of the P&L, if you look at it roughly $4.3 million of that was in relation to the convertible notes that we issued last year and during the first quarter because of the vote of the shareholders in special meeting that we called in February, where we approved the NASDAQ cap listing, they were able to convert $4 million as debt to equity. They also exercised roughly 210,000 warrants and brought in $1.6 million of cash to our business. And also because of the approval by the shareholders at that meeting, it also released the restriction of $1.5 million in cash balances. So, all those things are good converting debt to equity releasing restricted cash and bringing in $1.6 million in exercise proceeds and warrants. They are all good things in my view, but the accounting rules because of the way they are with derivatives it all resulted in a $4.3 million non-cash charge during the first quarter. So, in any event, it really swung our results. We have $6.2 million net loss, 66% of that being non-recurring charges related to the convertible notes. At the end of the quarter, all of our convertible debt is gone. And there is roughly 50,000 warrants left to be exercised of which they did exercise another 40,000 in the second quarter. So, we are virtually done with the impact of any and all of the convertible note issuances from last year. From a balance sheet perspective, if you look at the overall ratios and amounts, we have over $10 million in positive working capital at March 31 compared to $6.9 million at the end of 2014 of December 31, so roughly a $3.1 million improvement in working – net working capital. Our total equity improved to $10.8 million compared to $6.2 million at 12/31/2014. So, obviously, the complexion of our balance sheet improved dramatically. Certainly, a lot of that’s due to the conversion of the notes. One last item that we are dealing with here in near-term is the $2.5 million of subordinated debt that’s still on the balance sheet. It’s coming up for renewal or maturing here in the near future. We have started discussions with the holder of that to either extend or renew our payoff, the balance of that note and – but I think both Stan and I believe that the end result will be some combination of those three items. We will extend some, we will renew some and we will payoff some. So, that’s kind of where we see that’s been headed. So, I will keep my comments brief and I will wait and I will be available to answer questions during the Q&A session. Yes, I will do the same and allow us to get to the Q&A, but I do want to just point out that we have had and continued to see an increase in T&Es that are out there. I think we will probably this quarter surpass over 1,000 different agencies that will have bought body cameras from us and they are starting to outfit their whole fleets. We have approximately over 700 different agencies that are tested them. Currently, we have insight to timing in regards to what they anticipate the funding to be and wanting to implement a full blown program or they would have other offices outfitted with body cameras. And we are also seeing a little bit of a pickup in the fact that we have got packages that are being sold that these departments understand, that body cameras are not the total answer to their needs that they have out there as far as the revenues are gathering. And that the in-car system is a very important part of it. So, that coupled with our VuLink, patented VuLink technology that we have that allows for the hands-free activation, which helps in regards to the officers not going and turning on a system or may have thought they have turned it on and not to push the button hard enough or maybe the switch. Anyway, the VuLink is a very, very handy tool for them, because we will do it through the use of our Wi-Fi connection that we have in our units. So, Chad, I think we will go ahead and open this up for our Q&A time.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jim McIlree with Chardan Capital.

Yes, thank you and good morning.

Good morning Jim.

Tom, you talked about the customers pausing on the in-car purchases in order to do body cameras, so I am a little bit confused why your body camera revenue would be down quarter-to-quarter. Is there a seasonality to be aware of or something else going on? And then as part of that the Q shows pricing is stable, but could you just talk a little bit about pricing for the body cameras?

Yes, it’s part of the issues we had at the PCB board level in the first quarter. It did delay shipments, so we did drag a sizable amount of backlog into Q2 in terms of the FirstVU. So, I really believe our revenues in the first quarter were negatively impacted by those PCB board issues that we really have to correct and cause these problems on the gross margin side. In terms of pricing levels, our retail pricing has remained the same. What we are seeing is larger quantity buyers are at least quoting on larger quantities and we do allow that. We do provide that. And certainly in the GSA contract, there are quantity discounts available for that, but – we really haven’t discounted the product itself. We have turned to a, I guess a package deal, if you will, where anybody that buys a DVM-800 in-car system and a body-worn camera, we will at the same time provide a VuLink free charge or put that in as a sweetener to the deal. So, that would be the area that we would see some pricing concessions on just doing package deals from that standpoint.

Great, thanks. And I will jump back in line.

The next question is from Bill Gibson with ROTH Capital Markets.

Hi. And then my first question I think is for Tom, could you comment on the SG&A level? Is that a good run-rate going forward?

A good run-rate, actually the legal and professional fees I expect a decline throughout the year as we get ourselves through some of these lawsuits that are now pending and actually going well by that fact. The level of support personnel though I believe is pretty well fixed and it’s not going to decline, because we need those folks to service potential existing customers. So, I think other than some declines in other areas, you are going to see stable expenditures both in R&D and sales support and administrative support. So, the largest parts of SG&A is going to stay pretty stable to what it was in the first quarter. I think you will see a little bit of decline in legal and professional fees.

Thank you. And then Stan, in terms of just wanted to ask about MediaSolv being acquired by TASER, does that change the competitive environment?

No, not really. I mean, they are a software company. They have a case management system that we also have a little bit, I mean, Evidence.com is a – I would say it in some factors they compete against Evidence.com a little bit, but unless they are looking at maybe change in their business model to start going on micro-feeds with that particular company and then they may do that right now, but we ever ran into it and see it as much of a problem in regards to competition lines.

Good, thank you.

Next question is from Joe Magnus with Magnus Holdings [ph].

Yes, hi. I just had a couple of questions. First off, my understanding from some of the law enforcement agencies and so forth that we have spoken with is that the field of view of the 130 degrees that your camera employs has actually been a problem, because it’s not a true representation of distances between the people that they are contacting, the people they are interviewing, any incidents occur, it kind of gives them that bubble look and so they prefer the realistic 68 degree or 70 degree field of view like for example in a wide view camera and so forth. How are you addressing that? And the second question is what size agencies are you guys going after, because it seems like that the vast majority of your customers are small, police department, 5 officers, 10 officers and so forth and so how difficult is it for you guys to get into the major agency?

Yes. So, Joe that address the first question, I have never even heard anyone ever approach us on that 130 degree scenario. I mean, we actually have very good resolution as you recall that we are one of the few out there that are having HD systems. So, I believe what you stated there as far as a smaller angle of view, I have had never had anyone approach me on that. So, I am not sure how to address that, because that just has not been, if anything they like the wider angle view. In regards to the size of the department, Joe, we have got about 6,000 departments that we currently sell some type of video systems too, whether it be the old legacy 500s or even some of our newer stuff. And as you know, about 80% of the market is the smaller departments, they are the 60, 70 major municipalities that make up all the 800,000 officers that are out there. So, we are going after the bigger contracts. It is harder for us sometimes to get into those bigger departments, because we are a little smaller compared to TASER who already is well-known, but we have over 40,000 in-car systems domestically. We have state contracts in over 15 states. We have added boots to the ground and continue to bring on bodies just trying to meet the demand of people that are wanting us to come by for demonstrations, including very large departments. We have also a full staff that does the – it looks at all the bids that are out there, including the larger municipalities that do go out. So, hopefully they will go out and give us a chance to put our products in front of them and definitely look at the pricing, because when it comes to pricing, I think we are extremely competitive in regards to the competition that’s out there and especially when you look at the quality of product that we are able to deliver versus the competition. So, we are knocking on all the doors. We have ways that have helped us get into a lot of new markets lately and we think that will just continue because of the public pressure that it’s going to become easier to get into all these departments and also the dollars that are involved, the departments should be doing a very thorough evaluation and therefore we should be getting our foot in the door because of those innings too. So, on that first question, I have never heard that.

Thank you. Our next question comes from Bryan Lubitz with Newbridge.

Hi Stan, how are you. Good morning.

Well, good.

My question is in regards to the suppliers in reading your comments on the conference call transcript, you said that you believe the increase would have been significantly greater if the suppliers had been able to deliver to us and more timely basis can you address that and what it will be do – what we be doing to try and eliminate that moving forward?

Yes. Bryan I will answer, this is Tom. What happened we ran into this PC board level issue that caused a lot of rework and quite frankly a lot of scrap unusual material, so we had to reorder boards and boards take a while to go through the production process and get here, so that was the delay that we encountered. Now what we have done, we have expanded and are currently looking at least two other board manufacturers who want to get at least a second source of maybe a third source of these board. Now, byproduct of increasing the number of suppliers we have of the boards and by the way the boards are probably 80% of the cost of an overall system, so it’s the largest cost. The overall – the great byproduct of increasing the number of suppliers in that area is that there is price competition and we are going to see probably 20% to 30% maybe even 40% decline in our per unit pricing because of that. So we believe we got it under control, we are being very selective in these second and possibly third suppliers. These are major contract manufacturers that do this for living and we believe we will solve our issue there.

To follow-up with that with the GSA contract and obviously this is a government deal that we have, hypothetically they come to us with an order for a 1,000 cameras can we fill that order?

Yes, we can – we are keeping. And I think we have talked about this before. We have supply chain commitments that will supply us 4,000 pieces a month. So we have the ability to move up the 4,000 pieces a month as we go forward through this so that gives us quite a bit of latitude and ability to meet any type of within reason any type of demand as it comes up over the horizon very quickly.

And Bryan we have bought in large quantities some of the longer lead time items, so we have got in there and the other items you can ramp up a little quicker.

Thank you. Thank you very much guys.

Thank you.

Our next question is from Donald DeFilippo. He is a Private Investor.

Yes, hello. I would like to thank the previous speakers for intelligent questions and reasonable answers. I spoke to Mr. Falkner about this subject, the subject is Yardarm Technologies, they have a device that connects to a weapon that when it un-holds trigger it signals out a signal to a controller, it could also be arranged so that it could trigger a body camera, so maybe perhaps someone in the company could contact Yardarm Technologies, which I believe is a small privately held corporation and look into some type of agreement?

I appreciate that, Donald. Jerry actually brought that up to me and some information on it. We didn’t travel a bit, but we are always looking at new technologies that are out there, new companies that are out there that are looking for a way to branch on into the marketplace when – and we are not close to realizing that there was someone out there that may have a better mouth strap or maybe way ahead of us or have a totally new technology that would be of interest to us. So I appreciate it Donald, we definitely will follow-up.

Okay. I have a question did you field test your equipment against TASER and see which one has the superior product?

They actually – actually the evidence.com boys and then they actually came here and we were very really to put the two units side-by-side, of course we already know the answer to that because we have been able to obtain some of those systems in the past. But yes, we clearly – one other things I have seen the other day and I mentioned this in our presentation out in California the day that the San Diego Police Chief made a comment about having their officers having their body cameras on all the time. That is the big problem for a lot of our competitors, because after those four hours roughly of runtime that the units have been on, their batteries are dead. There is not so much restoring capabilities or onboard storing capabilities with their batteries are dead. And those units have to be completely need to plugged in or put in their cradle to be recharged. So, what our system, you pop out the battery and put another one in that we do have an extended life battery that actually will give you eight hours or more full-time recording time too. So, we clearly and again I will stress it and sometime again we have a superior product in regards to the resolution, battery life onboard it’s all there. So we are very comfortable and head to head competition with our competition.

Can you tell me who had the first patent on these body cameras?

Well, I don’t know that I know the answer to that.

Okay.

I mean I don’t know that I have ever seen anyone that has just a body camera like that. I mean you just go back to – you just go back years out there. Certain apps actually the cameras I mean we have got patents on and certain aspects I am sure YVu [ph] hasn’t gone as well as TASER. By the way I mean YVu probably has had the body camera the longest, they are probably the smallest of the companies that we have mentioned. So they probably do have some patents out there. We obviously have the VuLink patents, which has been very useful for us and such. And I am not sure if TASER, I don’t think there is – I think there are just aspects of body cameras that maybe available for patents and now they – but they have been around for quite a lot of time.

Okay. My last question concerns you till see associates litigation that’s going on, can you tell me what you could hope to get from this if we win the case?

For him to go away is what I mean their tactics of sending out e-mails and letters to customers and train basically in so many ways that if you go any other direction, but with them you are running the risk of violating the patent that has already been stated by the Patent Office, but likelihood it will be turned over should have never been a issue. So what is that they end up building the broader way in regards I can deal with that and our customers won’t have to deal with that. Two, there is damages that we would look to recover that well above legal fees. And so we would like to see our place out. We are very encouraged by the preliminary meetings that we have had and look forward to the final day in court which…

September.

Yes, I think. But guys I would encourage you to look at the 10-Q. We have got a litigation section there that kind of spells out all the ugly details if you will, but to summarize we did have some preliminary hearings on injunction motions and such that happened in the last couple of months. Actually February and March as I recall during those hearings we were able to put on the stand an ex-Vice President of utility who pretty much confirmed all our allegations and actually increased the number of allegations we did request to leave of court to increased our claims and rights, the damages including trouble damages because some of the acts that that Vice President basically confirmed happened. So we believe that our litigation hand is very strong and we are going to pursue this. Because it did have the impact on us at a time we were vulnerable if you will and did caused us problems and caused our customers problems. And we believe that’s what the court system is there for.

Well, thank you very much. One last note, superior products produced superior results, you use that line.

Thanks, Donald. I appreciate it.

Bye.

Our next question is from George Whiteside with SWS Financial.

Good morning, I understand…

Good morning George.

Hi, there. It’s my understanding that roughly $20 million has been committed by the bids are these going to require matching with local funds and how long do you think its going to take for these funds to trickle down through the local level?

Yes. George, there are several funds that are out there right now that are allocated towards body cameras and in-car systems. And they all had a little different twist to them and it also depends on your department size on what percentage you have to come up with to meet these funds. So it’s not a flat rate in a lot of situations if you have small municipality you may not have come up with as much as the larger municipalities. It’s all over the scale. But we are starting to see this start to trickle in the end already, but just in small numbers, but it has started. The process is fully functional and running and people are applying. We have calls daily, people need their systems in regards to known and where to go just what kind of paper work is needed to be applying for these firms. So I would say the mix 3 years George you are going to see quite a bit of capital in regards to matching firms coming into this sector.

Yes. This is Tom, obviously its in the paper, in the press, on the news daily, nightly whatever what’s going on out there in the world today. And I think because of that there is an increased sense of urgency to get these firms out there and available to the police officers and the police agencies. With that being said, it is the federal government and things go slowly there. So anyway I don’t know what to tell you in terms of timing, but I do know that there is an urgency out there. And hopefully we will see that kind of fruition here shortly.

Great, my second question is relating to timing of potential customers doing their testing and evaluation. It’s been about 8 months since Ferguson has occurred, do you believe that we can look forward to an acceleration of sales in the second quarter.

Yes. I think you are starting to see that. And I think you will see it throughout the year. More and more people had started their efforts, more and more they are out there doing the T&Es. And those will start to come to completion between now and end of the year and over the next couple of years, they will be out there in outfit and all their offices, but you are seeing it right now and the answer is yes George. We anticipate that and have pretty good insight. As a matter of fact, one of the things I said I would address is our $25 million number that we have thrown out there. With just the- again we are not going to win them all, but and they are not all going to get funded. But if you did look at the pipeline and you stated that you are going to get a large percentage of those that are doing T&Es right now who are our existing customers because they don’t want to try to run two different sets of software. You can get to that number by just body camera sales let alone our in-car systems, our VuLink, our MicroVU, the other products that we have in the commercial division. I do believe the commercial division will have the greatest increase in growth this year and maybe even next year. But because it is really unique product, it’s start to take off nicely as well. So George you see that it is increasing.

Yes. And we will look forward to that. I will get back in the queue. I have used up my two.

Thanks George.

Your next question is a follow-up from Jim McIlree with Chardan Capital.

Yes. Thanks again. Tom I think in your remarks you talked about fleet sales this year being I am not sure what word you used, you might have said substantial or significant I am just hoping you could kind of frame that, a range of sales to dollars as to what substantial or significant means?

Well, this is really a result or recent result of this FleetVU management software. I will explain a little bit more because it is pretty detailed. Right now there is a lot of asset tracking modules out there that track assets where they are doing and how they are deployed. And there are a few exemplary quarters which generate video of events, what display Vu management software does, cloud-based management software that we have just introduced, it combines both. And it also provides a very handy monitoring source which can monitor any number of drivers or assets that are out there. In other words, if you are say a [indiscernible] with 10,000 trucks out there, you don’t view it as a safety manager, you don’t want to sit down and review 10,000 trucks in any incidence that got recorded video wise that got generated by that truck. What this software does is it accumulates all the data on the all the events that occurred during the day, a week, a month, a year or whatever and it can rate those drivers from 1 to 10,000 based on your rating criteria. And obviously, the results of that are probably the bottom 10% you are going to counsel or fire and the top 10% you are either going to give raises to or promote. So, it’s a very valuable tool for fleet managers and safety managers that not only monitor their drivers, but their assets where they are at and how they are being deployed. So it’s a very unique tool, I think its revolutionary, I have not heard about it being available out there. So with that said, we have some significant customers in the pipeline as we speak that are very interested in that module. And I am hopeful that in the near future we will able be to announce some of those. And by the nature of those fleets that the numbers of units employed by those by definition will be a substantial game changer for us, it will be a significant effect on our revenue. So because of that I think you are going to see an acceleration of revenue in the commercial sector over the remainder of 2015. Bear in mind that we did roughly $1 million, $1.2 million last year in commercial revenues for the whole year, so it’s got ways to go. So but I think it’s going to become a meaningful sector of our business here in 2015 and probably beyond it will become more and more meaningful for us.

Yes. And then it also has the reoccurring revenue type of structure in it with the news in FleetVU software.

And will that drive additional camera sales as well?

I believe so. I mean, it’s a full blown management system. I mean, it can – when the vehicles come in you could be notified that the left rear tail light was out, I mean it does not only service, but and all the metadata, but the driver behavior and it has the capability of recording an incident when it occurs. So, we do believe so.

Yes, each is a formula that each unit that goes out would include a camera or DVM-250 camera plus this won’t be the two connector and asset tracking module. So yes, it would not absolutely require cameras and that’s obviously where you record the incidents. So the beauty of this thing is if there is a raft or collision or whatever a bad occurrence that you really want to look at you can go and see that video immediately.

Great. Thank you.

The next question is from David Williams with Ascendiant.

Hi, good morning guys. Thanks for taking my question. I was wondering if you could give us maybe a little bit of color on what you are seeing in terms of conversion rate, I guess if we think about your pilot programs and those that have been out there you kind of have lot of success, but what kind of conversion rates are you seeing today, how many of these departments or units that you are shipping out, are you seeing these departments actually take up?

Well, so yes it really is. I would say that and I guess you just – when you say conversion rate you are looking for the win rates type of scenario or are you talking about actually some upgrades and stuff on those systems just to make sure I understand David?

Yes. I think I am just trying to get an idea of what your success rate is being if you send a unit forecast, how often is that you are seeing purchased by these departments, just kind of thinking about the competition that’s out there, but I would assume that most departments would test several different units I am just trying to get an overview there about how you…?

So let me break it up in a couple of different categories, because David those that are already Digital Ally customers and already utilizing our back office software. Our body cameras utilize the same back office software and it takes management type of capability. So it’s real high when you are talking about those departments that have already bought from us and that’s some 6,000 agencies that are out there. I will tell you that the majority of the new customers that we have brought all and they have been because of the body camera. And so we have been winning our first share of those because the product is of high quality good price. And a lot of them are not sold it on the cell phone business model they are capable of managing their own data and have their own servers. So we do very well in those departments. The ones that we are challenge that is ones that are determined that they want to go ahead and do a cloud storage solution and like the factor if you are getting a product very inexpensively upfront and just probably have not really looked at all the math associated with the cost of the long-term scenarios they are going to have on their storage side. Those we are not doing so well. We do have a cloud based solution that’s very user friendly. I think that we will continue to see that growth. But some of them is frustrating because we never get a chance to get in the door and those – I think that’s changing as well. So I don’t know that I have got any real hard numbers for you, because relative to the Board, but you have to break it out through existing customers versus brand new customers versus the business model we are looking at.

Okay, that’s very helpful. Thank you. And then I guess my other question would be what is the opportunity for maybe integration or interoperability if you were to have maybe that came from you guys and then if they wanted to go with someone else like TASER or even vice versa, is there anything what limited you to integrate those types of systems together and have them work together or does it really need to be one system altogether really work officially?

So, the answers is yes they all can’t be, but you have to pretty much then surrender some of your really proprietary technologies and how you are doing things to get them to communicate with each other. So you should give away quite a bit of your trade secrets if you do want to go that route and work with the competitor I mean they are going to figure out a lot of information. And so you have that challenge, otherwise you are looking at two sets of back offices software that they are going have to deal with. We have had conversations with the couple of departments that do like a certainly software package or may already be using the existing in-car system that doesn’t match up with our body cameras. And they got to just make a choice either to – operate two different sets or they are probably going to look at something that’s not as, what we call it, not as sophisticated and that’s where you could run it on your regular Windows Media Player without all features that we have far as the encryption and metadata and stuff along with it.

Yes. And I would add that understand that we produce and support both in-car video obviously and body-worn cameras. TASER is he one not only it only has body-worn cameras, they don’t have in-car systems and they don’t produce among and sure maybe they support some I don’t know. Our other competitors in in-car markets to my knowledge all private label other body-worn cameras out there. So they don’t really produce their own. I know some of them are working on their model, but that has its own problems as well and getting all things worked out in such. But we are really the only cradle to grace in-car and body-worn camera manufacturers that’s out there. And that gives us a lot of flexibility David if we do find a – we will say a feature that a department likes. And we do not have that in our current system providing the cost is not too great or whatever. We have the capability of – and having a lot in the past implemented those features and so that it does meet with the customers’ needs and request are.

Perfect. Thanks so much, guys. I appreciate the time.

Thank you.

Our next question is a follow-up from Joe Magnus of Magnus Holdings [ph].

Yes, hi. I just had a question. One of the things that we have run across and are concerned with is if there is a dramatic shift from the in-car system to just strictly a body camera or a point of view camera system to go by with what my sister who used to work for the Attorney Journal’s office in Illinois said was that they are tired of videotaping a blank screen when the perpetrate or that runs out of the car and they are just looking at a camera and all the actions happening off screen. So, if police departments make that shift, if they decide that you know what we are following a drunk driver, I am looking at him, I am videotaping him, I get out of the car, videotaping him. And then he runs away, I am still following him with my camera. So, if that dramatic shift happens that’s currently what aids some percent of your business, how is that going to impact as you said your sales for in-car systems was flattening and do you anticipate further deterioration?

Joe, I mean that’s a point that’s well taken. And I think every department realizes that, that they are – when they buy a system if they buy a system that’s maybe a single camera system and doesn’t have multiple cameras to where you have different angles – different point of views that the in-car system is also capable of recording either they do run into that dilemma. And then it’s just the body camera that is there providing and hopefully catching the video that is native. The problem is there is also that perpetrator ends up tackling the guy. He is placed down in the ground. And you don’t have a camera, but then he is getting a blank screen of mud. So, it goes – the bottom line is you have to have them both working in concert to really have yourself protected and you need a nice in-car system that has multiple cameras giving you multiple viewpoints, that’s point well taken. And I think that is the in-game for these departments. It’s only to have a very nice body camera to one that has a lot of capabilities and strengths, but also the in-car system has to be just as powerful.

Okay, thank you.

Thank you.

The next question is also a follow-up from Bryan Lubitz with Newbridge.

Guys, I wanted to discuss with you the B. Riley Conference to ROTH Capital Conference, do you guys plan on continuing to go on these road shows and can we expect to see any type of coverage to come from some of these analysts?

I think, I can tell you we have been fortunate that a couple of analysts have actually been on this call. We don’t have anyone that covers us as of yet. We will continue to do what we can to get the Digital Ally name out there in the financial communities, including take advantage of some of the broker dealers that have offered to take us around to their client base just to introduce us to some of their institutional clients. So, yes, I would anticipate they are still trying to get out there and be marketing the name of Digital Ally and what we are doing at conferences in hope that an analyst at some point will pick us up and follow us closely and that will help spread the word as well.

Excellent and hopefully to New York.

Absolutely, Bryan.

Now, the other question, can you guys give us a little, I guess, color in regards to the LIDAR, I know you guys got a patent for that, where we are in terms of developing that and when we can expect to see it as a product?

Yes. So, it is quite a unique patent, the design all the above. We have put it sort of on the backburner, because of all the demand that we have seen on the video side. And Bryan, I am sure you are not aware of this, but my father was one of the pioneers in speed detection as far as radar and they have pioneered one of the very first moving traffic radars, very first instant on, hands held, [indiscernible] on and on and on. And so I still have contacts through the competitors, they will give me wrong that are in the industry, but they are somewhat really competitors and the fact that they didn’t vary up throughout inside stating that they have seen a decline in their business because of all this tension that’s going towards the video side of the industry. And so they are even looking at expanding more, trying to do some more stuff internationally looking at partnering up with us, because a lot of times your international business will couple not only the in-car systems that’s speed detection as well as a package. So, the LIDAR is a little bit on the backburner, but definitely not far from our thoughts, and I wouldn’t honestly – Tom, you correct me if I am wrong, but we probably will give it a whole lot of attention until sometime next year.

Yes, that would be my roadmap as well.

Okay, so thank you again guys. You have a great day.

Yes, Brian, I will throw in more comment on that. We may and again we have talked about this a little bit, we may in an effort to accelerate it we may go ahead and partner up with someone and maybe lend them our IP and let’s intake it and run with it and obviously focused on the video side of it too, so that could accelerate it a little bit.

Excellent, excellent. Thank you, guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, again, thanks everybody for participating and I agree with what Donald said earlier, some great questions out there that were given to us to try to help explain where Digital Ally is at, where it’s going and how we have the kind of insight that we do for the remainder of the year and we look forward for more news to be hitting the page in our next call that we will have at the end of the second quarter. So, thank you all very much for participating.

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