Kustom Entertainment, Inc. (KUST) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Hillary and I will be your conference operator today. At this time I would like to welcome everyone to the Second Quarter 2017 Operating Results Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Stan Ross, President and CEO. Please go ahead.

Thanks, Hillary. Thanks everybody for joining us. We are going to have Tom start the call off but then I will be jumping in to give you a little insight on the recent news that came out today concerning our litigation against Axon. Also give you a little clear vision in regards to our pipeline of business that we have going on and with these numbers first. So Tom?

Thank you, Stan. Welcome everyone. I appreciate you joining us today. We did file our Form 10-Q with the SEC yesterday evening at the close of business so hopefully everyone has had a chance to at least look at that. I want to start by reading the normal forward-looking statements. I apologize if it's boring to you, but it's one of those legal things we need to do. So with that I will start. Statements made on today's call will include forward-looking statements including statements regarding our expectations, beliefs, intentions, or strategies regarding the future including statements around projected spending. We intend that such forward-looking statements to be subject to the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking statements information is based on current information and expectations regarding Digital Ally Incorporated. These estimates and statements speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press releases we issued this morning and in greater detail in our quarterly report on Form 10-Q which we filed with SEC last night under the caption Risk Factors. Okay, with that let's get into the 10-Q and what's going on. Obviously the quarter was heavily impacted by both some good and bad events very definitive events. First of all that the overall complex of the quarter was dramatically impacted by the halts and shipments to AMR, just as a background there was an unfortunate accident in June down in Florida that involved with the death of two paramedics involving a drunk driver but that swerved and hit them and unfortunately two of the paramedics lost their lives in that accident. Our system was in that ambulance and the immediate -- it was damaged heavily first of all -- it was damaged heavily, power was cut and we sent some of our technicians down to try to do the initial data recovery they were unable to do so for unknown reasons and unfortunately with deaths involved, the DA gets involved, the attorneys get involved, all parties get involved and at that point the [indiscernible] in suspense and litigation hold and there's been no additional attempts to recover the incident itself. Now I will tell you that the incident was -- there were eyewitnesses and there's really not much doubt and who caused the accident and what happened, but as a result of that all shipments were put on hold by AMR and unfortunately we were sitting on over a $1 million in POs, purchase orders at that point that we were expecting to deliver in the second quarter. Obviously that didn't happen and had a major impact on our quarterly financials. Fast forward to today unfortunately there's not been a lot of discussion between the parties, us and AMR. I think a big piece of that is the fact that AMR last week announced that they were being purchased by KKR in a very large merger involving about $2.4 billion. So obviously there tension was divided at best and we hope to be able to have some more discussions with them and see if there is a path forward that we can get moving and back on track. We do know that AMR is using -- it's using their systems every day, it's about I don’t know 1700, 1800 [indiscernible] as it sits so they are enjoying the benefits of the systems and we hope that we can get that thing back on track and go ahead and build the full deployed fleet of AMR. The second thing that didn't really have a huge impact on the quarter but has a very large impact on us go forward is a very positive results in the Axon litigation. We have issued several press releases and quite frankly and Stan can probably chime in, in our wildest dreams we did not expect to get the very positive results we got from the patent office. We thought that they would at least look at the patent again and confirm validity but no, the results were 100% denial of the institution of the AIPRs against the 452 patent that Taser had proffered to the patent office which is obviously a slam down win for us and we really like that. I've actually, you know I'm not an attorney but I've become a little bit more familiar with patent law and litigation, how it works and I'll try to explain how I understand where we are in this process and I know Stan will probably have some more information about that. There's really three different sections of a patent litigation first, is the patent validation. The second is, determine whether it's infringement and third is the resulting damages. The patent validation section of that, the initial section has actually been validated now by the Patent Office. Patent Office has ruled the patents are valid statutorily Taser or Axon as they are now called is barred from filing any further IPR reviews on the 452 and the 292 patent but they -- you know as far as the patent office that is concerned the patents are valid, validly issued and in effect. The second part of it is determining whether Axon/Taser actually infringe on that patent and I would tell you that it seems that publicly Taser has already admitted to infringing in a press release they admitted that they took the technology in our VuLink and built their signal technology on that and added additional features. So I would say that they've publicly already admitted to that and secondly you know why else would they have filed all the IPR's. They filed an IPR almost two years ago or maybe in a little over two years ago to try to stop the 292 patent before we even had filed any infringement against them. So in any event I think the infringement piece of that we're pretty well through or at least that's how we believe it to be. Now the damages piece of it is a little more interesting, if you look at Axon's quarterly report they have reported in the June 30 quarter that they have cumulative bookings net of cancellations of $606 million and that's not actual revenues to-date that's all the bookings that they expect or anticipate to accrue to them over the life of their Evidence.com and their body camera and sensors divisions. So obviously the numbers are very, very large. They also indicated in their Q3 that they have a $169,000 Evidence.com licenses outstanding. So the numbers are quite large any way you look at it and hopefully if yet things move the way we hope they will you know the damages will be based somewhat off of those numbers. We're now looking at different ways to monetize the patent, monetize the VuLink patent which embodies our 452 and 292 patent. I will tell you that several competitors have already looked at it and I think see the writing on the wall and where this litigation is going and the strength of that patent and they've approached us about licenses and that are teaming up on bid in order to get access to our VuLink technology, that's a very significant right step in the right direction as far as we're concerned it shows that the industry and our competitors are recognizing the validity of our pattern and the strength of our patent and then secondly that it is quickly becoming the standard for the industry. We're also being approached by some large private equity funds about helping us monetize the patents and by monetizing the patent I mean financing the litigation, providing additional funds to develop the surrounding patents and I think we've made press releases in the past and most recently we announced that we have gotten a patent on the mark feature in the body worn camera area as well as the RFID tagging in body cameras both of which we believe have some very innovative and widespread applications not only in law enforcement but elsewhere. So I would say at this time the Board of Directors is considered various ways to truly monetize the VuLink patent and the 452 patent and as well as the other patents and hopefully we will have some news for you in the upcoming weeks or months in that regard but we're really looking forward to monetizing them. From an operational perspective we are aggressively moving to improve our operating results. Obviously we're moving towards a commercial channel in a big way, the sales pipeline in the commercial channel is loaded. It's never been bigger. I will tell you that we've got at least one opportunity that that's on the magnitude of three times the size of the AMR contracts and we're well on our way to booking that contract and hope to have some news here in the near future but that’s just one of many opportunities in our commercial pipeline and we're really gaining traction there and I think you know both Stan and I have said in the past that we believe the commercial channel will ultimately be bigger than the law enforcement channel and I think we're definitely seeing signs of that. Our FleetVu web based platform is really gaining traction and that's what really generates a lot of our service recurring service revenue. So it's a good type of revenue that the commercial group is generating in of it's recurring monthly service revenue. In addition to the FleetVu we're also getting recurring monthly revenues from ATUs, ATUs being asset tracking units which is an add on module that we've put on our FleetVu in the commercial area. We're also generating increased revenues from our cloud based law enforcement storage platform as well as our hybrid cloud that we're working from an international perspective and I'll talk a little bit more about that. But from a law enforcement standpoint we're readdressing how we go to market in that you know right now we have well over 6000 agencies as customers. There's 18,000 agencies in the U.S. So we're virtually in a third of the agencies in terms of numbers. Now we're not necessarily that well represented in the larger agencies but we are certainly in all of the agencies including smaller sheriff's departments and municipalities. So really what you're looking at in terms of a win-loss position you get kind of a tit for tat approach here where you win one, you lose one, you win one, you lose one. So we're going to refocus our efforts into more of a large opportunity network in terms of approaching the market. So we're going to have more centrally located salesman and marketing people that go after larger opportunities from our Kansas City base. So that's a change we're doing in the law area. Now the international market interesting enough is wide open at this point and I think we've talked in the past that there are some very strict cloud storage rules or video storage rules that have been active in the European Union as well as Central and South American in certain cases and we've developed a hybrid storage system that we believe answers the demands of those laws. So we're getting some very good traction and some very large opportunities internationally and we hope that we can bring those to fruition. Now interesting I will also make the comment that that in these larger opportunities we are getting a lot of questions about our patents and the international community and agencies seemed to be as concerned or even more concerned in the U.S. agencies about the litigation and the patents and who's stepping on who's patents on and so forth. So I think all that leads us to believe that the international revenues will improve in the future and at least we hope so. We're also developing new non-law enforcement channels. What we're trying to do there is really capitalize on our engineering group. We've got a very, very talented small but very talented engineering group here and we're able to take individual situations and tailor some engineered solutions for that. You know take for instance the at the Royal Caribbean cruise line situation that's a perfect example of that where our engineering group was able to do design and implement a specialized solution for that niche market. Now I say niche it was a pretty large opportunity for us and there are other opportunities similar to that that we're chasing at this time and I think we'll have some good results there. So overall the quarter was disappointing from a financial results standpoints but we did meet some milestones I think bode well for our future and especially the rest of 2017. First and foremost we got validation of our patent in the Axon lawsuit, now we believe that that thing will move forward expeditiously and I know Stan is eager to talk about the press release we put out this morning about the way we're changing our approach to the litigation with Axon and trying to expedite the court process there. We're anxious to get a solution and hopefully get our share of the damages that that are accruing to us. And we're obviously moving towards monetizing our patents not only the VuLink patent but the RFID and the wireless Taser patent and others as well so and we're getting some help from private equity funds and looking at that and how best to do that. The huge improvement our commercial pipeline is staggering I'm very excited about where our commercial group is going now. We did get the setback with the AMR, halt in POs and process but if we land the three or four large opportunities that are on our pipeline we will forget about AMR. I mean it's that large and that big an opportunity and I'm excited that hopefully we'll have some news for you here in the near future. We are developing a new channels like I talked about and we're trying to capitalize on our engineering group and capabilities that we have in-house here. So hopefully the remainder of 2017 we will be better financially and that we'll be able to report some big wins from the commercial side as well as the international law and move to monetize our patents and other products. So with that I'll turn it back to Stan Ross.

Thanks, Tom. Yes I tell you as you can tell from Tom and as I will repeat you know the enthusiasm of our pipeline that we have created and the opportunities that are out there for us on the commercial side are just very, very large and really look forward to some of them coming in yet you know finishing out this year real stronger and then 2018 would really be quite a running start on it. A couple things I wanted to talk too and not to neglect law enforcement, a matter of fact we would have a couple different newly designed and some of these that do have a pattern ability features for law enforcement that we will be announcing and showing that for the first time and actually be able to take orders at the IACP which is the our big International Association of Chiefs of Police meeting. So law enforcement still getting a lot of attention along with our commercial side. So we think that this new product that we're coming up with currently the market is selling something of this quality north of $5000 per unit. We should be able to come in with unbelievable margins dramatically below that and really you know again be a really disruption to the law enforcement market as far as our in-car video systems and our capabilities. The mark feature that we have, the patent we just received on it is very exciting. I'm sure we will be counting that happen and all the others at the ICP as well. A couple of things in regards to the litigation I hope you all can pull up the press release that we put out today because what this does is by -- we truly believe that the 452 patent that we have and that is already went through the trials at the patent office it has been what they considered wash, you know clean it's not going to be and Axon and our competition cannot sit there and file additional challenges of that particular patent. So that being said and since we believe such a large portion of our damages and when I am talking the large portion will over 90% what we believe are damages are going to be or are going to come from the 452 patent. Therefore instead of trying to save a penny or a nickel we went ahead and are pulling the 292 patent from the litigation side of things. Now don't get me wrong we will still be in front of the patent panel and when Taser is trying to present reasons why it should not you know still be active but anyways we will continue to have the 292 patent, we will continue to have it in play WatchGuard, Coban other companies that are out there. We're not pulling the 292 out of their litigation, obviously their litigations a little bit behind the bigger fish here. So by doing what we've done and what we're requesting the courts to do we've really defined a clear path for the courts to expedite this case to where we can start finalizing discovery and selecting a jury and getting this thing to trial. So we think by doing this we've clearly accelerated what potentially we hope to be a real good outcome in regards to the damage side of things and again clearly remember this -- we will have no problems showing wilful intent in regards to the damages which allow those damages to be tripled. So excited about that, we have -- obviously our lawsuits still in place with WatchGuard, WatchGuard is like number one in the in-car video system in our market so I think they've toted in the past of revenues in excess of $50 million. So we'll find out a whole lot more and you got to keep in mind that the way this works and again I've pointed this out before in the damages is that it's not just the individual piece, but that individual piece was part of a package that you eventually got the bigger order it's the whole package that comes in and is looked at when it comes to damages in patent cases. So extremely excited about that, extremely excited about our commercial pipeline. We have a very exciting ISCP [ph] ahead of us and I think you know the nice thing about the AMR, they were going through that $2.4 billion acquisition so I can understand them laying low to make sure you didn't change the complexion of the picture that you're selling. So hopefully not only will AMR get kicked back up and we start install these units but it maybe even the new acquirer or like our products and like its capabilities and we may actually be able to generate more business from this relationship with AMR. So with that being said we will go ahead and open up for Q&A.

[Operator Instructions]. Your first question comes from the line of Brian Kinstlinger with Maxim Group.

Can you breakdown the June revenue by maybe product and maybe split between commercial law enforcement?

Sure. Hang on a second I can get you more accurate, shot I don’t have it. I would say for the quarter the commercial actually was probably around 20% to 25% of overall revenues but it's growing exponentially from a smaller base obviously. And remember a lot of the commercial revenues are deferred in nature, they are service so what we're able to recognize is whatever product sales that pertain to the hardware but more importantly we're booking future revenue, deferred revenue if you will regarding the service part of that. The ATU piece is a growing piece, that has a tracking unit those roughly go for $25 a month service revenue and the FleetVu is pretty much all over the board but it's probably 20, 25 maybe 30 bucks a month as well.

Maybe just roughly and the price related quality body cameras versus in-car systems.

Body cameras, and again this is an estimate I don't have it right here in front of me it would be around 15% of overall revenues. So it's a smaller piece, the in-car video system is still the vast majority of our business.

Brian, obviously the in-car system sell for around $4000 and our body cameras around I would say on average we're $500 bucks.

Okay. And then given the halt in AMR for now do you expect 3Q and 4Q absent one of those large three or four deals will look like 2Q and even if you win those large deals maybe it will take a little bit of time before you ramp up production to ship them just maybe take us through to understand?

Brian, some of the deals that I've seen is that they're doing their pilots and they've already have approval from corporate to start implementing their decision in the fourth quarter and some of the things. I've seen that for sure and then there's others that have talked about maybe trying to move it a little faster but I think that you could easily see us announcing a win you know possibly this quarter and just as quick as we can you know muster up all the inventory start doing the installs for them.

So third quarter might be a little bit more pressure than Q2 but then a rebound in fourth quarter is that how you think about it?

Well again this is forward looking but you know as I see it right now I think fourth quarter is going to see a pretty much full impact from these newer contracts but back in slide a week or two one way or another and then you know obviously we've got a supply chain, we've got to gear up for those larger numbers but it's exciting for us obviously to get those revenues at least on the books or contracts on the books.

Okay. And then have you ever experienced a scenario where your in-car system didn't record video and I guess that speaks -- do you believe it why it sounds like you're not sure a function of the damage hardware?

So Brian, all products that have some level of failure. This particular situation the accident was so violent and I'm not trying to go into a lot of details but the mirror was hit so hard that it could completely severed it from any power and it also has a backup power, it has a battery within the system so that it can try to shut down and that information could go to an internal card but this particular accident was so violent that it may have even just affected or even broken the internal card, I mean these units aren’t like you would imagine you know the black box in an airplane or something like that. I mean these are commercial units and stuff like that but this one was in particular really bad and I would say if you look at it on a percentage basis it was a very, very rare incident that that did not recover the video and again we can't get access to the card to the internal and really take a hard look at it because it's locked up because of the case itself. So I don't have a good answer for you.

There is just a lot of unknowns that we don't know exactly what happened and I don't think anybody knows exactly what happened to the mirror. We do know that they used the jaws of life [ph] to get into the unit, they may have cut through the cords and the system doing that, we just don't know. It's just so preliminary right now and just happened you know a month or two ago so, and there's a long way to go before we can put our finger on exactly what happened or didn't happen or whether it was a card failure or a hardware failure or whether it was just a result of the jaws of life who knows. I mean we just don't know at this point.

Okay. And then finally with the stay of one of your patents, what has to happen before they set a trial date and I think I recall thinking February timeframe of next year was when we might see a trial is could have been much earlier now that you're staying the 292 patent?

Yes I would think so. I mean that's the one thing is that they have requested that we get all the feedback in regards to the litigation from the patent office's we have got that and we will ask the courts to expedite this because Taser is out there still infringing on our technology that we clearly own. So we will ask for an expedited meeting to try to accelerate this and matter of fact that's all being filed today.

Right, but your lawyers they say if they didn't come back [indiscernible] trial date, what do your lawyers tell you might happen first?

You're right, they haven’t given us some insight yet. I mean I'm sure they'll know more even like later today and definitely by the end of the week because the court should respond rather quickly.

And Brian, just to follow up on that when we find out something so that we can give you all a clear vision, timing we will probably make a press release was to lay it out there a little bit so that you guys can know and could do some calculating. So we will do a release so that you guys know.

Your next question comes from the line of Ishfaque Faruk from WestPark Capital.

Just on the AMR contract do you think that this year -- you're not fulfilling the AMR contract currently. Do you think it might negatively impact your other potential commercial clients?

No I don't think so. I mean you have to look at it and I'm not too sure that you know the delay on the AMR I mean like I said that they went through an acquisition, they've had a lot of things going on. We've received some very nice e-mails from one of the AMR divisions out in California that that talked about how they were one of the worst divisions in the AMR family and once they implemented you know called driver behavioural systems that we have as far as our in-car systems they have seen a dramatic reduction in incidences with their fleet. So it clearly has reaped great benefits to a lot of AMR. I mean it's just -- you're going to have occasionally and I don't care who it is even that's out there, occasional situations where a device may have gotten destroyed and/or there may be a corrupt SD card in there, there's things along those lines. So anyways in short I don't see that the AMR been a -- whether or not they stopped where they're at or if they move forward, I don't see that impacting the other business that we're doing.

Okay. With respect to the 452 patent, Axon clearly failed to demonstrative like you know the likelihood of them being able to indulge with the patent. Do you guys have like any visibility in terms of when a schedule for trial might come about?

We will know more I would think later this week because we're filing all our -- everything with the court, as a matter of fact I think it's all being filed today and so we'll have some pretty good insight later this week for as timing through the courts but far as the patent office again Taser cannot file anything new. They've put their best foot forward, the only thing they're doing right now is they've sent a letter saying, hey would you please reread that you know and trying one more time for a hail mary pass to try to have things delayed or looked at and I got to tell you the likelihood of those I mean that you've already been turned down twice -- these are very bright people that have looked at the data and they don't make a lot of mistakes but the likelihood of them getting it is less than 10%.

Okay. Tom, briefly mentioned you know that you guys had like preliminary conversations with private equity firms and strategic firms, I mean like how are those conversations going and like what kind of arrangement are you guys looking at, is it like a licensing? Is it like a joint venture or what is it?

You know they're all over the board. I mean there's a guy to see that you know we've got a real strong patent portfolio that we can continue to build on, as a matter of fact some of them have suggested other companies that might be a strategic fit for us and they've proposed different finance packages that there's still development of the patents to a piece of the action in regards to the litigation. So it's really all over the board.

Okay. And in terms of the AMR contract, when are you guys expecting that contract to start like being fulfilled again? Is it from the next one or from like the last quarter of the year?

No, I would imagine I mean I'd be surprised if we don't start having talks with them on or what their intent is and what they would like to do yet this month. So I think that's the thing, we will probably setting up a meeting and say just okay, I know you guys got new bosses now and got a new company with KKR and you know what your intent here? So we'll probably visit with them for sure I would think this month.

Your next question comes from Charles Stokes, Private Investor.

I may repatriate [ph] who invest quite a bit in your stock and I've seeing it going down 50% since I purchased it and I'm just hoping for an improvement.

We agree. We are on the same page, we definitely realize and want to do everything we can to bring value to the shareholders and fully thing that we've made some very strategic moves that will allow us to bring a lot more value to the company which would then be reflected hopefully in the stock for the shareholders as well.

No I live in Canada and I'm wondering are you doing any business up here?

We have a little bit up there, yes.

We have several distributors that we just got a new distributor up there that's been very active and we're seeing some pretty good results in terms of his pipeline and where he is going. As I understand, Canada has the same type of statutory storage laws as the European Union and some of some countries in South America and we've got a solution that's dovetailed for that that's very appealing to this distributor and we hope to some of the Canadian police agencies. So we do expect more business out of Canada and we do have some business coming out there now but I think with this new distributor and their attempt to utilize the hybrid solution for the storage we should see some pretty good traction there .

Well I'm wishing you all the best, obviously I've a concern for the stock price and hopefully everything turns out well and you march forward. Thank you for taking my call.

Thank you, Charles.

Your next question comes from George Godfrey with C.L. King.

I just want to be crystal clear on the timeline and the probability of events around that. So you've made a request for an expedited hearing, when will you hear approximately whether or not that requests for an expedited hearing is granted?

So the court has asked us to make sure and have all this information filed in front of them by Thursday of this week and since in -- and their whole reason for the stay was waiting to see what came out of the patent office. Since the 452 done as far as Taser or Axon's ability to go in there and try to challenge it, the courts cleared the move forward as soon as it would like to and so I'm hopeful to hear some get some kind of indication or feedback yet this week from them.

Okay. So if you get an expedited hearing is that usually a month, two months? What is the garden variety of immediate request for an expedited hearing?

Yes, well I don't know but I would hope that it's within 60 days and the reason I say that is I mean again they've got to recognize that these guys are still out there just walking all over our technology and either throw a temporary injunction against them being able to do anything or even get this thing in front of a jury and let's get this thing going. So that's how we're going to table on it.

Obviously we want to push this thing as fast as possible because we believe we will get a good outcome. Taser on the other has a vested interest in slowing it down as much as they can. So there's going to be a lot of wrestling and so on and so forth but the court was very, very straightforward in their ruling on this stay that it was temporary and that would last until 14 days after the ruling from the patent office on the IPRs and this Thursday is the 14th day. So the court's been very transparent that they want this thing to move forward and I hope that is a good omen for us but you know I both know that courts especially the Federal District court move at their own pace and we can't guarantee anything in terms of timing.

Right, and I understand that and that’s actually my follow up question. Just for the sake of discussion if we assume that the expedited request is not agreed to and it proceeds in a more traditional path in six months, nine months is that a reasonable time frame or it could be even longer?

I will tell you what I will do, I will enquire and try to get as much information as I can from our attorneys and from the courts and I will try to get out an update maybe as early as next week with a little bit more clear timeline. I just don't know. So we've got to get some feedback from them. So I will try to give you some insight here as early as next week in some kind of a public announcement.

Your next question comes from Bryan Lubitz with Aegis Capital.

You guys mentioned that AMR is still using the products currently?

Yes, they have got -- I don’t have the exact number but it's well over a 1000 maybe as much 2000 units in the field working. We've had a five to six year relationship with AMR. So you know it's been a long relationship, for the most part a good relationship and they use it every day.

Bryan, even matter of the fact the other day they had I think one of their divisions or one of their outposts had like 10 more vehicles coming in and they called up and said, hey would you go ahead and get us another 10 coming this way.

So they have ordered 10 units since they have stopped shipments?

Yes, so this just one of the existing outposts that already has our units and everything else so it's not the bigger national deployment. This was just one of the smaller or not smaller but one of their outposts that has been using it and got some new vehicles in and wanted 10 more.

Okay. So with the 1000 plus units that are in use current, we're receiving money for the [indiscernible] on those?

Yes, if they are equipped with ATUs and some are we would also be receiving that as well. Now the way it works we typically bill up front for the upcoming year so we may and probably have already collected that revenue and it's in deferred revenue we recognize the actual financial statement impact as the year goes on.

I understand. You guys have in your last conference calls and press releases etcetera stated that you're leaning heavily on all of your new contracts having all the residual business built-in with the data storage etcetera. So with that part of the business we're seeing an uptick and we expect to continue to see the uptick even though there has been a delay in AMR?

Yes, the commercial side -- this FleetVu platform that we have there is very powerful, it's unique, it's innovative, and its designed for large fleet use in that you know you've got a risk manager that doesn’t have to sit through all the videos generated by these knucklehead drivers doing stupid things. Rather with this FleetVu it summarizes and makes available all the underlying data but it summarizes all the violations or the events that triggered it and at a moment's notice or at a fingertip you can do a summary by driver, by area, by country whatever as to how your drivers are behaving that day, that hour, that week, that month, that year. So it's very powerful, very user friendly and it's really taken over.

And that's where we do a significant number in terms of gross margins, correct? But we have a high number there?

Yes, our cost you know we've already developed the system and obviously we spend a lot of money with engineering and product development and web development for this FleetVu system and we're recouping that at 20 to 30 bucks a month from all the users of that. So on an ongoing basis after the developments done which it's already been done our Q costs are really just the pipe you know and the cloud storage which is minimal and it's getting less and less costly every year and as we add additional volume to what we're storing, we even get further discounts. So it's a very profitable business for us.

Okay. Now in terms of revenue, I just want to focus again on the VuVault, in terms of revenue in this quarter compared to last quarter for that particular product. Would you say that revenue is up 50% year over year or what's the number we're looking at there?

It's strictly from the FleetVu, in that platform it's at least 50% increase if not a 100%, it's well in addition to that.

All business moving forward are we making a mandatory where they need to if they hit a certain number of cameras they have to use the VuVault or is that something we're just trying to push?

Well it's FleetVu again, it's not VuVault, we call FleetVu for the commercial users but we have not done that. Some of our competitors have mandated that. We do allow smaller shops in particular smaller shops to do their own local storage but what that means is that they have to sit through all the events themselves and spend the time to understand what's going on. This FleetVu is so much more user friendly and scalable for risk manager that for any large installation they can and should be using it and right now I think it's a no brainer sale whenever we're in a situation where they've got over 100 vehicles or 200 vehicles it's automatic. They don't want to spend that time sitting through those videos.

I totally understand. I would just imagine that as a company and you guys have leaned on that, you're trying to build that up significantly that's kind of where as a guy on the sidelines looking at this, that’s where I see you guys making a lot of your money moving forward because you can always sell so many cameras but if you can lock these guys in for three years on a residual basis that's going to really going to help your revenue. What I also want to just -- I want to shift a little bit towards the litigation with Axon/Taser, fielding a lot of phone calls, a lot of clients etcetera being in it. One of the big things that we're facing headwinds on are your comments compared to Taser's comments. So for example in a recent Benzinga article they're quoting a gentleman who works there at the company and he's basically saying that they believe the most recent IRP denial has no bearing on your litigation , that you guys have already withdrew the 452 from the district court claims on that. Can you guys rebut that in any way? I mean there is a lot of negative press that comes out with them towards you guys?

Well what else can they say? I mean the bottom line is they got shot down twice at the patent office, we now have a real clear path to begin able to get in front of a jury -- a judge and jury and what we believe in the near term and we clearly have a very strong 452 patent that they are going to have to address. I mean I don't know how else -- I mean they've got to try and save their little face but I can tell you one of the things that happened as soon as we made the announcement that the patent office denied Axon's ability to challenge our 452 patent we have now gotten into some very large police departments that we were not able to get into early on and you'll be surprised how many let's say departments and Chief of Police and stuff are watching this closely because it really -- they've made a decision to go down a path that it's going to have a dead end soon in regardless to their ability to buy that product. So we've been very pleased and so they got to say something to try and safe face but end of the day a judge and jury will be the ones that I believe will be dictating at this point.

Bryan, I pointed to you or directed to some of my earlier comments that we're getting competitors calls and discussions and approaches that they're asking to team with us on bids, they're asking us to license the VuLink to them. So the competitors understand where this thing is going and at least publicly Taser has not admitted that but it certainly looks to our competitors that that is where this thing is heading and couple that with the fact that the private equity funds and these are large, large funds, they have their own team of a patent attorneys looking at this and they don't need approach companies that have had dead patents or bad patents or that are going to get thrown out, they may look for the best ones and the most defendable ones and the strongest ones to hook their wagon to help monetize and we're certainly getting many inquiries and approaches from those type of folks too. So you know you got the private equity funds recognizing where this thing is going, you got our competitors outside of Taser and WatchGuard I guess, understanding this thing is going. In my view it's a matter time.

Can I ask in regards to the competitors looking to license the patents with you guys work on an agreement, has there not been an offer that you feel is worth signing to or are these preliminary, how can the Street expect news on that? Because I would imagine hypothetically you signed some type of a deal 20% royalty whatever, that would set a really good precedent in the court case as well.

Yes Bryan, you hit it right on it. There got to be one thing -- we want to take a step at a time one is we wanted to make sure solidify the patents, and make sure that we're not having any issues down the road and make sure that was handled. So we will now get with our legal team, our counsel and see what they feel the moves are that we can make without setting a precedence in regards at least a negative precedence on what we believe the damages could be because again -- our little company's has only got like a $20 million market cap if you look at the kind of revenues that Taser has toted and booked and you just pick a percentage, you pick your percentage that you think is that we might have a shot at and then triple that for wilful infringement and you come up with a pretty large number and so anyways we do not want to do anything that would put any kind of a cap or ceiling on what we believe we can recover.

Okay. And lastly in regards to the stay of litigation and we don't know whether the charge is going to lifted or not lifted and obviously Taser has being steadfast in the public. Have they approached you guys at all being that the stay is or the last U.S. PTO ruling came in your favour to potentially make this go away or they are just digging their heels and trying to go to trial?

So what happened I mean again all of this is probably very new to them. We did not telegraph them what we're going to do in regards to pulling that 292 patent out of this litigation. So I'm sure their legal team and corporate is getting together and discussing what they should do their next move and so I probably I will just leave it at that Bryan.

Okay. I'm sorry guys, one last thing in regards to AMR. When you guys signed this contract you guys obviously did a deal and finance to get some inventory and right now you've got a 1 million worth of purchase orders just sitting there. Hypothetically AMR being that they are acquired by KKR walk away from the deal. Is there any provisions in the contract where you guys will be made whole or is there any penalty towards them for that?

Well again right now I think we're on pretty friendly basis with them. I'd rather just keep it that way, Bryan, not good get in a public what-ifs, so right now we're glad that their acquisition went through and now they're a much larger company and hopefully that the fact that they're much larger would mean maybe a lot more business for us as well.

Ys, maybe to KKR, I mean they own everything off. Again hypothetically that doesn't pick up that 1 million worth of inventory, could easily be shifting in another direction if you guys did wind up getting a major contract?

It could. Those units could go to a different home.

Okay. Awesome. Guys, thanks a lot for your time.

Thank you, guys. Listen, we've ran out of time today. We're very thankful for your interest in our company and we will do our best to try to keep everyone aware of timing issues and the progress we're making on some of these larger contracts in the form of press releases and following up by calls. So again thank you so much for your time today.

This concludes today's conference. You may now disconnect.