Good morning and welcome to the Digital Ally 2017 Annual Operating Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. 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 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 and 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 Tuesday evening in greater detail in our Form 10-Q filed with the SEC under the caption Risk Factors. You may find this and other SEC filings on our website at www.digitalallyinc.com. Please note that this event is being recorded. I would now like to turn the conference over to Stan Ross, CEO of Digital Ally; and Tom Heckman, CFO of Digital Ally. You may begin.

Thank you very much and thanks everybody for attending today. Tom’s going to do a pretty in-depth review of our numbers for 2017. And then, I’ll take back over and give you a little bit of color in regards to what we’re seeing in 2018’s outlook. I’ll also cover our strategic options that we have out there that we’ve retained Roth Capital Partners to assist us with, and will also get into our patent litigation, concerning our lawsuits that we have against Axon and WatchGuard. So, Tom, I’ll let you start off. And then, I’ll jump in after that.

Thank you, Stan. And welcome, everyone. I appreciate you joining us this morning. I want to remind you that we did file our Form 10-K this morning. And I would refer everybody to the 10-K as filed for a more in-depth and full disclosure of what’s going on with the Company and certainly with respect to the year-ended 12-31-2017. So, please refer to that. I’ll direct my comments more to the larger issues and larger trends that we’re seeing as we sit here today. First of all, I want to -- I think, everyone realizes our conference call and our filing of our 10-K has taken a little longer this year than it typically does. And in fact, we did file an extension, an automatic extension with the SEC that gave us an extra 15 days. So, by filing this morning, we met that extended due date. So, no harm, no foul in terms of that. The primary reason for the extension or the need for the extension was we needed to conclude the refinancing that occurred and actually closed on April 3rd. Although we tried our darndest and really wanted to get this thing close by the end of March, so we could file on time, we weren’t unable to do so for a variety of reasons including Easter holiday, obviously. But anyway, that’s really the reason for the extension. We wanted to conclude that and be able to put that in our financials and in our financial statement footnotes as a subsequent event. Just talking about that refinancing. We closed on a $6.05 million 8% convertible debenture with institutional investors on April 3rd. The conversion price is $2.50 per share, which is roughly $0.20 a share above market on a day of close. The convertible debt has 40%…

Thanks, Tom. Like Tom said, we are seeing strength in both the law enforcement and the commercial divisions and honestly anticipate and expect to see growth in both of those divisions, not only because of the stance that we are having in regards to the substance behind our patents but the overall market itself seems to be a lot healthier. And again, the commercial market is quite new and available to us. There’s a tremendous amount of new opportunities that are popping up in that division. So, I anticipate that both the divisions to have a great 2018. In regards to our strategic options that we are looking at, give you a little background for those that have not been following real closely. A lot of this started back in October of last year and it was unsolicited, but there was a little bit of consolidation going on in the law enforcement market. And we ended up winning in the patent office against Axon, again, one of the challenges that they had put up against us. And so, as soon as we had that win underneath our belt and that acquisition occurred, we started getting calls from other companies, not only within our industry but wanting to enter our industry. And therefore, it put us in a position where we needed to go get some outside assistance that could deal with this type of -- these inquiries as we still tried to stay focus on running the business. Since that has occurred, there’s been multiple companies that have contacted Roth Capital, multiple NDAs that have been circulated and signed. And we’re even at the point of visiting their corporate headquarters as well as their -- would be visiting and ours. So, that’s way down the road. We really didn’t let…

[Operator Instructions] And your first question comes from Ishfaque Faruk.

Hello, Ish.

Hi. Good morning, guys. So, could you give me a sense for how far and how many different parties you’re currently speaking with, given your strategic review? And how far the process is along?

Yes. What I can tell you is that I know that there is probably -- we’re well over a dozen people that have shown levels of interest. There have been nondisclosures that have been signed off on that’s in the works or have already been signed up on six to eight of them. And then, talks have occurred with several of them. And then, you’ve got to realize, some of the initial conversations are being held by Roth while we’re continuing to run the business itself. And again, we held them back, like I said, Ish, in regards to making sure some of the real value points in regards to digital. We’re going to be very clear for those that are taking look at us. And that revolved around the timing of the challenges in the patent office and the litigation.

Okay. And in terms of WatchGuard, when you think there will be a resolution? I mean, WatchGuard filed a lawsuit against you too, right? So, isn’t that going to be [indiscernible] in the court?

I’m not sure I’m familiar with what you’re talking about there, Ish.

They filed a motion for inequitable conduct on your part too, right?

The counterclaim stuff? I mean that would be customary. I mean that’s nothing that we’re too concerned about. I mean, the bottom line is, they violated our patents. If they didn’t believed they violated, then why did they try so hard to invalidate them, years, and I can imagine how many hundreds of thousands if not millions of dollars they spent on trying to invalidate them. So, these guys got to do something to try to scare us off, try to have a spend a little bit more money, but it’s not the case. We have been very successful in the patent office. And that patent office challenge is basically over with; it’s now a courtroom time.

Yes. I would add Ish that to-date, as far as I can tell and reading the law -- the court proceedings in that, neither WatchGuard or Axon have really come have out and said that they don’t violate our patent. They’re just trying to invalidate it, so they can continue on with their infringing product. So, it’s really not a question, whether they violate the patent; they obviously do or else they wouldn’t -- they wouldn’t have gone to the patent office to try and get them invalidated. So, the question is fairly clear and straight forward as to, if the patent stands, which it has so far and it’s withheld five, six, seven IPRs and such that the answer is pretty apparent.

Okay. In terms of financial impact, which one of the company, either WatchGuard or is it Axon, which one is having a bigger impact in your -- trying to in your contracts and when you’re solicited the law enforcement ISVs et cetera?

Yes. So, I think if I’m understanding your question correctly, obviously Axon is the leader when it comes to body cameras. They’ve done a very, very aggressive campaign and have had a lot of success. You have to give them that. I mean, the approach they’ve taken is they’ve turned up [ph] business. And so, they’ve got a tremendous amount of agencies, officers, licenses that are out there in regards to the body cameras. In regards to in-car, WatchGuard is the Company to go after. I mean, WatchGuard is a good company, good competitor. I mean, I’m not knocking the companies and their products, it’s just the fact that the way they went about walking all over our technology that we spent a lot of time and energy developing, and should have had been able to monetize that in the general course of business. These guys just quickly copied. But so, you’ve got one, in regards to WatchGuard, it’s much more of a presence in the in-car and obviously Axon in regards to the body camera. Now, when it comes to monetization and/or damages, I will tell you what, they may be run neck and neck. And I say that only because I don’t have a clear picture of what to bookings and such look like in regards to WatchGuard. Axon has put their numbers out there. And you can get pretty good understanding. As a matter of fact, even in the most recent press release, they have no problems going ahead and talking about their Axon signal device, which is comparable to our VuLink. So, we really don’t know who’s -- until we get the final discovery completed, who may have to write the biggest check.

All right. In terms of like the Axon, it has been like really affecting your sales for the last couple of years. Do you still have any sense for the timing of when this whole thing will go away and/or when you [indiscernible] any damages to us?

Yes. So, let me give you a couple of things that I think again, and this is -- clearly falls into the forward looking statement and speculation and stuff. But you have to realize that we have been taking it on the chin time after time after time in regards to both parties coming after us. And we have been successful in dealing with them in the patent office and now moving forward to the courtroom. And the fact that there is already a pretrial date set for July 24th, on Axon is a pretty good indicator of where we think we’ll be with regards to the ruling of the Markman’s hearing, also on mediation and the closing of discovery. WatchGuard will be a little bit behind that. But I think if you start seeing rulings coming down in our favor in regards to the Axon case, WatchGuard will probably be wise to want to come to the table sooner than later in regards to their scenario because it will start to get to a point where there is going to be possibly ruling out there that would look very unfavorable for them at the time they get to the courtroom. That being said, because of the strategic opportunities that we are looking at, one of the things that I’m sure that the two parties that I’m talking about have been thinking in the back of their mind and we have heard in the past is that these guys just won’t go away, meaning Digital Ally, we just won’t go away. We continue to fight another day, another round and stay in there and have being very aggressive. The thing that they’ve got to be worrying about is now you have entities that are obviously larger than us that are contacting us and probably are a lot stronger positioned financially to weather this storm. And that’s probably go to make them a little bit concerned as well that if we do have a much larger player come into this, then they know they’re going to have to go to the map.

[Operator Instructions] Your next question comes from Bryan Lubitz.

I wanted to dive into the cost reductions that we have that Tom had alluded to earlier. And I just wondered, Tom, did you say the breakeven for us for a quarter, now it’s about $3.2 million for revenue?

Well, Bryan, that’s what I said because once the SG&A cuts come into full fruition, now, some of those, in fact a pretty good size, a substantial portion of those came to effect late in January. So, we won’t get the full effect in Q1 but we certainly should in Q2, 3 and 4. Yes, I mean, 3 million, 3.2 million, 3.3 million, in that range, and the reason I’ve given you range is the gross margin is kind of bouncing around on this little bit, product mix and all that. But, I think that is a reasonable goal. That gets us to EBITDA positive or at least neutral range and that’s our immediate goal. And obviously our long-term goal is a lot higher than that.

Okay. So that being said, you also alluded to in the earnings report, jump in the residual business that we are getting from the data storage products that we have and you also talked about the upgrade over at AMR, which would add to that number. Those are significantly higher margins than just selling our product, correct? Those are 80%, 90% in that range?

Yes. Well, it’s software services obviously, and we’ve already expanded that as R&D when we developed the fleetvu.com platform and that. And really our only cost -- our true cost going forward is the cloud cost, which is minimal compared to the revenue side. Now, we have looked at -- at least on the commercial side, our recurring service base on contracts in place and already on the books will exceed $1 million in 2018 already. So, we’ve got $1 million of recurring service revenues on the book already. And quite frankly, we’ve got several tuck-in, more than three, four, five, large contracts, commercial contracts that we believe we will book here hopefully in the second quarter, if not the third that will probably more than double that. So, we’ve got some significant opportunities. You are right. The margins on that -- on the fleetvu.com especially are very nice because we’ve already expanded the R&D to build up that platform.

Okay. So, it kind of jumped ahead of me with -- into the big commercial contracts. I want to still stay with the margins aspect of it. When you say very nice, am I going too high in seeing 80%, is it closer to 70%...

I would say, it’s at or around 80%, put it that way.

Okay. Obviously, the more that increases, the more that helps our margins overall. And just bear with me, Tom. So, you are saying roughly 3.2, and I just want to for my own mind here, we did 14.6 revenue for the year this year without these cuts, and now we have these cuts and we have an expanding margin product that should even bring again those numbers higher. So, if that was everything implemented that we had this past year, if that was implemented in that past year, and assuming no other promise, we would have been profitable for the year with that close?

Well, probably not profitable, in accounting sense, but in EBITDA sense we’d certainly been very close to breakeven.

Okay, all right.

We do have a lot of non-cash financing cost below the line. But from an EBITDA cash flow perspective, you are right, we would have been much closer to breakeven.

Okay. Now, AMR, obviously you guys are going back; they’ve continued to use our product the whole time, but we’ve put the original installation of their whole fleet, which correct me if I am wrong, was close to 7,000 or 8,000 ambulances, we’ve put that on hold. Do we expect after this upgrade of the 600 units to resume that contract as well?

So, we’re there. Bryan, as you know they went through an acquisition. And so, we feel like that’s probably was more of the reasons that everything put on hold or the breaks that were hit because, we are seeing their acquisition is being completed, we are seeing additional orders, we are seeing the upgrades, we are seeing starting to get back to business as usual. What we don’t have a good sense of yet is really how aggressive they will be to go ahead and finish what they started. They’ve had a lot of success with them. The fact that they’ve had our units in their vehicles that have saved them, I’m sure countless millions in regards to litigation and liabilities, costs associated with it. So, it’s a little early Bryan to really have a good sense of where that’s going. But, there is definitely a very positive atmosphere between the two companies.

Yes. And I would add, Bryan that there has been some catastrophic events that have occurred since last year are the time when they put this contract on hold that our systems did capture. And that’s a good omen. I mean, they see that. And I can tell you the countless number of events that some are humorous even, if you will that they caught and been able to get out in front of and manage their liability exposure. So, they see and are enjoying the fruits and the cost containment reductions and liability reductions of our systems. So, our systems are performing for them. And like Stan said, and let me back up, they went through a large acquisition. They were acquired by KKR and merged with or will be merge with Texas Air Medical Group. So, they were going through a very large corporate transaction. Their parent was changing. They -- obviously when those type of transactions happen, capital expenditures are restrained and constrained until the deal is done. And I know they had some antitrust issues they had to resolve out in Hawaii I think, and so the various reasons. I think 2018 hopefully will be better for that contract.

Okay. Now, I’d like to talk about VieVu if we could. How much of VieVu account for, for our revenue for last year?

The contract was signed in November and we had to do a little bit of engineering to get the product ready to integrate with their product. So, the contract required then to $50,000 worth of VuLinks in 2017, which they did. So, $50,000 is the revenue from the VuLink or VieVu contract in 2017. 2018, they have to buy $2.5 million worth of VuLinks to maintain exclusivity. And they have to buy $3 million or above in 2019 to maintain exclusivity.

So, this contract obviously with the cuts that we made and assuming we continue with the same business mix we already have from last quarter, could really put us over that level to get to profitability or at least on the EBITDA part?

Yes, the VuLink product is -- it’s our patented product. And quite frankly, we’re monetizing it and we should have that opportunity, because we invented it, we’ve built it, and the market demands it right now, I mean, it’s really a standard, and most contract offerings and bids that are being floated out there. So the VieVu contract we believe is the start of something big on the VuLink side, especially as we hopefully are successful with the Axon and WatchGuard litigation. And as I said before, we have other competitors coming to us wanting to license or get a supply contract or buy from us or somehow be able to use that technology. And that’s how it’s supposed to work. But you have characters in our industry that don’t play by those rules.

Yes. Can I ask regarding VieVu? They have the NYPD contract, correct?

Correct.

And now that’s the contract that requires hands-free activation.

I don’t recall if it required hands-free activation at the time that they were awarded it. But I know that it’s a feature like all departments that they would be interested in. I mean, again Bryan, you can -- there has been too many cases where departments have done the right thing and have got in-car systems. They’ve got body cameras. But unfortunately for whatever reason, the officer did not activate those devices. And that becomes a real nightmare when those situations happen, especially if there is a shooting or fatality of some sort. It just doesn’t look good why you not turn on your body camera.

Yes, or you commute it in some cases, like what happened in Seattle. Can I ask, does VieVu have an in-car dash system?

They do not.

Okay. Is that something that we’re looking to break into a space with them on? I mean, obviously they’re covering a lot of our about products or similar products, have we had talks with them regarding that?

We’re open to talking to a lot of different companies. Seriously, I mean VieVu is a great company, the people that we’ve worked with there are tremendous, very excited about continuing to work with them. But honestly, I would -- even though we’re suing them but there is nice companies out there like WatchGuard that they do produce a good product, they are a very capable competitor that keeps us on our toes, keeps us pushing every day to have more innovative products and designs, but they are a pretty nice organization as well. My point being Bryan is that we’re receptive to talking to anyone if it makes financial sense for us all.

Now that contract that you have with VieVu regarding them have exclusivity and now the fact that we’ve hired Roth, and Stan you had we had roughly 12 companies, inquiring roughly six to eight NDAs and talks with several of them where it’s going to progress to potentially corporate headquarter meetings. Is VieVu a part of that group? And if not, how do they feel about having an exclusivity with us and us potentially selling ourselves out as a company?

Yes. That’s -- Bryan, I can’t disclose who the parties are.

Okay. So, reading -- I’m not going to go there, okay. I don’t want to get you in trouble or me.

That’s right.

Did you mention Markman's you expect to have within a month? I mean, it’s been…

It’s been since March 7, I think it should -- again, I really believe it can happen almost any day. And I would anticipate it clearly not going past April, because again we’ve already got a July 24th, pretrial date set. And I would hope that and bringing into it that the mediation and discovery would have been completed by that date as well. So…

And how much time you need for that, the mediation and the discovery?

Mediation, they have requested it to be done within 30 days. And if I know Axon, they’ll try to set something up on day 29. And the discovery would be then another 30 days at the end of that. So, a total of 60 days after the Markman’s hearing. So, again, all that still can fall within the timeline that we’re talking by far as the July 24th date.

Okay. Otherwise, they would push back that date?

I’m sure they would try.

Yeah. Okay. Last, I know it’s a last thing before, last thing. You had mentioned Tom that we were very, very close, and you guys have said this on other conference calls and we’ve announced major contracts like AMR and such and Yellow Cab and some of the things that we’ve done with parties. So, we believe you when you say you’re close on contracts. You had mentioned something about possible second quarter, possible third quarter and the commercial fleet. Is this off the heels of what we have going on with NASCAR?

Well, part of it clearly is developments that have came from there, but honestly, the majority of the things -- and this is Stan, the majority of things I think Tom is referring to we’ve been working on prior to NASCAR.

Okay. Well, thank you very much for your time guys.

Thank you.

Thanks Bryan.

We’ve been pushing this thing it looks like a little over 50 minutes. We’re a little longer than what I thought. I do want to thank everybody for their time today and really appreciate the input, the questions, the emails that we’ve received and the leads that even some of our shareholders have generated for us. It’s all been very appreciative. And again, I couldn’t be more excited about 2018, our prospects not only with the SG&A, things that we’ve done there to right the ship but the prospects. It seems really exciting. And again the Roth Capital and the litigation at all, looks like 2018 is going to be very exciting for us. So, thanks again for your time today. And we will keep in touch.

This concludes today’s conference call. You may now disconnect.