This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words believe, expect, anticipate, intend, estimate, may, should, could, will, plan, future, continue and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectation or forecast of future events, can be affected by inadequate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document and readers are cautioned not to place undue reliance on such forward-looking statements. Digital Ally will undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that forward-looking statements contained in this document will in fact transpire or prove to be accurate. Good morning. My name is Chelon and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to CEO, Stan Ross. Please go ahead.

Thank you everybody for joining us today. I have Tom Heckman, the company’s CFO with me today. Tom will do a little in-depth dive into the numbers and give you little understanding how the quarter turned out. We are very pleased with some of the headway we have made in a lot of the different areas, especially the cost control areas. And then I will touch on the current status of our litigation with Axon and WatchGuard and what our future plans look like and those matters. Tom?

Thank you, Stan and welcome everyone. I appreciate you joining us this morning. As you might have seen, we have filed our Form 10-Q this morning. So, I do suggest that you refer to that for a more in-depth dive into the numbers and what’s going on with the company. You might have also recognized that we did file an extension for the quarter, it was a 5-day extension, so we are a little late here, but we are filing on time according to the extension. And the reason for the extension was nothing more than we have recently finalized a financing with Brickell Financial, our Brickell Key Asset Management at least tranche 1 of the financing and we wanted some time to step back and take a look at things and make sure we had it fully disclosed in the financial statement. So nothing other that, we just wanted couple of extra days to catch our breath and look at things. Now, let’s swing to the quarter. And I guess what I would say is you know progress sometimes take smaller steps, but in the right direction and that’s really what we saw in the second quarter here. We have reversed some bad trends and we have continued with some good trends in that and we are taking the steps necessary to reach, first of all, breakeven EBITDA and then hopefully positive EBITDA here in the near-term. If you look at the numbers for the quarter, our revenues reached roughly $3.6 million for the quarter that is our best revenue figure since Q1 of 2017. So that’s certainly a nice step in the right direction for us and we hope that, that continues and we have got some good things to talk about little later on here that I…

Sounds good. Thanks a lot, Tom. Yes, I just want to sort of add a little bit in regards to the litigation side of things. I think Tom did a great job of sort of giving you an idea of where the company is at and what our expectations are and where we are going, but the significance that we have seen since maybe our last call is, a lot of the announcements that we have made have been announcements from our success in the patent office. And just recently, we are really starting to see more of the announcements and our wins that we are seeing in the courtroom. And so we have been very pleased with the fact that the courts are saying enough is enough. They are stepping up their timelines. As Tom said, we have got discovery on the Axon to be completed, I think by September 17. You have another 60 days from that point to get all your depositions and your duction line in regards to your expert witnesses and have that submitted. And then we actually have a pre-trial that is scheduled, which will actually be a face-to-face in the courtroom on January 16. This will be a conference that we will make sure there is no additional outstanding issues and be able to start moving forward and talking seriously about a trial date and the picking of a jury. So we are pretty excited about the fact that we do see the light at the end of the tunnel. We also like the fact that we will be putting ourselves in a position to where if the company would elect, we could possibly file for summary judgment. If we feel that we have got all the evidence that we need and that’s…

Thanks. [Operator Instructions] Your first question comes from Ishfaque Faruk.

Hi, good morning.

Good morning Ish.

Yes. In your prepared remarks you mentioned a little bit about the VieVu contract termination, is there – what was the promise behind the contract termination since Axon acquired them earlier this year?

Well, I think you sort of answered the question. I mean one of the things is that we were interested in working with VieVu and some of the larger contracts they had throughout the country. Axon acquired and so there is a little bit of wrinkling through our willingness to be in there alongside of them. But it’s one of those things that both sides looked at it and decided that it’s probably in both best interest to just walk away and tear up the documents.

Alright. Okay. In terms of the two trials as it looks like the trials are both headed – both the lawsuits are headed for a trial as opposed to one either of the parties settling in advance, so your legal expenses are supposed to move higher in the second half of the year?

Yes. That will be little higher in the second half of the year. And you got to look at those from both sides of the table. And I will try to look at it from both sides of the table. They have been doing everything they can to stretch this thing out, to wear us out, to hope that at some point in time we wouldn’t have the same power to be where we are at today and they have been unsuccessful to-date. They would probably both and all of them are listening in on this call, probably going to want to get a pretty good understanding of the discovery and the status of discovery and some of the things that they may learn over the next less than 30 days as far as discovery. And then you have got crucial events getting ready to occur. We have the IACP which is the biggest tradeshow of the year coming up here in October. So it would be interesting to see how that plays out in public perception, because we will clearly be there making sure the industry knows that we are the rightful owners of this technology. So that will be coming up here in October. And then as I mentioned even the expert witnesses that at least on the Axon case need to be completed approximately 60 days from the discovery side of things. So you have got a lot of information that’s going to be coming at you and so if I am sitting on the other side of the table, I think that I am going to want to have as much knowledge as I can before and if I want to try to make go talk to Digital Ally. But at the same time, we are very happy to keep moving down the direction we are going and just looking forward to hopefully the court’s ruling in our favor to where an injunction becomes out against them utilizing our technologies. The WatchGuard case 2 is about 60 days behind the Axon. So again, very close timelines. But as Axon has probably already seen and is experiencing – I am sorry WatchGuard has seen and is experiencing, a lot of the possible rulings that maybe handed down in the Axon case will set a precedent in regards to their case. So they may not have the ability to fight as strongly as what Axon has been able to. So it’s going to be interesting few months here.

Okay. And the pre-trial conference date has been set for Jan 2019, when do you reasonably expect this thing to go to trial if it proceeds to the trial?

All I can tell you is what the magistrate said and as you can see the tight, tight scheduling guidelines that she had laid down already that her comments were, this has been going on long enough. And so I anticipate they will move rather quickly, but you have got to remember, we are going to be then in a position too as I stated that if we feel strong enough about everything, it’s very possible we may go straight to asking for a summary judgment. And so far you have had 7 wins in the patent office and so far the rulings in the courtroom have sort of – the courts have recognized our position. So, I don’t know – I don’t know that I would be willing to take that chance and a judge sits there and rules in our favor and then all is you are doing is going to a jury trial to figure out damages. So there is a lot going to happen at the end of January.

Okay, okay. Yes and my last question, so the Brickell financing that you did, what was the premise behind that, are you – is it like a investing in the patent or is it to raise additional financing?

Yes, it was sort of a consolidation of financing. As you know, we have got a note out there. We needed some additional working capital. So, working with them and having them fund that first tranche was good timing for us. They are continuing also to do some due diligence, but they seem to be an investment fund that would be someone that would be good to have as a partner throughout the finish of this.

Alright. Thank you.

Thank you.

Your next question comes from the line of Bryan Lubitz.

Good morning, guys.

Good morning, Bryan.

Tom, just first and foremost, my thoughts are with you and your family.

Thanks, Bryan.

No problem. I want to just piggyback the last point that Ish made in regards to BKI, obviously, they stepped in for $0.5 million on the first tranche and this is second tranche possibly for $9.5 million. I am assuming this will also work with us in regards to any type of legal fees, etcetera moving towards the proceeding of the trial. Is that kind of what that financing was used for?

We will sit there, if they would like to go ahead and move forward on that second tranche, obviously, we will take out the first note holders and get that whole consolidated and then we would be able to utilize the additional proceeds for all sorts of working capital, including the litigation, don’t get me wrong, but it would be a nice shot in the arm in regards to the working capital to see us through not only the transition we are making with the company and the growth of the company, but also assisting in the litigation.

Okay. And obviously kind of gives us that position of strength I would say in terms of cash versus Taser not negotiating if we do negotiate out of weakness?

Correct.

Okay. Wanted to stay with the court case, I saw in November on the 29 settlement talks, I haven’t seen you guys mention it, but mediation to be held with the court as well, is that correct?

Yes. Bryan, that’s a good point, I should have touched on that in my opening remarks, but that is one of the things. I mean obviously we will have the discovery done here in less than 30 days. And then the expert witnesses will have all presented their findings for both sides 60 days following that so call it 90 days from now. So the courts felt that at least at that point in time it made more sense for us to get around the table and see if we could resolve this and not bring it to the courtroom at that point in time. And we sort of agreed because originally they had a schedule prior to an earlier date, but I don’t think both sides understood each other’s position well enough to really have some substance behind why we are asking for the number. We are asking for and why they believe that the numbers should be what they would be saying it may worth. So with this discovery and expert witnesses, information available to both parties they went ahead and they did schedule that. So again November 29 I think is the date and so we will be around the table at that point in time and see how apart we are.

So less than 2% of these cases ever really see trial, that’s kind of the last hurrah [ph], if we are going to put this thing to bed before we get to the pre-trial date, that’s what that is?

Possible, I mean I don’t know they may wait till you are walking into the courtroom. And I think it’s closer to 5%, but anyway 2%, 5%, it’s a real small number and we will get there, because there is a tremendous amount of risk that we think that a company that is infringing on someone’s patent is taking. Especially when you have attempted in virtually every fashion you can and have been unsuccessful in the patent office thinking that now all of a sudden, you are going to go to a courtroom and have the courtroom say well, the patent office doesn’t know what the heck they were doing. And so I would – I understand why that number is now so small. So they may play the game a little bit longer, but look we have been – we feel that we have been damaged greatly. And as Tom did a great job of explaining, I mean we clearly were one of the largest clearly had superior technology, advanced technology without activation. And again stressing, I mean its one thing for a department not to be able to own and have their officers having a body camera. There is another thing for that officer to have a body camera and forgot to turn it on. For whatever reason and there is an answer that goes down and all sorts of stuff comes out of the woodworks in regards to what was he thinking by not activating that. So it could get quite exciting. And don’t get me wrong, you are talking about, so far we mentioned the two people that we have litigation with. You got to realize Panasonic, Motorola, L3, there are some other substantial names in our industry that I am sure are also becoming very much aware of what’s going on, because they are in this market for to make money as well and get there putting the door. So we are keeping our ears open and talking to a lot of people.

Okay. So I have got two things and I will get to you if you will – two questions left, first and foremost, in looking at Axon or Taser’s reports in regards to the amount of body cameras they have sold since this case has begun, am I right it’s over three quarters of $1 billion at $750 million that they have sold them products so far and body cameras?

I have heard them it’s throughout those kind of numbers in regards the bookings. So they will have a 3-year, 4-year, 5-year contracts, I mean 1-year contract. So in regards to the contracts that they have booked which is future revenue that they were anticipating, they have thrown out those kind of numbers, yes.

Okay. And now they also have just won a case themselves against Taser the royalty rate Stan was that 40%?

Yes, it was.

Okay. So this is their own precedent that 40% and they have at least booked $0.75 billion. Will you guys be going for treble damages, I know you are going for the injunction, is that something else that you guys can put forth to the judge that you are requesting?

I think so. And I think they have a hard argument against it. I mean, if you didn’t think you violated our patent, why the hell you try to invalidate it so strongly and for so long. If you don’t violate it, what’s the big deal? So, they clearly knew – in our opinion, they clearly knew what they were doing and they were just still after trying to buy the business, they didn’t care. They are the big boys. They could be the bully in the playground.

And this is the last thing I will get at. So the simple math is if you are looking at future or booked or whatever it is, 40% of that number is roughly $300 million. I know you guys have hired Roth Capital for strategic exploration. When you guys told Roth or you go to the potential people that are having conversations with you, is that a real number? I mean is $300 million a realistic number that you guys are fighting for and that’s without the treble damages? I just want to make sure I am in the right ballpark here.

So we are not allowed to disclose any kind of numbers as such that we are looking for as of yet. The only thing I could tell you is that obviously the board is very much aware of what we believe potential damages could be in the number associated with. And again we are talking about the damages. And so if someone came to us, the board would at least be well informed on whether or not it was a solid deal or a deal that we should entertain.

Yes, Brian, this is Tom. The numbers are quite large. And I think I called them stupid big before, but in reality, that’s our damages. I mean, we should have won those contracts. And if we were not having to compete against our own technology in the marketplace those would have been our revenues, no doubt about it. I mean, the marketplace has dictated auto activation as a standard feature for quite some time. So, you look at Axon and Taser and what are they going to do? I mean, they were backed in the corner. They didn’t have the technology, so they stole it from us. So, the numbers are quite large, but that is our damages.

Got it. And obviously they have to decide whether or not they want to go against you guys in court, with USPTO ruling in your favor twice. I just don’t see the logic of a multibillion dollar company not just trying to pay you guys to make it go away. Again, I don’t see that logic. I am sure you guys don’t see it, who knows what they are thinking. I know I said last thing, this is my last thing. So, margins have gone up. You touched on earlier, Tom in terms of SG&A is down, margins up, revenues up. I know we are at 45. I know we have said in the past we want to be close to the 50. Do you guys attribute that to the rest of the industry sort of being put on warning not to take bids if they are in potential litigation and the word getting out with the patent wins for us? Is that one of the reasons why you attribute those numbers going up?

We have seen improvements on all levels. I am not going to go as far as the statement that you are making there. I think that a lot of the margins and stuff have been because of the efforts that we have done in our cost containments along those lines. We will tell you though that we are very aggressively stressing to the industry and I could watch right now and see some of the people that are on this call and recognize certain chiefs that are listening in from different departments and recognize that the industry is wanting to know more and understand more, so they make an educated decision, especially with us aggressively looking at an injunction on these products. And secondly, these are taxpayers’ money and we hear all this stuff about China stealing our technology. Why don’t we look here a little closer to home and deal with that as well? So anyways, we are getting the word out. We feel that it’s starting to get some traction out there. Again, some of these things are long lead items. So we are just now starting to see some of the bids like recently, Phoenix right in Axon’s backyard, put in there a bullet that said do not be submitting products that violate U.S. copyright and patent laws. So, appreciate them taking the right stance and hopefully all departments will take that stance as well.

Well good luck with continuing the litigation and settlement and glad to see the quarter look much better than last quarter and I will talk with you guys soon. You guys have a great day.

Alright. Thank you.

Your next question comes from the line of Steve [indiscernible].

Hello.

Hi, Steve.

How are you? Good morning guys. I was going to touch on that Phoenix thing. You kind of answered it, but is there any evidence that Axon got shutout of the bidding process yet because of it?

Not that I am aware of. Again, I don’t have that package in front of me. So, I forget what the crucial timelines were, but let’s be realistic, I don’t know that they care. They are probably still going to submit and leave it up to the departments to be the ones that decide whether or not they are going to throw them out or just go with another company. They have had – have been out there indemnifying these agencies for sometime and therefore, they may still take that stance. But I don’t know, I mean, I think departments are getting smarter. And again like I said, they could read the press releases, they could see that these patents have been challenged 7 times and each time the patent offices stood behind them. And so now you have got a courtroom that even ruled very, very strongly in our favor in regards to the claims construction. So more the writing should be continuing to be in our favor and they have got to make those decisions, but some of them may just – the fact that they are so large and if they are getting indemnified, they may say what the heck? What’s the worst case? They got a – buying back, I mean, I don’t know what the worst case would be, but no evidence as of yet.

And one more quick one please. Is anymore vigorous we will say NDAs coming in the last couple months or solid I should say?

I am sorry, could you repeat that?

I know you had a bunch of NDAs in March, April come in, people looking at the company more closely, anyone...

The majority of that’s being handled by Roth and they have been letting us and they are even helping us with NDAs. They know that we want to continue to get a couple more things underneath our belt. But anything that’s substance to bringing forth to the board, so I don’t know of any – I know there has been a few trickle in that I am aware of from talking to them, but I obviously don’t know what number is up to right now.

Okay, great. And please just one more, could an injunction happen at anytime or has it been filed in or are you just waiting until to get more into the meet of the case?

Steve, again, I am not an attorney, I think you have got to wait till the meet of the case. I think we are going to have to wait until that January date before we could attempt something like that unless maybe there is something that’s really significant that would pop up in discovery, but I don’t think that’s how it works. I think we have got to wait until the end – in January sometime.

Alright, thank you.

Thank you.

Your next question comes from the line of Stuart Goldberg [ph].

Good morning, gentlemen. Just a quick question, I was a little confused on VIEVU. So with that agreement, were you being paid a royalty by VIEVU for your technology?

No, no. Nothing like that. They were actually just – it was more of a distribution agreement. So, we agreed to sell them a product that would work with their device in regards to assisting them with auto activation, but no license or anything along those lines or royalty.

Okay. And so that means that Axon now has that product in the field and that they are – and they are – obviously they are using it and is there any...

No.

No, the termination, Stuart, they agreed to stop selling marketing and using our product as of the date of the agreement, which I think was July 29 as I recall. So they have stopped that. The confidentiality provisions survive and are part of the termination. So they are going to return to all our proprietary literature, products, everything and we are returning theirs as well. But in reality, we cut that off. Taser/Axon/VIEVU no longer has access to sell our VuLink product.

But does that – but was your product deployed in any of the contracts that VIEVU had?

See, I don’t know that we really can cover that based upon the termination agreement on that, but one thing you may have seen an article that just was printed in wired magazine the other day. And I think even Axon commented on it, but they had a gentleman that looked at five different companies and he didn’t look at Axon or WatchGuard, but he looked at VIEVU and Digital Ally and three other companies. And 4 of the 5, he was able to hack into their equipment and even manipulate the video. Digital Ally was the only one that he could not. And so if we know that they had been continuing to look at improvements on their product and therefore – I just don’t know what they tried to deploy or not to deploy.

Okay, great. Thank you.

Thank you, Stuart. Listen, I want to thank everyone for their time today. Really appreciate it. Really appreciate your interest in our company and the patience you had with us as we have had a tough, tough road to fight, but it looks like it’s getting real close to paying some real nice dividends. We are very excited about the growth in most sectors that we have and we are looking forward to the next few months. And we will keep you abreast of our continued improvements not only from the patent office if there is additional awards coming down through there, but also the courtrooms and any significant orders that we would be landing as well. So, thank you all so much for your time.

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