Good morning. And welcome to the Digital Ally’s Second Quarter 2016 Operating Results Conference Call. All participants will be in the 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 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 risk and uncertainties that could cause our actual results to differ materially. These risks discussed in our press releases we issued Friday and in greater detail and our quarterly report on Form 10-Q for the year ended June 30, 2016 under the caption risk factors. You may find this in our other SEC filings on our website at www.digitalallyinc.com. Please note this event is being recorded. I would now like to turn the conference over to Stan Ross, CEO of Digital Ally Incorporated and Tom Heckman, CFO of Digital Ally Incorporated. Please go ahead.

Thank you very much. Thanks everybody for joining us today. We’ve got quite a bit to cover here. So we will start off with Tom doing sort of a recap of our numbers and walking everybody through our second quarter results. I have a few comments in regards to some of the things the outlook of what we see as far as the market not only in law-enforcement, but also our commercial divisions and then also little bit about our litigation and open up for some Q&A. So, Tom, do you want to start off with the Q stuff?

All right. Thank you, Stand. And welcome everyone, I appreciate you joining us on this Monday morning. We did file our 10-Q earlier today and I do want to refer once the filing for additional information more deeper dive into the quarter and our operating results. I’ll hit some of the higher points and discuss some of the major issues that we faced in the quarter and give you some senses what we are expecting towards the end of the year, the second half of the year of 2016 is upon us here. So anyways, overall the second quarter 2016 was a disappointing quarter obviously. At a high level our revenues were flat with the previous quarter Q1 2016, but it was $1.2 million less than the previous. However, the most disappointing factor in the quarter was our gross margin. Our gross margin dropped to 29% versus 42% in Q1 2016 and 55% a year ago, and recall that our goal has been and continues to be reaching a 60% gross margin percentage. So obviously we failed to reach that milestone and there are some reasons for that, that I’ll get into more depth later on in this call. One bright spot, SG&A was slightly less than Q1, 2016 and about $200,000 more than the previous year. So SG&A was pretty much in line with expectations. Let’s look at the revenues in a more deeper look. Our FirstVU really slowed and or were delayed in the quarter in Q2, and we believe there is couple of reasons for that. The biggest reason was the PCB board contamination issues that we encountered during the quarter, and we’ll talk in more depth about that a little later as well, but we believe that that’s slowed and or delayed orders in Q2. And…

Great job, Tom. And I just want to emphasize a little bit on the VuLink and the patent that’s -- that we’re out there defending against Taser and WatchGuard. Many of you and matter of fact it was one of our shareholders actually sent me the article on which an incident occurred in Chicago, where a police officer said they forgot to turn their body camera worn. And it just happens to be the officer that was directly involved in the shooting. So that’s again brings up a lot of concern with departments that are -- want to make sure and have total transparency and trying to gain the trust back with -- since they’re they are protecting. So the VuLink we see it as a product that is going to be a standard for the industry, and I agree with Tom’s analysis of how important this thing is going to be for us. So let me go ahead and open it up for Q&A and go from there.

The floor is now open for your questions. [Operator Instructions] Your first question comes from Brian Kinstlinger of Maxim Group.

Hi, good morning guys. How are you?

Doing good, Brian.

Can you talk about in the lawsuit with Taser, I think there is two pieces to it. What Taser is appealing? And what maybe they’re appealing in terms of the two pieces?

Well, I think there is two pieces. One is sort of an unfair trade practices and the other is just a straight up patent litigation. I think the thing that they’re appealing or trying to get through now is the unfair trade practices. From my perspective, they seem to believe that it’s okay to fly Sheriffs and put them up in 5 star hotels with the family or even worse just go ahead and have them on their payroll and have those people be part of the decision process for a municipality. I’m not quite bind into that, but that’s the one that they’re trying to get kicked out. The patent side of things, they continue to sit there and try to find an angle to either get to the patent and validate it or just try to figure out how they’re trying to get around it. But that’s a tough one. As you know, they already challenged it at the patent office one time and were unsuccessful. So those are two real issues that Taser is attempting to…

I’m curious, has Taser approached you about licensing it, I mean not that you might be willing to yet, but it would show obviously their position and their argument is not that strong?

No, I mean both sides are -- took the gloves off real quick into the beginning as you realize they actually came out with a press release right after that stating that our patent was unpatentable and they did that day one and it’s created some hardship on us because of those statements. And so in our patents we’re re-validated or say through the patent office. We didn’t care to put the gloves on and go back and talk to them. And so we swung back. So no, there has been no real talks with them.

And then on the PC boards was the -- is the supplier the same as the supplier that had the issue a year ago, is it different? And then how far are you in fixing the problem or is it just now a matter of going through all the outstanding PC boards and making a switch?

This is Tom, that’s a good question. This contract manufacturer it only does our boards for the first few. So no, the one a year ago was not the specific contract manufacturer. What we have done to kind of eradicate this issue is we have an engineer that is in-charge of our quality control who is now making trips to contract manufacturers, auditing their process, looking at it and getting heavily involved in the day-to-day workings on their production line. So we hope to be able to head these off in the future. Unfortunately it caught us by surprising the second quarter. A year ago I think we did have an issue on the connectors for the first few. But that was really our choice of connectors that was the issue. It wasn’t really the contract manufacture’s issues.

And again most of these manufactures we always visit their facilities and make sure they have the capability. We just now taken it even a step further as far as a lot more hands on auditing of their process and making sure that we have the test pictures in place at their facilities to the level of quality that we expect before they come off the line. So it is greatly increased, I might point out just to give you an example, the last 1,000 units that we received far as PC boards we’ll have 15 that failed the process.

Okay. Last question I’ve got is related to international, realized the second half of this year timing was uncertain, it could happen, it could not some of these big orders. But as you look to next year, I think in the past you talked about some substantial numbers. The competition is strong and internationally and for non-law enforcement and do you have enough visibility to still see that next year will be a significant year for commercial?

Yeah, we still feel great about the commercial business and especially domestically and -- but to address your question on international it’s interesting we had a couple of areas where we were interested and pursuing an opportunity to be bidding on and they had some of these agencies went with real cheap Chinese model or something like that and now when they are coming back to us says they are very unhappy. We are finding in some areas though that honestly we are probably one of the first to be in the region, especially with us having more of a hybrid cloud storage solution that meets their needs. So we are very -- again we want to be bullish, but we’ve also been stunned so many time internationally. But we do have some very big projects that we are working on internationally. One of the things internationally that kind of sets us apart is that we have the whole ecosystem, the whole storage system, many of the lower price knock-offs, what we call knock-offs that are coming from the far East use Windows Media Player or something like that have no ecosystem though, no storage, no chain of custody, all of which is very important and certainly for a law-enforcement agencies as well as even commercial project. So sure our is going to cost more because we have the full product, the whole suite of services from start to end and we believe that that will shine through at the end especially with this hybrid cloud solution that we’ve come up with. The laws of these foreign countries are very restricted on where the video stored and actually I think I can’t recall the country, but came down on one of our competitors because of that. So anyway, we believe we have a leg up because of that.

Great. And looking forward to the progress for both the commercial as well as the lawsuits. Thanks very much.

Thanks, Brian.

Your next question comes from William Gibson of ROTH Capital Partners.

Hi. When did you first become aware of the contract manufacturing issues in the quarter?

It was roughly May, early June as I recall. And reason we found out Bill is we always burn in our units for about a day before we ship them. And which we’re shipping some of those and they were coming back within a week after that as failed, and we just couldn’t understand why. So we did a full autopsy on some of these returned units and we figured out why the issue was occurring. So it was mid to late-May as I recall when we first experience the issue.

Okay. And I know you talked about accruing cost and charges in the second quarter. Does that cover what might occur in the third or are there additional charges in the third?

Well Bill I like to think we’ve covered all the cost. But I’ve been in the electronics industry too long and technology there is always some gulches [ph] out there. But I think we have a crude for all known problems and problems that we expect based on the history of the returns. Now remember, only 30% of the total is suspect, but we have to tear down 100% to find those 30% and that’s what’s really difficult on us.

So no issues in your inventory?

No we’ve torn down all the inventory and rebuild that. So that we identified the problem boards, we threw them out, put new ones in and rebuild the inventory with good board. So nothing in inventory now has the suspect boards on.

Thank you. And then one last question on the sales front, are opportunities emerging among cities or agencies that originally went with Taser and potentially now come back to you?

Yeah we seeing a little bit of that. Some of the agencies have just flat thrown the contracts out. Other agencies has sit there and said maybe we ought to be looking at this in a little more in-depth to see if we’re missing something. So we’re seeing a little bit of that. We do think that that will continue as well. Bill I’ll sit there and tell you I think more and more as people and departments understand where we stand in regards to auto activation and where we stand on pricing and quality and the overall pricing of it where they after they get the sticker shock of being with Taser for a year or so. You may see more of them coming back to us. So yeah we got beat out of the blocks, we still think we’re right in the middle of this race.

Thank you.

Your next question comes from Brian Rockowitz of Aegis Capital.

Good morning, guys.

Good morning, Brian.

How are you, good?

Doing well.

All right. Couple of things I want to address. First off the manufacture issue, in your press release it says that they did not follow your instructions. Do they do anything to rectify your losses?

We are discussing now with them right now Brian. And again the reason was they used unapproved flux and I don’t -- that's probably a lot of words. But they’ve used an unapproved process to rework the components on the failed board. So yes, it was that situation that we’ve begun discussions to them. They’ve stepped up to the plate and they’ve eradicated their issue. But obviously we’ve got a lot of charges and costs so it’s cost us that we want to them about as well. But I can’t promise you on any kind of resolution of that. And we certainly haven’t recorded any recovery of those losses in our financials yet.

Okay. So they’ve obviously taking fault for their issue, you guys have addressed it, you feel that that’s knocked out of the part. But any losses you may have incurred it’s up in there whether you guys can recoup or not?

That’s correct. Yeah.

I will tell you this Brian though they have come up here, we’ve visited with their CEO. And while they’re probably not looking to write a check, they may get little aggressive on pricing to assist us in sort of recovering some of the damages.

Okay. So they may discount in the future to make up for it.

Correct.

Okay. I see that you guys have four orders this quarter for over $100,000. I remember last year you made an announcement for seven and that was the first time ever. Even though the orders maybe lower it looks like the amount of money is slightly higher. Are you attributing that to the new product are you attributing that to the cloud and the data storage? Or are these just larger orders on the camera side?

Yeah, Brian this is Tom. Those were orders off the state contracts and the contracts we already have. Rather large orders with large customers of ours that have been customers for quite some time. And they were actually in car systems that they ordered.

Okay. So it would be not to body camera it would just be the in car dash is what you’re talking about?

Correct. Yeah, in fact it was a large DVM-750 order, as well as couple of DVM-800 orders.

Okay. Lastly from me some of the other analyst have touched based on the international business. I can see obviously in the press release it’s going up significantly 200% above where we were in the prior quarter and prior year. This last contract that you guys just released for over $1 million, that's an international contract as well.

Yeah it sort of hard to explain, the majority of all of our handling of the product will be here domestically with a little bit of it being done internationally. But the parent company is an international company.

Okay. So when you guys record this as a contract it goes down as domestic or internationally?

Brian I’ve been thinking about that since we released it. I don’t know we may make a third category of it. It has elements of both, but I really haven’t come to a resolution on it, but it’s a great question.

Well the way I’m looking at it, obviously the parent company is internationally and they do their business internationally, but were manufacturing and distributing here for them it sounds like an international contract. The way I’m looking at it is, it looks like a significant increase in that segment. And I know that you guys have alluded to more contracts that you’re working on that will be of the same elk or same size. If that’s internationally as well we can see it and I know you guys have been burnt in the past, but we can see a trend there. Is that something that you consider or you think is going to happen in the near-term? I know you guys have some things that are out there that are being testing right now.

Yeah Brian this is Tom. I can tell you that our pipeline -- our sale pipeline from international projects is as healthy as it’s ever been. But we’ve had pretty healthy pipelines in the past and they go away for whatever reason. You got bombings in Paris, you got dollar problems, you got oil prices going down. So it’s very, very fluid if you will the pipeline. But on the other hand I am very optimistic because we have the best product for that international market for body worn cameras. They love our small profile the two piece design coupled with this hybrid storage solution that we’re coming up with. I think really puts us in the forefront.

And that was a commercial line as well, correct?

Yes, both actually.

Okay. So the last thing I would say about the international business, if we’re going to be doing commercial business obviously there is no bid and they can write the check if they like you guys tomorrow. With this $1 million contract is am I right in assuming that they paid for everything upfront?

Well again it’s a commercial very qualified customer that as we’re doing the installations we’re billing them according as we would with any commercial customer.

Yeah we’re not treating them the same as some of the other international customers we have. They’re very well capitalized and there is very little if any credit risk with them. So we are giving 30 day terms. And quite frankly we believe this is the initial orders and it’s going to be a very long and profitable relationship for us and them. So we think, the things are going grow from here.

It sound very large and it sort of sounds like what you guys got going on with the ambulances. So hopefully we can continue with that.

Yeah, that’s an analogy.

Awesome guys. Thank you very much.

Thanks, Brian.

Your next question comes from Ish Faruk of WestPark Capital.

Hi, good morning. Could you guys give me a little more color on your backlog, I think you guys mentioned a $6 million to $7 million backlog for the rest of 2016?

No, this is Tom, what I mentioned was, as we sit here today, our backlog is roughly $1.6 million to $1.7 million. That includes the large order that we put in the press release last week. We’ve shipped I don’t know $200,000-$300,000 on that order. So the backlog is pretty healthy even without that significant order. And I think a lot of that is because of the first few the delayed purchases from the second quarter has hit this in the third.

Okay. Now that we’re fully in Q3 and with all the recent events that took place are you guys seeing like much higher order flow in Q3 compared to Q2 now that you have solved your issues regarding the PCB circuit boards and your contract manufacturing issues?

The thing I could tell you Ish is without trying to give you guidance is that it seems like weekly there is news coverage out there and stories surrounded body cameras and in-car or dash cameras as they want to say. And so the inquiries continue to come in. The bids we continue to participate they have not shown up at all and providing funding there for these guys. They’re going to get to a point where body camera is a standard as their batch, it’s going to be on every officer. So and they’re really still the impasse in regards to get it, they just got to get the funding. So we’re still seeing a lot of interest around both in-car and body cameras.

Okay. On the commercial front you guys got like a large order from the international market for the commercial products, are you guys seeing more traction surrounding commercial in the second half of 2016?

Yeah domestically we’ve got very encouraging things that we’re doing, some of these deployments in the commercial side could be as many as 1,000 units and we build on that number. So we’re pretty optimistic of what -- how this is -- remainder of the year is going to finish out on commercial, but it’s really, some of these are really the beginning very beginning of what could carry on over into 2017 and being multiple times bigger. So we’ve got to do a good job of providing them with a quality product. We can’t have, our contract manufacturers making mistakes, we’ve got to sit there and service the product well and I think that we’ve found a few niches much like Brian has talked about as far as the ambulance company that we could build on and be the leader in this particular market that we’re getting some traction in.

All right, thank you very much guys.

Thanks, Ish.

Your next question comes from Bryan Lubitz of Aegis Capital.

Guys, I just wanted to follow-up quickly on the Taser stuff. First and foremost you mentioned that discovery is still ongoing?

Correct.

Okay. Typically or I know you mentioned the utility suite that was two years and you’re just now getting in the court, is this discovery extensive where it’s taking longer than normal, I was assuming that it would have been done by now?

No again it’s one of those things that there is obviously delay sometimes maybe a little bit on our part where we need an extra two weeks to gather all the information in regards to the Taser deal, I mean, we’re going to be giving a lot of information in, not only just from them, but there’s going to be other department that we will be talking to municipalities and consultants, that will be gathering information. So it’s going to be pretty in-depth. But the court has laid out a timeline and pretty aggressive timeline and, I may look at given you guys one extension, but don’t be trying to hit me up for anymore. This thing needs to get resolved.

Okay.

The Utility deal was a little more challenging, because I think we had to fight jurisdiction.

We had the IPR.

IPR, yeah. Brian, it the utility case they filed an IPR. Actually, we filed an IPR with the patent court or not patent court, but the patent tribunal that delayed this thing probably six months to nine months, which we won by the way, if you recall. So it’s a little different, because Taser has already gone through the IPR process and lost. We won that process. So that six to nine month delay should not occur in here absent that. And the second thing, there were some motions early on in the discovery that delayed the beginning of discovery. And honestly, it was -- it’s probably a month and half delay at the beginning and quite frankly, we won every one of those. There were like 5 points that they were putting in motions on discovery that we basically won every one of them. So as I said in my earlier remarks, nothing we’ve seen has surprised us. In fact, I’m very pleased with what we’ve seen to-date and where this thing is headed. I can only hope that it continues that way.

So I’ve been looking a little bit at the documents as well. And it seems that you guys had to file motion to compel in regards of discovery is that based off of them not supplying certain documents.

Yes. Correct.

Any and all. I mean, it -- there is games that attorneys play on pretty much litigation. It’s not different here. And this probably won’t be the last motion to compel, because there is a lot of information that they probably don’t want us to see.

Okay. So now in regards to the summary judgment that they filed, they filed it on both fronts, have we gotten any color back from the judge? I’m assuming obviously if the case is still going one, their summary judgment was denied, correct?

Well, I’m not sure it was summary judgment. There was a motion to dismiss filed with respect to both parts, patent and the unfair trade practices. The patent part of it was we won that. And we’re going forward full tilt on the patent side. The other side on the unfair trade practices issues that has not been decided yet. But we expect that here within the next 30 to 45 days. It’s hitting on the judge’s desk. And as I say it’s right for adjudication.

Okay. So with the patent side of it being that we know that’s going to continue. They did file for the patent review. They lost even though they put a press release stating that our patents weren’t validated. As soon as the judgment from the U.S. PCO comes down that they have lost. I have a little experience, it seems like they’re on the hook for willful infringement. Do we have a number in mind right now in terms of from that date, how much revenue has been derived from our product at least or is done?

Brian, I got people kicking me right now. I just can’t comment.

All right. So I’m trying to drag as much as I can out of you, you guys know I’m going last going, I don’t want you in trouble here, had ask earlier Taser had come to you and try to work out a licensing agreement. I know you guys are going to be mum on that, that’s something that you’re in the midst of doing. However, there are other companies in the space besides just Taser, for example, Motorola, Panasonic, et cetera. Have any of these other companies seeing the action that you have bought against Utility, against WatchGuard, against Taser made a call to potentially work a licensing agreement in advance of using your product this way that they do not get a lawsuit. And the reason I’m asking this, obviously, if we set personate it’s going to look much better on our case.

Yes. I think what we’re -- we’ve had some, let’s say some early discussions, but what we’re at right now is at this point, we don’t want to set -- what I might say kind of presence in regards to valuations. This is a product, a patent that is being requested by almost all the departments that are out there. I mean, it’s one thing not to have a body camera, it’s another to have a body camera and not turn it on. And so we have a really, really unique opportunity here and we need to be able to take advantage of it.

Still a number, but what about a percentage. Would you guys have a number in terms of percentage that you would feel comfortable with the licensing agreement?

We just haven’t gotten that fair with it.

Our lawsuit in our peripheral leaf, it requests a permanent injunction. And that’s what we’re going for. We want them to protect our patent as it’s issued. We spent a lot of money, lot of time, lot of effort and we’ve developed that technology. We should get a patent, and we should have that protection. That’s according to law. So that’s all we’re asking for at this point. A licensing type arrangement there would be an after adjudication issue, I would think, but nothing that we go into any kind of mediation or anything like that with that in mind. What we want is them to protect our patent and permanently enjoin both WatchGuard and Taser from infringing on our patent. And quite frankly, we believe there is a number of other competitors that may in fact infringe as well, but the ones we’re dealing with it at this time is WatchGuard and TASER.

Okay. Well, I appreciate the time again guys. I’ll speak with you soon. And good luck to keep the international and rest of the sales up for you. All right.

Thank you, Brian.

That’s concludes the question-and-answer session for today’s conference. I will now turn the floor back over to Mr. Stan Ross for any additional or closing remarks.

Well, thanks, everybody for participating, we really appreciate it. And as Tom mentioned and did a very good job of explaining sort of where -- how we got, where we got to in the last quarter. We’re clearly making the strong trunk moves to resolve our gross margins issues, the sales and marketing side of things continue to look real strong, and we’re very excited about how we’re going to be able to finish the year out and also moving on into 2017. So thank you all for your time.

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