Ladies and gentlemen, thank you for standing by. Welcome to Digital Ally 2018 Fourth Quarter Results Conference Call. [Operator Instructions] The 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 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 expectations or forecast of future events, can be affected by inaccurate 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. I’d like to turn the call over to Stan Ross, CEO. Please go ahead, sir.

Thank you. Thanks everybody for joining us today. I'm fighting a little bit of cold here so I apologize for a bit of rough voice here. I got Tom Heckman in here the company’s CFO. He will go over the numbers and give you a little bit of recap. Then I will come in and comment a little bit on our litigation that we've going on with -- for the patent infringement cases. And then we’ll open it up for Q&A. So that being said, Tom?

Thank you, Stan, and welcome everyone. I appreciate you joining us this morning. I hopefully, you guys have seen our Form 10-K which we filed on Friday. So you have the weekend to peruse that, and hopefully have had a chance to do that. I don't intend to spend a lot of time on certain things but I will hit some of the highlights and hopefully would be able to answer some of the questions before you ask them. So anyway let's first look at the P&L statement. And obviously 2018 was a challenging year particularly in our law enforcement revenues. They were depressed this year. That's no secret. We've seen that throughout the year and talked about it pretty much on each of the quarterly conference calls. We think price competition has become more and more fierce. And quite frankly, we think even the patent infringement that we are seeing out there is becoming more and more brazen. Not only with Axon or WatchGuard who we've active lawsuits with, but we believe potentially even other competitors out there. So we believe we are becoming more brazen and obviously as we move forward with the trials and lawsuits and that hopefully we knock that down and are able to reverse that trend. In addition, we noted in recent weeks and actually months that Axon has becoming more monopolistic in their behavior. And we hope that the regulators will take notice of that and make appropriate adjustments in that. But in that regard we also intend to be addressing that legally as well. So we understand the law enforcement's revenues have been depressed and we are taking actions to hopefully fix that. One of the things we are doing is our current product line was initially introduced back in 2012-2013. The…

Thanks a lot, Tom. Yes, we are pretty excited about 2019. We, obviously feel like there's a high probability. We'll be finalizing some of this litigation with both Axon and WatchGuard. And as Thomas mentioned, we've been very successful in the Patent Office and so far in the courtroom. And so we've got a couple of open issues that we're waiting on the judges to rule on. But as that those rulings come down, I think it'll be a lot clearer in regards to the kind of when we'll say damages that we're actually going after. I think it's already been out there in print that we're looking at over $200 million that we're going after Axon for and there's nothing out there on the WatchGuard front, but it's a large number as well, not to that extent but very big number. And then we will also look at monetizing with anyone else that's out there that may be copying our technology. The second the launch of the EVO, we've already started receiving orders on that. So we're very excited to get it out in the marketplace. It has a tremendous amount of upside potential for us. We do believe it's probably one of the most dominant in-car video systems that would be out on the market. So we hope for a late second quarter launch in that particular product. I think we can go ahead and open this up for a Q&A now.

[Operator Instructions] Your first question is from Bryan Lubitz, Aegis Capital.

Good morning, guys. How are you good? Stan, you had just left off with the $200 million that was already put out there in print. Since we filed against Taser and that number of the 2 or 4 has come out. Taser reported about at least for one quarter I know of $100 million in sales and about $25 million from cloud services. That number of the 204 that as of September of last year, am I right?

I think it's actually of August of last year, but you are correct. Those damages are continuing to pile, pile for us.

So can we gauge for like every $100 million that they do in sales what to expect that number to increase by?

I don't know. I'd have to dig a little harder on that, Brian, but again it's a big number and here's the other side of it. It's not only is it a big number but begin we truly believe that this was all willful infringement. So whatever that number is gets tripled.

Okay but a percentage of their sales. So Taser has put out some articles where they're totally going against your number and saying it's a much smaller percentage as you would imagine, but they're trying to in at least the articles I've seen say you guys really have no claim to the cloud service part of it. Can you comment on that?

Yes. The way the legal side of things is looked at in regards to these patent damages is they looked at the whole package. I think I may tried to explain on a prior call, but let's say that Phoenix is going out for a bid and they're asking for 2,000 body cameras and auto activation and cloud storage. It's a package; it's a whole complete package. And so the convoyed sales side of it, we believe will come into play on this. So you will be looking at the big picture not just the individual item.

Okay. Just piggyback in that now I put it to bed. So it's been about seven months since we've had that number adjusted in your minds eye do you think we've crossed a quarter of a billion in terms of damages or liabilities for them?

I'll tell you go ahead --

Bryan, $200 million came from financial experts in that and we didn't have privy how that was particularly calculated in that. But you can make your own assumptions on that. It's a big number; it's a big, big number and certainly from this con-- what they call convoyed sales where what Axon and others have done is that they've pretty much given away the hardware in order to get the five year contract for the cloud services. So obviously what Axon is promoting out there as well the hardware which is are part of it, VuLink wasn't that valuable because we gave it away. Well, sure they gave it away so they get five years of recurring revenue at 80%, 90%, 95% margins. So, yes, it makes sense and the law provides for that or at least we believe that the law provides for that. So that will be a matter that's addressed by the court even before we hit the courthouse steps for the final court hearings in the trial. So hopefully that gets taken care of in our favor which we truly believe that it will and it should be makes common sense. If that happens and the numbers is quite, quite large. And it's growing every day.

Okay. Now Axon finally in their last report addressed in their 10-K your lawsuit. It's been several years that this has been going on. And I know you're not here to comment on their price drop from that, but shortly thereafter there was an article written with their entitled that they are confident that they would prevail. They referenced something called slate technology. I've never seen a PR, have you guys seen a PR from them at all with any sales over the last couple years with this new technology, slate technology?

No. Bryan, they can call it what they want. It's --what we believe is happening there is that all that you have lost seven times at the patent court. They've lost pretty much everything at the district court. They've got to bring some type of defense to bear in this matter. And I think they're grasping for thin air at least we believe. So I've never heard the slate technology. I don't think anybody in the industry has. So we believe it's apparent what's going on there. They've lost at every turn. The patent court is denied pretty much every challenge that they've had. They're - their defenses with, at the federal district court are very, very minimal at this point if anything. So they're trying to gen up new ideas, new theories in order to defend the matter. But, luckily, not luckily but we think appropriately that the district court is dispensed with those theories, as well as the patent court. And hopefully they will continue to do that.

All right. I got two more and I'll let you guys go. So just piggyback in that, Tom, again we've talked in the past and less than 5% of these cases ever really make the courthouse steps. Do you guys believe this is posturing?

Well, it could be. I tell you that we do have litigation with WatchGuard and as you may have seen in the filing, we delayed a little bit of our discovery because the parties are talking. Okay, so at some point this posturing will have to come to a head and as we continue to have more and more success, it just strengthens our, I say I guess our position for us any kind of posturing so --

Yes. Bryan, one thing and I did see the release from Axon and they basically said that all the court rulings to date are irrelevant, which I would bear to say that if they won those they certainly would be relevant, so how can they say they're irrelevant now. So anyway it's the way things go and especially with companies like Axon. They're not used to losing patent cases and even cases in general, but to date they've nothing but lose and we hope that they continue.

Okay and I understand exactly what you're saying. And this is my last one for you guys and then I'll let you run. Switching real quick to WatchGuard. There was a document that was released on Taser about a week or so ago and it looked like, I don't know, if you guys filed it together or at the very least that both sides were already agreeing on certain issues. It feels like the pace of that is a little quicker than what we've seen so far with the Taser case. Is there any comment from you guys in terms of that case looking like or at least feeling like it's proceeding at a quicker pace?

Yes. Bryan, it's in a different court, but it's still here in Kansas. It's actually down in Wichita, Kansas. And they did add a couple more judges down there. And so I don't know if it's because of the workload or what's happening. But we literally had a call with the judge and he wanted to get a status report. And while we had accomplished a lot without the help of the court. There were some open issues that we needed to have the courts help on. And so the judge says, the Judge [S Platt] said, okay, guys what you are doing next week instead of three months from now or something. I mean this guy, this particular judge; he wants stuff resolved and off of his docket as quick as possible. So it's very possible that we'll go to court maybe before --in the WatchGuard case before we do the Taser.

Your next question from Nathan Weinstein with Aegis Capital.

Thanks, Stan and Tom. How are you guys doing? And thank you for taking my call. So I just want to go through couple of different buckets, but if you want to start on the operational side first. The service line has been coming in nicely with that growth rate. And obviously, right now move the needle little smaller, but potentially if you extrapolate those growth rates out a couple of years, it sets be really interesting. So structurally is there anything that we should think about that stop you guys from growing that as a customer concentration or do you see a lot of open run rate with that?

Well, there's a lot of -- this is Tom, Nathan, appreciate the question. There's a lot of greenfield out there and the reason I say that is the service revenues derived both from law enforcement and commercial. Commercial is really driving it right now in that the fleet manager tool that we have out there has been wildly successful. And is increasing in popularity. So I don't see anything stopping and in fact I think that may accelerate. The other part of that is law enforcement. And I think once the court addresses the patent infringement side of things that will unleash the revenues on the cloud service side and law enforcement. So I think actually to the contrary, I think if a couple things happen especially from the court side, you can see those numbers move up dramatically. And the law enforcement customer base is much larger revenue wise than the commercial market right now. So you can see that if that happens there could be some good results in the service line.

Thank you. And then just a couple other questions. So if we're able to monetize the patents either through litigation or in some other fashion, and then there where a large influx of money into the company, in terms of how would you allocate that cash is returned to -- if cash returned to shareholders in the plan or have you thought about what that might look like?

Yes. Nathan, I mean it's all well and fine to kind of count money before it comes in, but that'll be up to the board and certainly that would be a consideration. But it's at the board level that that would be determined. And in quite frankly, we're so focused on being successful in the court cases that we haven't moved beyond that yet, but obviously that'll be a matter for discussion.

That's a fair answer. And then just finally in housekeeping question, obviously, the legal fees are big portions of the SG&A spends. Those obviously in fact higher during long cases when you're more in the court, and so I'm just wondering when you think about 2019, you mentioned it wasn't going to be much relief there, but as the litigation activity picks up, should we expect actually to influx higher?

I found it very difficult to predict legal fees. Certainly when you got two cases running on separate tracks. We did almost $3.5 million of professional fees in 2018 which was up from $1.5 million a year prior and predominantly the increase was in legal fees with both Axon and WatchGuard cases. So I do not see any relief but then again it could go away tomorrow if we resolve the thing and settle the deal. So I don't see relief but there are a lot of unanswered questions right now. Whether the thing actually goes to trial or not? If it does go to trial then obviously the legal fees will remain high for the next three or four quarters.

Yes. Nathan, this is Stan. We went through the, I guess the toughest part in regards to the expense and the legal side against Taser. We already had all our depositions. We had expert witnesses. So we've done a tremendous amount of the legwork on that and financially so you really just have maybe the trial dates and a few more --I don't even know, does that mean more motions that we really will be going. So Taser is not that --going to be that much more expensive until time for trial. And then Axon, we still have to sort of go ahead and start the depositions and expert witnesses. And I don't see it being quite as expensive as what Taser was. We had three different patents against WatchGuard and there I guess I'd say their business model is a little bit different than Taser's as well. And they actually have the auto activation built into their equipment. So it probably is a lot easier case to prove in front of the judge and jury. So I wouldn't expect the same kind of a legal as we had with Taser, but we have just, let see how it plays out.

And I would add also that part of the increase was due to the IPRs, the inter partes reviews that were outstanding and then there were, I think there was even an appeal on one. So those things are statutorily barred now. So that will not recur and I unfortunately don't have it the amount of legal fees related just to the IPRs from 2018 but it was not a minimal amount. It was substantial. So that bodes well for 2018 in terms of total legal fees.

Our next question from [Mahank Aduri], private investor.

Hi, Stan and Tom. I was just curious regarding all the press releases from the Axon side as well as from Digital Ally side. If Axon really had this slate technology for some time now I think what's their rationale do you guys think in coming up with that kind of a statement at this late in the game so to speak?

This is Stan. I can't even find anything on their website about this technology that they're talking about. And we clearly haven't seen it out in the industry. So I don't even how to address it. Seems like --

Yes and quite frankly at this point this late stage, I'm not sure that they can amend their complaint or their defenses to the matter. In fact, that's one of the things that's has to be ruled upon by the district court judge is whether they can even open their defenses and add something to it. And I can't remember what they were trying to add at this point. But, yes, I think it's doubtful that they could even add that as a defense in this matter because I guess they just prepped it up. And again their defenses have been disappearing with each court order and in motion denied on their behalf. So obviously they're going back to the well to try and figure something new or something different out. But I'm not sure it's going to work with this judge jury.

So thanks for that explanation. And that's kind of what myself and bunch of others have been able to do our own due diligence and come up to an agreement about that or what we potentially think is the reason for their slate analysis or defense at this late in the game. But I would like to kind of have one more question, if I may. Last year around October timeframe, I think you guys had filed a specific form that typically seems. I mean I'm sorry I forget the name of form, but it basically talks about the lack of needing to further dilute, if you will. The number of shares I think it; you know what form I'm talking about, Tom?

I'm not sure that I do now. You may be referring to the register direct offering we did back in --what we did, we used an S --, if I recall right an S-3 which is a shelf statement and we registered those shares off the shelf if I recall right. That may be what you're looking at. We've not authorized more shares since the last annual meeting. I think there was an approval going from $25 million to $50 million in authorized. So we certainly haven't issued that many, right.

Right. I think typically when such kind of a form has been filed in the past; it seems to indicate that there is a very close proximity of the company getting either bought out or taken over. So anything I know we are already talking about potential settlements and stuff like that, but anything you can comment on that front?

Yes. I think I know what you're referring to now. We had asked the shareholders to approve blank check preferred stock at last annual meeting which was overwhelmingly approved by the shareholders. But unfortunately for a change in capital structure like that you have to not only have a majority of yes votes at the annual meeting, it has to be a majority of all shareholders. So even though, I can't remember how many shares were present or accounted for at the annual shareholders meeting, we did not meet that quorum to make that kind of change in capital structures. So unfortunately that blank check preferred issuance or authorization did not happen. Now you're very correct that most people use blank check preferred in cases of unwanted takeovers and defensive of tender offers and such that would may or may not come into play here. The board has again authorized us to put that on the proxy. So we're hoping to get that approved this year. It gives us a much better defense for a tender and in negotiating a potential buyout if one would ever to come upon us. But and hopefully maybe I'm marketing this but hopefully shareholders will take a good look at that and approve that at the annual meeting like they did last year, but hopefully we reach the quorum that we need to get that capital change effective.

All right. One last question regarding some timelines on either the WatchGuard case or the Axon case. I know earlier I think Stan had mentioned about three to four quarters. I mean is that the kind of timeline we should be anticipating for some kind of a resolution potentially at least for either one?

Yes. Here's what I think is going to happen. I think you're going to see some rulings come down any day. I mean you could have some of these rulings occurred later today. We just don't know what the timeline is there. And actual court date, again, I think we're all sort of anticipating that over the next couple quarters, you're going to see the rulings and that will really size up what kind of damages, what kind of defense and they will throw out a court date which we think probably be in the fourth quarter.

Okay. That's on Axon side or on the --

Again that are the court is pretty fast. I would probably say you got a shot at both of them into the fourth quarter. End of Q&A

This time we have no further questions.

Fantastic. Well, listen, thanks everybody for calling in and spending the time with us today. And hopefully we answered the questions that you had. If we did miss out on something, feel free to give us a call here at the office. Thank you.

This concludes Digital Ally 2018 Fourth Quarter Results Conference Call. You may now disconnect.