Digital Ally Inc (DGLY) 2017 Q2 法說會逐字稿

Good afternoon, my name is Hillary, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2017 operating results conference call. (Operator Instructions)

Thank you, I would now like to turn the conference over to Stan Ross, President and CEO. Please go ahead.

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

Thank you, Stan, and welcome everyone. I appreciate you joining us today. We did file our Form 10-Q at the SEC yesterday evening at the close of business. So hopefully, everyone's had the chance to at least look at that. I want to start by reading the normal forward-looking statements. I apologize if it's boring to you, but it's one of those legal things we need to do. So with that, I'll start.

Statements made on today's call will include forward-looking statements including statements regarding our expectations, beliefs, intentions or strategies regarding the future, including statements about 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 statement information is based on current information and expectations regarding Digital Ally Inc. These estimates and statements speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in our press release we issued this morning and in greater detail on our Form 10-Q, which we filed with the SEC last night under the caption Risk Factors.

Okay. With that, let's get into the 10-Q and what's going on. Obviously, the quarter was heavily impacted by both some good and bad events, very definitive events. First of all, the overall complexion of the quarter was dramatically impacted by the halt on shipments to AMR. Just as a background, there was some -- there was an unfortunate accident in June, down in Florida, that involved the death of 2 paramedics involving a drunk driver that swerved and hit them. And unfortunately, 2 of the paramedics loss their lives in that accident.

Our system was in that ambulance. And the immediate -- it was damaged heavily. First of all, it was damaged heavily, power was cut and we sent some of our technicians down to try to do the initial data recovery. They were unable to do so for unknown reasons. And unfortunately, with the death -- or deaths involved, the DA gets involved, the attorneys get involved, all parties get involved. And at that point, the mirror's been put in suspense and litigation hold, and there's been no additional attempts to recover the incident itself.

Now I will tell you that the incident was -- there were eyewitnesses, and there's really not much doubt in who caused the accident or what happened. But as a result of that, all shipments were put on hold by AMR. And unfortunately, we were sitting on over $1 million in POs, purchase orders, at that point that we were expecting to deliver in the second quarter. Obviously, that didn't happen and it had a major impact on our quarterly financials.

Fast forward to today, unfortunately, there's not been a lot of discussion between the parties, us and AMR. I think a big piece of that is the fact that AMR last week announced that they were being purchased by KKR in a very large merger involving about $2.4 billion. So obviously, their intention was divided at best. And we hope to be able to have some more discussions with them and see if there's a path forward that we can get moving and back on track.

We do know that AMR is using their systems every day. It's in about, I don't know, 1,700, 1,800 ambulances as it sits. So they are enjoying the benefits of the systems, and we hope that we can get that thing back on track and go ahead and fill the full deployed fleet of AMR.

The second thing that didn't really have a huge impact on the quarter but has a very large impact on us going forward is the very positive results in the Axon litigation. We've issued several press releases. And quite frankly -- and Stan could probably chime in, in our wildest dreams, we did not expect to get the very positive results we got from the Patent Office. We thought that they would at least look at the patent again and confirm validity. But no, the results were 100% denial of the institution of the IPRs against the '452 Patent that Taser had proffered to the Patent Office, which is obviously, a slam down win for us, and we really, really like that.

And I've actually -- I'm not an attorney, but I've become a little bit more familiar with patent law and litigation, how it works. And I'll try to explain how I understand where we are in this process. I know Stan will probably have some more information about that. There's really 3 different sections of a patent litigation: first is the patent validation, the second is determining whether it's infringement and third is the resulting damages,

The patent validation section of that, the initial section, has actually been validated now by the Patent Office. The Patent Office has ruled the patents are valid. Statutorily, Taser -- or Axon, as they're now called, is barred from filing any further IPR reviews on the '452 and the '292 Patent. But they -- as far as the patent office is concerned, the patents are valid -- validly issued and in effect.

The second part of it is determining whether Axon/Taser actually infringed on that patent. And I would tell you that it seems that publicly, Taser has already admitted to infringing. In a press release, they admitted that they took the technology in our VuLink and built their signal technology on that and added additional features. So I would say that they publicly already admitted to that. And secondly, why else would they have filed all the IPRs. They filed an in IPR almost 2 years ago, or maybe a little over 2 years ago, to try to stop the '292 Patent before we even had filed any infringement against them. So in any event, I think the infringement piece of that we're pretty well through, or at least that's how we believe it to be.

Now the damages piece of it is a little more interesting. If you look at Axon's quarterly report, they have reported in the June 30 quarter that they had cumulative bookings, net of cancellations of $606 million. And that's on actual revenues to date. That's all the bookings that they expect or anticipate to accrue to them over the life of their Evidence.com and their body camera and sensors division.

So obviously, the numbers are very, very large. They also indicated in the Q that they have 169,000 Evidence.com licenses outstanding. So the numbers are quite large any way you look at it. And hopefully, if things move the way we hope they will, the damages will be based somewhat off of those numbers.

We're now looking at different ways to monetize the patents -- monetize the viewing patent, which embodies our '452 and '292 Patent. I would say that several competitors have already -- have looked at it and I think see the writing on the wall and where this litigation is going and the strength of that patent. And they've approached us about licenses and/or teaming up on bids in order to get access to our VuLink technology. That's a very significant step in the -- right step in the right direction as far as we're concerned. It shows that the industry and our competitors are recognizing the validity of our patent and the strength of our patent. And then, secondly, that it is quickly becoming the standard for the industry.

We're also being approached by some large private equity funds about helping us monetize the patents. And by monetizing the patents, I mean financing the litigation, providing additional funds to develop the surrounding patents. And I think we've made press releases in the past, and most recently we announced that we've got a patent on the market feature in the body-worn camera area as well as the RFID tagging in body cameras, both of which we believe have some very, very innovative and widespread application, not only in the law enforcement but elsewhere.

So I would tell you, at this time, the Board of Directors is considering various ways to truly monetize the VuLink patent and the '452 Patent as well as the other patents. And hopefully, we'll have some news for you in the upcoming weeks or months in that regard. But we're really looking forward to monetizing that.

From an operational perspective, we're aggressively moving to improve our operating results. Obviously, we're moving towards a commercial channel in a big way. The sales pipeline in the commercial channel is loaded. It's never been bigger. I will tell you that we've got at least one opportunity that's on the magnitude of 3x the size of the AMR contracts, and we're well on our way to booking that contract and hope to have some news here in the near future.

But that's just one of many opportunities in our commercial pipeline, and we're really gaining traction there. And I think both Stan and I have said in the past, we believe the commercial channel will ultimately be bigger than the law enforcement channel. And I think we're definitely seeing signs of that.

Our FleetVu web-based platform is really, really gaining traction. And that's what really generates a lot of our service -- recurring service revenue. So it's a good type of revenue that the commercial group is generating and of its recurring monthly service revenue.

In addition to the FleetVu, we're also getting recurring monthly revenues from ATUs. ATUs are Asset Tracking Units, which is an add-on module that we put in on our FleetVus in the commercial area. We're also generating increased revenues from our cloud-based law enforcement storage platform, as well as our hybrid cloud that we're working from an international perspective, and I'll talk a little bit more about that.

But from a law enforcement standpoint, we're readdressing how we go to market in that, right now, we have well over 6,000 agencies as customers. There's 18,000 agencies in U.S., so we're virtually in a third of the agencies in terms of numbers. Now we're not necessarily that well-represented in the larger agencies, but we are certainly in all the agencies, including smaller sheriff's departments and municipalities.

So really, what you're looking at, in terms of a win-loss position, you get kind of tit-for-tat approach here, where you win one, you lose one, you win one, you lose one. So we're going to refocus our efforts into more of a large opportunity network in terms of approaching the market. So we're going to have more centrally located salesmen and marketing people that go after larger opportunities from our Kansas City base. So that's a change we're doing in the law area.

Now the international market, interesting enough, is wide open at this point. And I think we talked in the past that there are some very strict cloud storage rules or video storage rules that have been enacted in the European Union as well as Central and South America in certain cases. And we've developed a hybrid storage system that we believe answers the demands of those laws. So we're getting some very good traction and some very large opportunities internationally, and we hope that we can bring those to fruition.

Now interesting, I'd also make the comment that in these larger opportunities, we're getting a lot of questions about our patents. And based -- the international community and agencies seemed to be as concerned or even more concerned than the U.S. agencies about the litigation in the patents and who's stepping on whose patents, and so on and so forth. So I think all that leads us to believe that the international revenues will improve in the future, or at least we hope so.

We're also developing new non-law enforcement channels. What we're trying to do there is really capitalize on our engineering group. We've got a very, very talented -- small, but very talented engineering group here, and we're able to take individual situations and tailor some engineered solutions for that.

Take for instance the Royal Caribbean, the cruise line situation, that's a perfect example of that, where our engineering group was able to design and implement a specialized solution for that niche market. Now I say niche, it's a very large opportunity for us. And there are other opportunities similar to that, that we're chasing at this time, and I think we'll have some good results there.

So overall, the quarter was disappointing from a financial results standpoint, but we did meet some milestones that I think bode well for our future, especially the rest of 2017. First and foremost, we got validation of our patent in the Axon lawsuit. And now, we believe that, that thing will move forward expeditiously. And I know Stan is eager to talk about press release we put out this morning about our -- the way we're changing our approach to the litigation with Axon and trying to expedite the court process there. We're anxious to get a solution and hopefully get our share of the damages that are accruing to us.

And we are -- obviously, moving towards monetizing our patents, not only the VuLink patent, but the RFID and wireless Taser patents and others as well. So -- and we're getting some help from private equity funds in looking at that and how best to do that.

The huge improvement in our commercial pipeline is staggering. I'm very excited about where our commercial group is going. Now we did -- did get the setback with the AMR halt in POs in process. But if we land the 3 or 4 large opportunities that are on our pipeline, we'll forget about AMR. I mean, it's that large and that big an opportunity, and I'm excited that, hopefully, we'll have some news for you here in the near future.

We are developing the new channels like I talked about, and we're trying to capitalize on our engineering group and capabilities that we have in-house here. So hopefully, the remainder of 2017 will be better financially and that we'll be able to report some big wins from the commercial side as well as the international law and move to monetize our patents and other products.

So with that, I'll turn it back to Stan. Stan Ross, yes.

Thanks, Tom. I tell you, as you can tell from Tom and I will repeat the enthusiasm of our pipeline that we have created, and the opportunities that are out there for us on the commercial side are just very, very large and really look forward to some of them coming in yet, finishing out this year real strong, and then 2018 will be a running -- quite a running start on it.

A couple of things I wanted to talk about, too, not to neglect law enforcement. Matter of fact, we will have a couple different newly designed and some of these do have patent ability features for law enforcement that we will be announcing and showing for the first time and actually be able to take orders at the IACP, which is our big, International Association of Chief of Police meeting. So law enforcement is still getting a lot of attention, along with our commercial side.

So we think that this new product that we're coming out with, currently the market is selling something of this quality north of $5,000 per unit. We should be able to come in with unbelievable margins dramatically below that. And really, it can be a real disruption to the law enforcement market as far as our in-car video systems and our capabilities. The mark feature that they have, the patent we just received on it, is very exciting. I'm sure we will be accounting that patent and all the others at the IACP as well.

A couple of things in regards to the litigation. I hope you all can pull up the press release that we put out today. Because what this does is by -- we truly believe that the '452 Patent that we have and that has already -- went through the trials at the Patent Office, it has been what they'd consider washed and cleaned. It's not going to be -- Axon and our competition cannot sit there and file additional challenges of that particular patent.

So that being said, and since we believe such a large portion of our damages -- and I mean, when I'm talking a large portion, well over 90%, but we believe our damages are going to be -- are going to come from the '452 Patent. Therefore, instead of trying to save $0.01 or $0.05, we went ahead and are pulling the '292 Patent from the litigation side of things. Now don't get me wrong, we will still be in front of the patent panel and -- when Taser's trying to present reasons why it should not still be active.

But anyways, we'll continue to have the '292 Patent. We'll we continue to have it in play. WatchGuard, COBAN, other companies that are out there, we are not pulling the '292 out of their litigation. Obviously, their litigation is a little bit behind the bigger fish here. So by doing what we've done and what we were asking course to do, we've really defined a clear path for the courts to expedite this case to where we can start finalizing discovery and selecting a jury and getting this thing to trial. So we think by doing this, we clearly accelerated what, potentially, we hope to be a real good outcome in regards to the damage side of things.

And again, clearly, remember this is -- we'll probably -- we'll have no problems showing willful intent in regards to the damages which allow those damages to be tripled. So excited about that. We have -- obviously, our lawsuit is still in place with WatchGuard. WatchGuard like #1 in the in-car video system in our market. So I think they're -- they've tallied in the past of revenues in excess of $50 million, so we'll find out a whole lot more.

And you got to keep in mind that the way this works -- and again, I pointed this out before in the damages, is that it's not just the individual piece, but if that individual piece was part of a package that you eventually got the bigger order, it's the whole package that comes in and is looked at when it comes to damages in patent cases. So extremely excited about that, extremely excited about our commercial pipeline.

We have a very exciting IACP ahead of us. And I think the nice thing with AMR, they were going through that $2.4 billion acquisition, so I can understand them laying low to make sure you didn't change the complexion of the picture that you're selling. So hopefully, not only will AMR get kicked back up and we start to install these units, but it may be even the new acquirer will like our products and like its capabilities, and we may actually be able to generate more business from this relationship with AMR.

So with that being said, we'll go ahead and open up for Q&A.

(Operator Instructions) Your first question comes on the line of Brian Kinstlinger with Maxim.

Can you break down the June revenue by maybe product and maybe a split between commercial and law enforcement?

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

Maybe you just roughly in the products related, body cameras versus in-car systems?

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

Yes, Brian. Obviously, the in-car systems sell for around $4,000 and our body cameras are around, I would say, on average were $500.

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

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

So third quarter might be a little bit more pressured than 2Q, but then they'll rebound in the fourth quarter, is that how you think about it?

Well, again this forward-looking, but as I see it right now, I think fourth quarter is going to see a pretty much full impact from these newer contracts, but that could slide a week or 2 one way or another. And then, obviously, we got a supply chain, we've got to gear up for those larger numbers. But it's exciting for us, obviously, to get those revenues at least on the books -- or contracts on the books.

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

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

There's just a lot of unknowns that we don't know exactly what happened, and I don't think anybody knows exactly what happened to the mirror. We do know that they used the Jaws of Life to get into the unit, they may have cut through the cords and the system doing that. We just don't know. They're just -- it's just so preliminary right now. It just happened a month or 2 ago. So -- and there's a long way to go before we can put our finger on exactly what happened or didn't happen, whether it was a card failure or a hardware failure, or whether it was just the result of the Jaws of Life. Who knows? I mean, we just don't know at this point.

Okay. And then finally, with the stay of one your patents. What has to happen before they set a trial date? And I think I recall thinking February time frame of next year was when we might see a trial is -- could it be much earlier now that you're staying the 200 Patent?

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

Right. But the lawyers, they say, if they didn't come back and say, all right, here is a trial date, what do your lawyers tell you might happen first?

You're right, they haven't given us some insight yet. I mean, I'm sure they'll know more even like later today and definitely by the end of the week, because the court should respond rather quickly. Yes, and Brian, just a follow-up on that. When we find out something, so that we can give you all clear vision of timing, we will probably make a press release just to lay it out there a little bit, so that you guys can know and you can do some calculating. So we'll do a release so that you guys know.

You're next question comes from Ishfaque Faruk from WestPark Capital.

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

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

Okay. With respect to the '452 Patent, Axon clearly simply demonstrate, like, a likelihood of them being able to invalidate the patent. Do you guys have, like, any visibility in terms of when a schedule for a trial might come about?

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

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

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

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

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

Your next question comes from [Gregory Oragano] with Retail Investors. Gregory your line is open.

Hillary, it sounds like he dropped off. Let's move to the next.

Your next version comes from [Charles Stokes], private investor.

I'm a retiree who invested quite a bit in your stock. And I've seen it going down 50% since I purchased it. And I'm just hoping for improvement.

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

Now, I live in Canada, and I'm wondering, are you doing any business up here?

We have a little bit up there. Yes.

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

Well, I'm wishing you all the best. Obviously, I have a concern for the stock price. And, hopefully, everything turns out well, and you march forward.

Your next question comes from George Godfrey with CL King.

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

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

Okay. So if you get an expedited hearing, is that usually 1 month, 2 months, 3 -- what is a garden variety of [remedial] request for an expedited hearing?

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

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

Right. No, I understand that, and that's actually my follow up question. Just for the sake of discussion, if we assume that the expedited request is not agreed to and it proceeds in a more traditional path, is 6 months, 9 months, is that a reasonable time frame or it could even be longer?

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

Your next question comes from Bryan Lubitz with Aegis Capital.

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

Yes, yes. They've got -- I don't have the exact number, but it's well over 1,000, maybe as much as 2,000 units in the field working. We've had a 5 to 6-year relationship with AMR. So it's been a long relationship -- for the most part, a good relationship. And they use it every day.

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

Wait, wait -- so they've ordered 10 units since they've stopped shipments?

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

Okay. So with the 1,000-plus units that are in use, currently, we're receiving money for the VuVault on those?

Yes. Yes. If they're equipped with ATUs -- and some are -- we would also be receiving that, as well. Now, the way it works, though, Bryan, we typically bill upfront for the upcoming year. So we may and probably have already collected that revenue. And then, it's in deferred revenue, we recognize the actual financial statement impact as the year goes on.

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

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

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

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

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

Strictly from the FleetVu and the (inaudible) platform is at least 50% increase, if not 100%. It's well in addition to that.

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

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

I totally understand and I would just imagine that, as a company -- and you guys have leaned on that -- you're trying to build that up significantly -- that's kind of where, as a guy on the sidelines looking at this, that's where I see you guys making a lot of your money moving forward. Because you can only sell so many cameras, but if you can lock these guys in for 3 years on a residual basis, that's going to really go to help your revenue. What I also want to do, is I want to shift a little bit towards the litigation with Axon and Taser. Fielding a lot of phone calls, a lot of clients, et cetera, being in it, one of the big things that we're facing headwinds on are your comments compared to Taser's comments. So for example, in a recent Benzinga article, they're quoting a gentleman who works there at the company, and he's basically saying that they believe the most recent IRP denial has no bearing on your litigation; that you guys have already withdrew the '452 from the District Court -- claims on that. Can you guys rebut that in any way? I mean, there is a lot of negative press that comes out with them towards you guys.

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

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

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

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

Okay, and lastly, in regards to the state of the litigation. We don't know whether the charge is going to be lifted or not lifted and obviously, Taser's being steadfast in the public. Have they approached you guys at all, being that the stay is -- or the last USPTO ruling came in your favor to potentially make this go away or are they just digging their heels in and trying to go to trial?

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

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

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

Maybe through KKR, they own everything. Again, hypothetically, if it doesn't pick up, that $1 million worth of inventory could easily be shifting in another direction, if you guys did wind up getting a major contract?

It could, those units could go to a different home.

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

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