Digital Ally Inc (DGLY) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Digital Ally Third Quarter 2017 Operating Results Conference Call. (Operator Instructions)

Statements made on today's call will include forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, including statements around projected spending. We intend that such forward-looking statements be subject to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. The forward-looking statements information is based on current information and expectations regarding Digital Ally, Inc.

These statements -- these estimates and statements speak only as of the date on which they are made, are not guarantees of future performance and involve risks and uncertainties and assumptions that are difficult to predict. All forward-looking statements that are made on today's call are subject to risks and uncertainties that could cause our actual results to differ materially.

These risks are discussed in our press release that we issued Tuesday evening and in greater detail in our Form 10-Q filed with the SEC under the caption Risk Factors. You may find this and our 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, Inc.; and Tom Heckman, CFO of Digital Ally, Inc. Please go ahead.

Good morning, everybody, and thanks for joining us today. We've got quite a few areas to cover. I'm going to touch on in the very beginning here our recent supply agreement that we signed with VIEVU, which is a division of Safariland that we'd like to elaborate a little bit on, so you guys understand the significance of that.

Also we will talk about the reasoning that we retained Roth Capital Partners to explore some strategic opportunities for us and how that came about. I will also give you an update on our -- the litigation front and patent front as far as timing and elaborate on anticipated timing as well on when we expect to hear some rulings. And then Tom, I'll turn it over to him, so he can handle the third quarter numbers.

But let me start off with just saying that while I'm excited about touching on these big events that have occurred for us since the last time we've talked, I do anticipate the news and the things that are going to be coming out of the Digital Ally camp between now and the next time we talk, which would be at the point where we would be announcing our year-end numbers, probably one of the most active times that we will see.

And that has a lot to do with stuff that's occurred, such as our supply agreement with VIEVU. This was an agreement that we entered into after we were confident of the patent ruling that we received on the '452 Patent and very, very excited to partner up with these guys. They are very large. You may recognize VIEVU as the ones that got the New York City contract. They recognize and, matter of fact, even stated publicly the value of our technology. And therefore, they also valued and respected the patents that were awarded as well and also were upheld in the patent office.

So we entered into this agreement. And the reason we're so excited about is VIEVU is a great company. They've got a quality body camera and they've got a quality organization worldwide. We look at this as an opportunity not only to supply them with our VuLink product, but I could see us also partnering up with them on other opportunities as they do not have an in-car system. And if someone is looking for the complete package, we would be able to contribute to that side of the opportunity from that perspective instead of just the auto activation device.

So it's going to be exciting. We've already received the very first order, roughly 200 units that we expect to try to get out here in the fourth quarter. And as mentioned in the press release, they're looking at approximately 10,000 units is what they'll need to be acquiring from us to maintain the exclusivity over the next couple of years. We'll have to do that each year. So it could really generate some real good revenue for us and additional opportunities.

That being said, we announced our, let's say, our supply agreement right before the IACP. That's the big International Association of Chiefs of Police Conference that virtually anybody and everybody shows up for. It's clearly the largest law enforcement conference that we have every year. So we wanted to make sure to have the deal completed prior to that so that they could actually have our device in their booth and demonstrate it to their customers as they were walking by.

That being said, recently and announced at the same time, there was an acquisition made of one of our competitors called COBAN. COBAN was acquired by a company that's not real familiar in the law side of things but very active in school buses and other areas. So this was sort of their way of getting on into this particular sector. COBAN was represented by Roth Capital Partners.

Well, at the IACP, a lot of people were walking around, wondering what is going on between us and VIEVU, wondering what -- how everything is going to stand with COBAN and some of the other companies that are out there. And there just seems to be a lot of buzz going on. And no more did I get back from the IACP and started receiving some phone calls of interest. And I won't go into all the details there, but anything from also trying to work with us and have a way to get involved in some ownership in our technologies and some of our patents to discussions that may include the complete purchase of the whole company. So it really was calls that covered a broad spectrum of opportunities.

And so, I'm familiar with Roth Capital. I know they represented COBAN. I know the CEO, the former CEO of COBAN. And he spoke very highly of them and how the situation worked out for them. So I visited with them, told them what we were doing -- was happening. I disclosed this to our Board of Directors and felt that it was necessary to go ahead and actually retain them. So while the supply agreement was done late October, the COBAN -- we went ahead and retained Roth Capital on November 8. And so it's real early in the process.

And so we probably won't elaborate a whole lot more on it, other than, I think, because there were a lot of companies that are out there were not successful in the acquisition of COBAN that maybe this was what really sparked it, that they still have a level of interest in getting involved. So that's probably how it all came about. That being said, as things do develop and they're worthy of sharing, we will definitely be sending out a press release and/or -- I guess, we'll have to have a call or something along those lines.

All right. So now let's talk a little bit about litigation and timing of events. After we got the successful ruling from the Patent Office, one of the requirements was us to get back in touch with the courts and tell them the outcome. And obviously, the '452 was a very positive outcome to where the Patent Office would not even allow them the ability to get in front of the panel because they felt like they did not have a chance of proving the invalidity of the patent.

So that being said, we contacted the courts. The courts set up a time in which both parties called in. We obviously started lobbying for the stay to be lifted so that we could start moving forward on the litigation and proving of damages of Taser, at least in this particular case, or Axon now as they go by, violating our patents. And we feel that there's -- they violated them and have reaped a lot of benefits from them.

So that call occurred. The judge gave us both 10 days and 10 pages to submit why the stay should be lifted and they submit why it should not. And then, there's 10 days and 10 pages to rebuttal each other's filings. After that, that was actually filed on October 12. And so it's been just a little over 30 days since it's been in front of the judge. With that being said, we're optimistic that -- and I know that, to a lot of people, 30 days seems like a long time. It sure does where we're sitting. But I think, we're hopeful to hear something any day in regards to the ruling and in regards to the stay.

Now if the stay doesn't get lifted, that's only because they may be able to try to wait until the panel addresses the '292 Patent. But as we had mentioned in our previous call, it's our intention to go ahead and pull the '292 portion of the litigation out of the Taser litigation and just focus on the '452. And that way, we still believe that 98% of all our damages will still come from the patents -- from the '452 Patent. So we're hopeful that occurs really soon.

In regards to the '292 and the timing, that's coming up on us as well as far as the panel. Right now, Taser is supposed to reply -- submit a reply to the -- our opposition briefing that we submitted already to the Patent Office. And then, we get a chance to respond to that, which will -- their response will be due by November 28. Our response is December 22. And then, it is set for February 2 for all arguments to occur. Now again, that's just on the '292 that we're talking about, it has nothing to do with the other patents.

There is one other patent that's out there that we received. That's the '950 Patent. And the '950 Patent is a patent that we have named in our lawsuit against WatchGuard. And for those of you that are not familiar with WatchGuard, they just filed an S-1, they plan to go public. It looks like their -- their numbers have been running at about, well, I'm going to say, $90 million to $100 million run rate. They're a nice quality company. Anyways, all that being said, they have clearly been one of them, too, that has violated the patent.

So we have both the '292, the '452 and the '950 Patent named in that particular lawsuit. So they're trying to oppose the '950 Patent. And we anticipate hearing by December 6 whether or not they're going to get an opportunity to be in front of a panel or not. In other words, is it going to turn out to be like the '292, where the panel is going to listen to oral arguments? Or is it going to be like the '452 to where they're going to say, "There's not enough evidence that you have a shot at overturning this and therefore we're throwing it out"?

Again, you could tell right now that we've got a lot of events that are going to be happening before we're able to have our next call with you all. So that's sort of the timing of what we have going on, on there. And as soon as we have some indications of any of those events, we will be getting out a press release.

Tom, I'm going to let you touch on the third quarter results, and then we'll do some Q&A.

Sure. Thank you, Stan, and welcome, everyone. I appreciate you joining us this morning. I would like to remind you that we did file our Form 10-Q yesterday evening. And it is a full discussion of the events of the third quarter and year-to-date. And I encourage you to go ahead and look through that for a full discussion. I'll be hitting some of the highlights here and discussing some of the major issues or events that occurred to us in the third quarter that, I think, would be appropriate to discuss.

First of all, I guess, the third quarter was a difficult quarter for us, no doubt about it. I think it was really overshadowed by 4 substantial matters or issues that affected not only the third quarter, but in my opinion, will dictate the fourth quarter and potentially even 2018, where the company heads and the benefits of resolving these issues. These 4 issues -- and I'll go into more detail about each one of these. But the first one is really the AMR contract and the halt in shipments that occurred in the second quarter that affected the third quarter; the patent litigation, which Stan has already discussed a little bit, and really my comments on that is more towards the high litigation legal costs that are -- that we're incurring; third is the market disruption that Axon has created because of their 1-year free giveaway campaign. I want to talk about the impact of that to our quarter and how we plan on dealing with that on a go-forward basis; and then fourth, I think the monetization of our VuLink patent, how our strategy to do that and how successful we are with that will be a major contributor to our fourth quarter as well as 2018 operating results.

So first of all, let's look more deeply at the AMR contract. As you might be aware, we were awarded that contract in January 2017. At that time, it was the largest commercial contract in our history. We did have at least 1 or 2 other law contracts that were larger than that. But certainly, this was our largest commercial contract by far in our history. The contract was a 3-year total deployment of 6,500 ambulances, which was at that time the full fleet of AMR ambulances, and covered about $8.3 million in revenue over those 3 years at a minimum.

The 2017 deployment of that was approximately 1,550 vehicles and about a little over $2 million in total revenue. The contract included a large component of service revenues. And by service revenues, I include the installation cost, which is primarily labor, the FleetVU monitoring, which is a monthly pay, as well as the ATUs, which are the Asset Tracking Units, were involved in that contract. And that would be -- there'd be a hardware sale upfront as well as service revenue on a monthly basis after that. We installed approximately 500 of those units year-to-date into June. But we did not get them fully connected. Some of the ATUs were not available to us in -- from our suppliers, so we had to back-order those, so the ATU piece did not, for most of those 500 units, get installed at that time.

Unfortunately, and as we previously reported to you, in early June, there was an accident in Jupiter, Florida involving one of AMR's ambulances that had one of our systems in it. It was a catastrophic accident caused by a drunk driver, no doubt about that, eyewitnesses. The man that caused the accident was charged with vehicular manslaughter and wound up being an illegal alien on an immigration hold as well. So clearly, the cause of the accident was not AMR or in any way related to our product.

Unfortunately, although we've recorded almost 1.3 million incidences in the AMR ambulances over -- we've had the contract or had various portions of the contract for 6 years, our camera did not record that incident for whatever reason. And we'd only be guessing if we told you why it did not. It was a catastrophic accident. There was damage to the unit. And we suspect that had something to do with it, if not the complete reason for it. So anyway, at that point, although we've previously recorded so many videos without incident or very few incidents, AMR looked at it and halted the contract and the shipments at that time, understandably so. I mean, it was a catastrophic event, 2 paramedics died in that accident. And they wanted to understand that more.

In the intervening -- and that was in early June. And if you recall about that time, we had 2 or 3 hurricanes come through and AMR had the FEMA contract, so they were distracted with that. They also have the ambulance service contract for the city of Las Vegas. And we all know what happened in Las Vegas during that time period. And then thirdly, AMR was sold by their parent to a group including KKR. So there was a lot of distraction, a lot of other events. So for a lot of reasons, there wasn't a lot of dialogue between the parties for quite some time.

Then finally in late Q3, we were able to engage with them. And we had a very frank discussion obviously. And they had -- they stated their concerns, we stated ours. And quite frankly, coming from that until recently, I was resolved of the fact that we probably had to involve attorneys and maybe even a court case to enforce our open POs. But the situation has been fluid in the last week or 2. There's been a lot of dialogue, discussion, attempts at resolution. And again, it's a very fluid situation and I think -- and I'm hopeful that we're headed towards a reasonable resolution of the situation to the extent where we could partially at least restart the contract here in the fourth quarter.

And then, based upon how things go between now and then, then obviously in the second quarter or maybe even late first quarter, be able to start the deliveries again under the contract to open POs. So I'm hopeful that happens. We've got a long way to go to get that papered up and all parties agreed. But at least, there's dialogue going on and it's a positive dialogue at this point. Although that obviously doesn't mean that things will get all resolved in the near term, but I am very encouraged by what's been happening in the last week or so.

The halt of that contract, if we go through that, we had roughly $2 million of revenue expectations in 2017. We delivered almost 1/3 of that, so we're -- our shortfall in revenue from that contract alone, the halting of that contract, was in the $1.3 million, $1.4 million neighborhood. So it was a significant impact that landed squarely in the third quarter and obviously had a big impact on our revenues and was a big factor in our underrun on revenues.

Now I will tell you that the service piece of this also affected us because we weren't able to get the ATUs in place. So even our service revenues declined a little bit year-over-year primarily because we did not get the service revenue off of the AMR contract. So it did have a very big effect on us in the third quarter. But we're very hopeful that we're on a path to resolution and can get that thing started some time in the fourth quarter -- or restarted in the quarter.

The high legal expenses on the patent. I think Stan did a great job of describing where we're at. Unfortunately, the legal expenses will continue at elevated levels. I don't see that slowing down at least for the near term or at least until earlier or even mid-2018. But I will reiterate that we won all the IPRs on the '452 Patent, which is the bulk of the damages involved in the Axon/Taser litigation. So we won the validity piece of this, at least in the view of the Patent Office, which I think is controlling in this instance.

So if we're able to get the court to move and lift the stay and move forward on the Axon litigation, I'm very, very confident that we'll have a very good outcome from that. Now that doesn't mean there won't be appeals and a lot of legal maneuvering between now and then. But by and large, the validity of the '452 Patent has been established by the Patent Office. And there's no two ways around that. So we have sued them for willful infringement, which carries treble damages. So you can add up your own damages in that regard.

Let's go on to Axon, the disruption that's caused by their 1-year free offer. If you guys aren't aware, earlier this year, Axon came out and -- with a 1-year free trial, if you will, of their body cameras as well as their Evidence.com system. Obviously, that was appealing to the U.S. domestic law enforcement market. It had a significant impact on our domestic U.S. sales. Our FirstVU body camera revenues dropped from 22% of total sales in the third quarter 2016 to 12% of total sales in 2017.

So I attribute that primarily to that as well as some of the misinformation going on in a market about our VuLink patent. So obviously, we don't have a balance sheet to give away products such as Axon. But I hope you guys take a look at their financials as well on a quarterly basis. They lost a ton of money in the third quarter primarily because of this as well as other R&D efforts in the Axon area -- the body camera area.

Our strategy go-forward to combat the Axon disruption. First of all, we compete daily in the international law market. Quite frankly, we've got as good or maybe even better of a distributor network internationally as does Taser. We've got some very, very good distributors out there, and they're able to get us in front of international law agencies. And we feel confident that we'll be able to get some wins internationally and be able to combat that.

We also are utilizing body cameras in lateral markets. I think we've already discussed the cruise ship lines and also the medical. And that's a natural for us because we do have such a dominant position in the ambulance market. It's a natural for us to go into the medical side as well. Also private security is a prime example of a market that we're very strong in. And we're going to focus on that, that Axon really is not -- because their product is not developed with the private security market in mind.

Thirdly, we will fully prosecute and monetize our patents. In a perverse way, the sales that -- well, the giveaway of product that Axon is doing now is increasing our damages from the standpoint that when they're doing this, they're -- the promises that they will be able to upgrade to auto activation, so -- and that is squarely our patent territory. So in a perverse way, they're giving away the product and hopefully it results in higher damages when and if we get in front of the jury in this matter.

Okay, the next thing -- we need to monetize the VuLink patent. And I think Stan discussed the VIEVU contract, the exclusive distribution contract, in detail before. That's one of our big moves from that standpoint. But secondly, we will continue to prosecute this patent litigation. The auto activation technology that's embodied in the VuLink patent and our VuLink product is really standard in the industry now. There's very few RFPs coming out of law agencies that do not inquire or require auto activation technology. So it's standard for the market. So the best thing we can do to monetize our VuLink patent is to continue to prosecute fully the patent litigation between us and Axon and us and WatchGuard. And there will be others potentially on that list as well because it is pretty much a standard feature for the industry right now.

On a go-forward basis, here's the revenue streams, which we believe can be very, very substantial for us even in 2018. We do have direct sales of the VuLink. That's a fertile market for us. The indirect sales through the VIEVU distribution channel, now again, the minimum required units to maintain their exclusive distribution status is 10,000 units for calendar year 2018. That is an enormous source of revenue for us and substantial. And then obviously, the infringement damage awards from both Axon and WatchGuard, we're hopeful that, that happens in 2018. With the court situation and being able to predict court activities and certainly timelines is a very, very difficult subject. But hopefully, that comes to a head and is resolved in 2018. And obviously, we're hopeful of large damage awards because of the willful infringement both those entities have perpetrated here.

And then, after the court acts on the infringement litigation, then afterwards, we can grant additional licenses or actually gain injunctions from others selling auto activations. So we obviously have some very important and big tools in which to work with to monetize the VuLink patent after that. I just want to emphasize that the revenue stream is potentially very huge from this VuLink patent. And we intend to fully monetize that.

Okay. So the major issues we just talked about will have effects on the fourth quarter of 2017 as well as 2018. But we do understand we still have to tend to our current business and move our business forward in a profitable manner. In that regard, revenues, we have to increase our revenues. We were right at $3 million revenue for the third quarter. Obviously, that's not a breakeven level for us. But if you look forward, if we can get the AMR contract restarted, that's a significant source of new revenues in the future, certainly in 2018, if not the fourth quarter 2017.

The revenue streams from the VuLink patents as well as the distribution agreement with VIEVU, again we're looking at delivering roughly 200 units in the fourth quarter. So it will have a little bit of an impact in the fourth quarter. But 10,000 units in 2018 is a minimum that will have a substantial impact on revenues on a go-forward basis. We continued to focus on growing our commercial markets. And by that, I mean also the service component of our revenues in the FleetVU monitoring software, the cloud-based monitoring software as well as the ATUs, the Asset Tracking Units.

Our gross margins have been under pressure. We've had product issues in the past. We think those are behind us. What's getting us now, I think, more is the ups and downs in our revenues. And it's hard to plan headcount and production rates in that when our revenues gyrate and move around between quarters. So what we're trying to do at this point is to move more and more of our manufacturing out to third parties, so we can minimize our workforce from that standpoint. We'll never be able to get it down to 0, but we can certainly be more efficient if we're able to move some of the more involved manufacturing to third parties.

Again, the service revenue component. As that increases, that will have a big impact, favorable impact on our gross margins. It will certainly improve our gross margins since we've already developed the cloud-based software, whether it be FleetVU or VuVault.com. So the service revenues will be at high margins in the future. So we hope that helps us with the gross margin aspects.

All in all, Q3 was very difficult. But we believe that if we're able to successfully deal with those 4 or 5 matters that we've talked about earlier today in my session here, it will have a very favorable impact on Q4 and on into 2018.

So now I'll turn this back over to Stan.

Yes. Thanks, Tom. Some of the things that we've done, I mean, I'm not going to touch on it -- but I mean, even some of the things that we've talked about as far as being able to move some of the heavier lifting for us from the manufacturing to very qualified manufacturers that are here in the Midwest, we're looking at probably a reduction of SG&A and expense of, what, right at $3.5 million for 2018. So that will be a dramatic improvement that should help us as far as 2018 and going forward there.

So -- right. Well, let's go ahead and open this up for Q&A.

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

My first question, you addressed the cost side of the business. But given where cash is, at the end of your press release, you announced potentially raising more funds. So maybe just talk about that as your cash balance is quite low. And I don't assume you'll be generating cash flow the next couple of quarters.

Brian, are you talking about in the press release in regards to Roth Capital Partners?

Yes. And I think even at the end of -- I could be mistaken -- that one was one, for sure. I think maybe even at the end of the last night's press release, it may have said something similar. So yes, I'm just curious, plans to -- plans of financing operations, why (inaudible) alternatives and burn a little bit of money at the same time?

Got you. So again, we have been approached by numerous parties that have wanted to get involved in and maybe assisting in capital, and capital such as that's needed to assist with litigation and other matters. So again right now, what we're doing is just continuing to keep blinders on and trying to do what we can do to improve the underlying business. And we'll wait and see what Roth comes back with and what options that they think we ought to look at and explore.

Then I think you talked, Stan, in the past, when in April, when it was first announced, Axon's move to 1-year free wouldn't have a big impact on sales because they were already essentially giving away body cameras [to move] their recurring subscription. And I think you had mentioned also you were moving a little bit away from law enforcement. So as you guys mentioned, this is a disappointment in 3Q. Can you touch on the impacts? Maybe, let's take a look at what first quarter revenues from body cameras as a percentage were and second quarter's and what's changed that made you think it's having more of an impact than maybe you originally would have thought.

Well, the percentage of revenue year-over-year went from 22% down to 12%. So we lost almost half of the overall revenue mix year-over-year. And it's been a steady decline since they announced this 1-year free giveaway, if you will. And so -- but again, that's the U.S. domestic market -- law enforcement market. We're focusing more on the international law market and the domestic commercial or other uses of our body cameras, especially given the back-office tailoring that we can do for specific industries, a la the cruise ship industry. We've also got several other products for specific uses in the mix that utilize our FirstVU. So we're moving away from the domestic U.S. market as our primary source for FirstVU sales, body camera sales and more into the domestic commercial market marketing.

Yes, Brian, to give an example, I mean, like obviously the AMR is -- was a great start for us in the in-car systems. But there's clearly incidences and needs for what paramedics are doing outside of the vehicles, when they're going into different locations and stuff like that. So we see the -- a potential market there as well. And as I think we mentioned on the last call, while AMR was a great contract, we do have some unique pilots in other projects going on that are comparable or larger in size. So as I've stated in the past, we do see and do believe that our commercial division has a real shot of surpassing law enforcement in 2018.

So just to be clear, the 12% of revenue, is that U.S. sales of body camera? Or is that total sales of body cameras?

Well, that's 12% of our total revenue.

Is what?

Is from body cameras, yes.

Total body. And so what was that number in the first quarter and the second quarter of this year?

I don't have that specifically in front of me, but it was -- it's been a steady decline since they've done that.

But that's my point. Is year-over-year isn't necessarily the view? I mean, I'm curious, did it start happening in April? Or was the first quarter already off to a low start?

Well, I think you could tie some of it back to when the stay was announced because again, it continued to allow the industry to go out there and our competitors to go out there and state that, "Oh, Digital Ally's patent isn't going to stand up. It doesn't have any meat to it." And so I think that's really when we started seeing it, let alone part of their campaign. So it did start a little bit in the late first quarter of last year -- or this year, sorry.

Okay. Can you comment on the price that VIEVU is paying for each device? I mean, you mentioned the word huge twice. But even if I assume $100 per device, that's $1 million next year. So maybe that $100 price tag is way too low. But I'm just trying to understand what this contribution might be for 10,000 devices.

So let me state it this way. We retail that out at $495, okay? Obviously, the quantities that they're buying, we greatly discounted that to them.

Okay. And then, if you could take us through the thought process of giving an exclusive [deal] to VIEVU, you mentioned in monetizing the patents, potentially licensing it to others. But how will that -- how would that work, given VIEVU has an exclusive agreement?

So what we're looking at is, they've got sort of an exclusive agreement when it pertains to the law enforcement side of things, okay? And if you're looking at the fact that it's 10,000 units, and we start saying, "Okay, well, that's a pretty good number." But on top of that, if we're able to maybe get 20%, 30% of our in-car systems associated with that number, it becomes a really big number. And again, they are very large. I mean, if you just look at the fact that they've got the New York contract, I mean, that could be 40,000, 50,000 units just right there as far as body cameras. And most likely, there are going to be auto activation device associated with every one of those body cameras.

Yes, just as a matter of background. VIEVU, as it sits today, does not offer an in-car system. So we're hopeful that with them offering our VuLink with their body camera, a natural [is] for them to package our body -- our in-car systems with that offering. And quite often, RFPs come out as packages that include both body cameras and in-car systems. And you couple that with the fact that VIEVU is owned by Safariland. And I understand not a lot of people know who Safariland is, but they are huge. My understanding is that they're $2 billion...

2.5x the size of Taser is my understanding.

They have a heavy presence in military. And they have an international worldwide selling organization. So that's really the allure of looking at VIEVU. They're obviously a very well-backed company financially and managerially, being part of Safariland. And they need in-car systems to compete for package contracts and they have an enormous worldwide sales organization, not only in law enforcement but military and also commercial. So it was a natural fit for us that we thought made a lot of sense.

Okay. Last question I've got is, can you talk about the price paid for COBAN and what their annual revenue is, so we can kind of see the valuation that they...

Yes, Brian, I tried to get that out of them. They would not give me that number. I tried, but yes, sorry.

Your next question comes from the line of Ishfaque Faruk with Westpark Capital.

In terms of the contract with VIEVU, in the previous quarter, you mentioned the price per unit and you gave a little bit of color. Is it going to be based on a price per unit? Or is it going to be based on a percentage of sales? What are the economics in terms of the contract deal?

It's clearly based upon units. They have to acquire 10,000 units.

And you mentioned that you're greatly discounting that. So is it like a 20%, 30%, 40% discount to your current retail price? Or what's the (inaudible)

Ish, here you go. I mean, like I said, we normally on single -- selling a single unit, we'd retail about it at $495. And we needed to discount it greatly so that they could put it in their mix, have a little wiggle room themselves to recover and make a little money; at the same time really be in the position to sell the body cameras as well. So that's all I can really tell you at this point.

Okay. In terms of your preliminary conversations with your M&A adviser, do you have a sense which direction you guys are leaning towards?

We do not. I mean, what I did is I -- a couple of the people that had contacted me, I shared with them. And these are parties that they're already familiar with because they were a part of the interest in and process, let's say, that looked at COBAN. Since then, and knowing what's going on and the timing, which the timing is getting nearer in regards to potential things that could be occurring on the litigation front, I think that is what really started sparking things to get moving. So what I have done is try to stay out of it at this point until time -- there's been enough time for it to run its course. Like I said, we only retained them back November 8. So what are we looking at, just over a week almost or at a week? So all the ones that have contacted me directly, I have forwarded out to Roth. And I'm sure we'll have an update almost weekly on what's going on and what they're asking of us.

Okay. What's your current -- your near-term view on your litigation? I mean, like do you have some sense on where you could get something more conclusive? Because it's been running around -- it's been getting stretched for like almost a year now, right?

Yes. I mean -- correct. I mean, I think the last stay got put in place like in March of this year. And so the Patent Office came back and ruled in our favor. We've obviously got back in front of the courts. We both submitted our paperwork. And so I'm anticipating that we're real close because I know the courts now, they didn't give us much of a time line. They said, "You've got 10 days, 10 pages, and then you got 10 days, 10 pages for rebuttal." And so that was a rather quick turn that they were requesting of us, so I would hope that -- and as we requested for this to be expedited, that, that is what's happening. And they are going to look at it and will move forward rather quickly. We've already said "Hey, we'll pull the '292 out of it and we won't even consider the damages on the '292." And so that it makes it a lot simpler and clearer for the courts to just evaluate the '452 Patent. So Ish, I mean, it could happen today. I just don't know, but I -- it's been 30 days, and I would hope something rather quickly.

Okay. In terms of the AMR contract. So you guys are still not up and running for that contract as of yet? But are you guys going to be -- like in Q4, do you think that contract will start generating revenue again?

Well, Ish, this is Tom. I will tell you that this is a very fluid situation. And up until about a week or so ago, I really expected it to be -- that we would have to go to court to enforce the POs that are outstanding. But there has been a lot of dialogue and a lot of constructive dialogue in the last 7 to 10 days that encouraged me that we can get this resolved amicably between the parties and that we can restart at least a portion of the contract in the fourth quarter. Now that being said, it takes 2 parties to agree and move forward. We certainly don't have that affirmative answer yet. But the dialogue is very encouraging or at least the recent dialogue is very encouraging that they understand the importance of video in their ambulances and what we provide and we can get the thing going. Just as a aside, we've had a 6-year relationship, 6- or 7-year relationship with AMR. And we've -- like I said, we've recorded over 1.3 million videos of incidences. And just last week, there was a major collision with one of the ambulances that our system caught perfectly. So it's unfortunate what happened down in Jupiter, Florida. We don't know what the cause of it was or what the real reason for the unit not to have recorded that incident. But I think they're looking at the larger picture. We're looking at the larger picture as well and that willing parties can get to a real resolution.

Yes, Ish, again, and we could be speculating a little bit here. But obviously, they know that this isn't -- this unit is not a black box like in an airplane. And that particular incident was a very violent crash. But with the hurricanes, with their acquisition, I mean, there are probably a lot of moving parts for the delay. But we have had a great relationship. We look to try to continue that relationship. And like Tom said, there's real fluid dialogue going on right now.

Your next question comes from the line of Patrick McEvoy.

I just have 2 quick questions. One is, I don't know as though I've heard anything from you guys in a while about the Utility stuff and if there was ever a resolution to what was going on with them.

Utility, the litigation?

Yes, that's right.

Yes, I've seen something just the other day. I don't know if I can talk...

Yes, we have appealed that ruling from the federal district court judge. And the oral arguments on that appeal is some time in January 2018. So it's -- I'm wanting to say the 16th, but that may or may not be right. But it's -- the hearing, the appeal hearing is coming very soon in calendar year 2018.

Okay. So there -- it is still an ongoing process?

Correct.

Yes.

Okay. My other question is, Axon just announced like a week ago that they finally are installing their in-car fleet video systems. And the press release mentions Fort Worth and Louisiana, New Orleans. And it specifically mentions their -- Axon's signal technology as well in the press release. Do you guys think that this is going to have any major effect on the in-car stuff?

Patrick, this is exactly why we're so frustrated. I mean, we've got a technology, we own a patent, we've got a patent that's been challenged in the Patent Office numerous times, and we've been successful in defending it. And now we're just waiting on the courts to allow this -- us the ability to, I guess, stand behind it. I mean, all -- a majority of our new designs are going to be and are utilizing this patented technology. And until the courts, I hate to say it, wake up and address this, Taser and those -- and WatchGuard are just going to try to walk all over us and then hope they get their hands slapped. But meanwhile they've drummed up enough business that it doesn't hurt too bad. So we will make sure and do a masterful job of explaining the damages that have occurred and the damages that will be going forward because these contracts, most of them are like 5 years. But you hate to say that if someone's already got 5 years' worth of video, they're probably going to go another 5 years. So it's not just short-term damages. So we will be pushing for a big number.

Does that mean that you could maybe push to say that you've got an ongoing revenue stream from the contracts that they have that were made before winning the litigation?

Exactly. So absolutely.

Yes. Patrick, the question of willful infringement, I think, has already been answered. We know that they're willfully infringing. And if that's found, whatever actual damages are generally trebled or can be trebled in the award. So I mean, it's unfortunate that we've got to defend our patent to the nth degree and allow this to occur, but we're kind of powerless until the court acts. And we believe that the court will act soon and in our favor. And when that happens, I think the course has been set.

Your next question comes from the line of [Ira Thomas].

I'm a long-time investor. I was buying this 3-plus years ago when the stock was moving up to $15 and $20 and buying it. And hey, I may sound like I'm an antagonist, my (inaudible) questions is the last thing (inaudible) obviously, I like the stock at $15. But ever since I started listening to the calls, this is probably the 12th quarter in a row, it's like a tape recorder. It's everyone, same thing, "Hey, we missed our predictions, we missed our sales things and this." And I said to you 3 years ago -- it's the only other time they took one of my calls, this is only the second time, even though I've listened to every one and tried to get in. I told you that I was a litigator, and I said to you, hey, it's nice as a -- I'm trying to think of the superfluous -- whatever, [an extra in sight] money from patents. But I told you my experience is, "Hey, let's not base the company on our hopes for patent, let's worry about sales." And I always heard cream rises to the top, and this company has always touted itself as having the best product. So I go out and tell other people, friends of mine, "Hey, buy this stock. They've got the best product." I'm taking Stan's word, everybody else's word for what it is. And I've listened to this for 3 years about Taser, Axon, what they're doing, the other companies. If we've got the best product, why have the sales for 12, 13 straight quarters just continue to just like go away, like nonexistent almost? What's out there that -- and I hear the fact that -- again, I've never understood the reason every quarter talking about the confusion. That shouldn't stop somebody from buying our product. It should stop them from buying someone else's because certainly the other companies are not claiming that they've got the patent. They're just claiming that we don't have a patent, that they can sell theirs. I've never understood how that's affecting our ability to sell the Digital Ally product because there's confusion whether there's a patent or not. Again, if our product is the best, why haven't the salesmen been able to sell this for the last 3 years?

Yes, Patrick, there's a couple of ways to address that. One is, as you know, we -- early on, we got into a situation with Taser. And it's very, very well documented in regards to the amount of police officers that have been on their payroll or contributions or things along those lines that it just doesn't make sense. We've had situations where our sales reps would come back and say they're just frustrated. Taser got the contract. Well, why did they get the contract? Don't know, the chief loved it, everyone said they loved it and we're moving forward on it. I absolutely thought we had it. And then all of the sudden, from up above or from another angle, they decided to go with Taser. And I can also show you where there are municipalities out there and you can do your own homework and see that there's a lot of complaints that have been out there by local departments and other, what do I want to say, people that have been looking into the fairness of how some of the contracts were awarded. And going from there, I'll give you an example, where we had a bid right at a little over $600,000 on a particular bid. And Taser comes in at $1.4 million. And it just doesn't make any sense. But some of the things that Taser is capable of doing that we are not at this point is they're throwing other items into the mix. They're throwing in some of their tasers and their cartridges and other things that -- trying to -- again, look at their numbers. They're buying the business and hoping that at the end of the day that they get enough people signed up, their hand gets just barely slapped, that this strategy worked for them. So we still feel very, very confident. We've got a very solid product. We provide a 5-year warranty on the product, we're so confident in it. The specs with our product are very high quality to where we've got to be one of the leaders in the industry as far as the quality of product. So it has just to be some of the -- I don't know, I won't call it strong-arming, but some the things just don't make any financial sense at all why they win some of the routes with some of these departments.

Your next question comes from the line of Bryan Lubitz.

In regards to the 10,000 body cameras for Safariland, is that the largest contract you guys have ever had for body cameras?

This is for the VuLink.

It's the largest for VuLink.

Yes, certainly for VuLink for sure.

Okay. So when you say you retail at a $495, but obviously you guys discounted it heavily, it not like we gave it away for free, like what Taser is doing. Can you give me an idea of what the retail is for the entire system, the in-car dash, the VuLink, the body cameras, the works?

So it would depend a little bit on which in-car system that you went with, but we could sit there and package a body camera, a nice in-car system like our DVM-800 and also the VuLink product and come in, depending on quantities, anywhere from -- if the quantities are large, we can get down to around $4,000 and have a complete system with all the -- everything that they would need. The smaller quantities, they could see it as high as $4,700.

So between $4,000 and $4,700. And typically, when you package that together, what are your gross margins? Are you guys at 40%? Are you at 50%?

A package like that, we will -- we would hit 60%.

60%, okay. And then obviously, that's before heavily discounting it. So where I'm going is, if you guys have signed up with Safariland and you have this exclusive contract, yet they don't have that other part in their array to sell, do you guys feel confident that, that's something that could be a potential moving forward?

Yes, absolutely. I mean, these guys have been great to work with. I mean, they approached us over a year ago inquiring about our VuLink and our VuLink technology. And I don't know if I've ever told you this or said it on a call, but one of the principals there at VIEVU, his wife is a patent attorney. And they looked into it and they felt that it had a lot of strength behind it. And therefore, they decided not to try to walk all over it and run the risk like Taser and WatchGuard are doing.

Okay. So now in regards to the 10,000 units per year, your press release also states that it will be increasing each year. Is that based upon how they do in the first year? Or is that something that's already been put down in a contract? Do we know what that is going to be, that increase?

Yes, we know what the increase is. It's a dollar amount.

In terms of the amount of units does that increase or just a dollar amount we take home?

Dollar amount we take home.

Okay. Now in regards to, obviously, the litigation with Taser. This case, if you make it that from the first day, they put out a press release stating that you guys had your patents invalidated, that they've been willfully infringing from that point, am I right, have they sold about $240 million worth of revenue on these body cameras (inaudible) free?

Tom studied the numbers more than I. But they claimed to have booked over $600 million in potential business.

Oh, okay, so it's even more?

Yes.

Okay.

And remember, Bryan, that this thing was all started after we got our patent issued in, I think, it was 2014. They -- later that year, they came out and filed an IPR challenge against that patent. So it wouldn't be just from the time that they -- that we sued them or anything, it would be all the way back till then that they knew they were willfully infringing because they tried to invalidate it back then, so yes. And that $600 million figure is their total bookings, they call it, which is the total length of the contract, the hardware cost, the service cost that they're charging. And that was at the end of the last quarter. I'm sure it's maybe $100 million more now.

Yes. And I think I've said this before on a call that when they look at the way they look at damages, they look at the all-encompasses of a package. So in other words, if they want a $5 million package and auto activation was part of that or the potential upgrade to that was part of it, then it's that whole $5 million that gets looked at as far as damages.

Well, okay. So that being said, as you guys know, I've been on these calls for a long time, I know Ira is upset and I know Maxim and WestPark may be a little upset because they didn't get the deal Roth got. That being said, $600 million -- and I'm trying to help them in asking for the revenue and the damages, et cetera. $600 million, let's say, your average royalty contract in the electronic space is 20%. Let's just call it for what it is, let's go even more conservative and say 10%. You guys are looking at, before treble damages, roughly $60 million if they were to compute it that way in terms of potential damages, Taser's way, before treble damages. Does that sound right?

You have to look at it -- you ran your numbers correctly. And I would sit there and say that in the industry, it could easily be as high as 35%. So -- there are numbers all over the board.

I don't want to step on you. But I also want to make sure that I don't get cut off from the operator. So those numbers will, whatever it be, is roughly 4x your market capital, where you are on a very conservative basis. Now WatchGuard just filed for an IPO. And am I right in assuming that when they release their revenues, they did a lot more in revenue than we had expected?

Yes, they've built quite a little company. So they're on -- like you said, this year, they're on a run rate of somewhere around $90 million to maybe $100 million. And I think last year, they showed on their books, I think it was right at $70 million. So again, there, if you go back to start adding up theirs, and that's what they're showing as revenue. That's not showing or talking about what they may have booked in ongoing services. So they...

Between the two, just again you're looking at, what, over $100 million in damages before treble damages? And just for everyone that doesn't know what treble damage is, it's 3x the damage amount, correct?

It's a big number, Bryan. It's a big number.

All right. So that being said, and this would be my last question, obviously a bunch of guys or companies were in on the COBAN deal. They didn't get what they were looking for, outbid, whatever. And a handful of them or however many of them are contacting Digital for a potential buyout or exploring strategic opportunities. Taking into account that you have potentially $100 million in money, minimum, coming your way -- I think it's a heck of a lot more, do you guys have a number in mind that you're thinking about that -- where you guys, if they are bidding for you, that your drop-dead number that you would look for if they were to come knocking?

Yes, we haven't discussed -- it's just too early. We haven't discussed anything along those lines and haven't gotten any feedback from Roth yet on what everyone's thinking yet, so...

Yes, it's only been a week.

Yes, it's just too early.

There are currently no further questions in queue. I'll turn the call back over to the presenters for closing remarks.

Well, again, thanks, everybody, for your time this morning. And again, we are very excited about what's going to be taking place over the next, let's call it, 120 days before we have our next call. Unless obviously something of -- major material develops, we would probably reschedule something. But just keep watching. As soon as we learn the status of things, we will make sure and let everyone know. And again, we will continue to be out there and work very hard for you all. So thank you.

Again, thank you for your participation. This concludes today's call, and you may now disconnect.