Digital Ally, Inc.
Q1 2014 Earnings Call Transcript

Published: 15 May 2014

[Operator:]

Good morning, and welcome to the Digital Ally Incorporated first quarter 2014 operating results conference call. (Operator Instructions) Earlier today, Digital Ally Incorporated issued a press release that included certain cautionary language with respect to forward-looking statements. The company would ask you to review the language in the press release, regarding forward-looking statements as they are equally applicable to any forward-looking statements made during this conference call. Please note this event is being recorded. I would now like to turn the conference over to Stan Ross, CEO. Mr. Ross?

[Stanton Ross:]

Thank you very much. And thank you, everybody, for joining us today. I've got a little breaking news that I look forward to sharing with you all at the end of the call. Digital Ally, as you know, has spend a lot of time and energy and effort in regards to always trying to be a leader out there in regards to product development and the quality of products that we deliver to law enforcement. I will share a little more about some of our latest breakthroughs and announcements that we look to have presenting to us here in the coming days. But first, I'd like to introduce Tom Heckman, who is the company's CFO, and let him do a quick recap of the quarterly numbers. Tom?

[Thomas Heckman:]

Thank you, Stan, and welcome to everybody. I appreciate you joining us today to go over the first quarter results. I do, however, wan to let you know that we did file the Form 10-Q with the Commission yesterday evening, and it should be available for everybody to review. It will be a much more complete review of the quarter and what happened to us, our high points, low points what have you than what I'm going to go through today. I also want to direct your attention to the fact that we did file Form S-3 this morning. The Form S-3 was required by the convertible notes that we issued in March of 2014, and I'll go over some of the major terms of that a little later in the conference call, but we did file the Form S-3 this morning. I don't know, if everyone has had a chance to look at it or not, but it basically is registering the shares that would be required, if and when the holder of the convertible note converts his notes to equity or if we would choose to do a paid-in-kind on the principal or interest payments, if we paid-in-kind in the form of stock. So anyway, I'll talk more about the terms of the convertible note a little later in this call. Let's begin with the first quarter operating results. First of all, we had an operating loss of $546,000 for the first quarter. Obviously, management and the directors are disappointed from the overall results. Quite frankly, it's not what we expected and it's not acceptable to either the board or to Stan and I, for those type of operating results. It does show a deterioration from a year ago, where we reported $181,000 operating earnings. And what I want to do is recognize that we did show a deterioration from a year ago, however, much has happened in the past years that makes a comparison to the year-ago period, very difficult and somewhat meaningless, when you understand what's happened to us and what's happened to the market in the intervening period. During that period we've introduced several new products. We've done a full changeover to an employee base sales system versus a third-party contractor system. We've had patent challenges with a company called Utility Associates that raised its head in mid-2013. We've been granted several patents or sales during that period of time. We also endured a budget sequester and eventually a shutdown of the government late in 2013. So much has happened in the last year. And for that reason, what I'd like to do is compare our Q1 results to Q4 2013 in my call today. Basically, Q4 or the fourth quarter of 2013 really represent a low point for digital. That was really abnormal when compared to the previous periods, but it did happen and we did endure that quarter, which was the fourth quarter. When you compare Q1 2014 operating results to Q4 2013, it shows the following

[Stanton Ross:]

Thanks a lot, Tom. It's real exciting time for us. We always knew that the DVM-800 was going to be very disruptive and really make a splash in the market, once we're able to get it after and introduce it. And it has done that. The body camera, we felt the same way, we still believe that, matter of fact, because of some of the very new features that we are starting to be able to present and have completed. That body camera is going to be one of the most unique body cameras that's out there. I mentioned early on in my call, that I had two pieces of somewhat breaking news that I wanted to share in regards to the technology front. And the one and first is with the body camera. Currently, we are hosting the Lenexa Motorcycle Challenge, here in Lenexa, Kansas. And we actually have several of the officers including some stationary body cameras set up out there and are streaming live video back here to corporate headquarters, or actually that the truth of matter is any one from any location could get online and watch this event occurring right now. Our competitors have talked about streaming video, but their idea of streaming is stream into a tablet, stream into an iPhone and stuff like that. This is true streaming video to where an officer actions or the environment heaves in that video could be streamed directly live back to corporate headquarters. So that is occurring right now. We're very excited about that. That is a feature that a lot of our competition will have tough time overcoming, so we're real pleased with that. We also have talked about the cloud solution, Tom briefly mentioned on it, not only we're doing the cloud solution for law enforcement, but we also have it setup for our commercial markets as well. I think I've stated early on, we still anticipate our commercial division doubling again this year. So that should increase another $1.5 million in new revenues for the company, just through the commercial market. They too will start being able to take advantage of the body camera. It has a lot of applications and the duties that the commercial markets look at as well. And in the second technology, sort of breakthrough, that I wanted to tell about is the VuLink. Many of us, you've heard as talk about that technology how that actually ties the body camera and the DVM-800 together. Well, I'm very pleased to announce that not only have we developed an outstanding product, but we have gotten the word from the patent office that it appears that that the majority of our patent claims that we filed for will be granted. And that should happen in the next 30 days. So when that does come final and patents get issued, we will make sure to do a press release. So we continue to put ourselves in a position to where we have very unique opportunities when we go in the police departments. Our biggest competitor, obviously in the body camera is Taser, but Taser doesn't have in-car video. We have situations where departments now say, if you can't provide me a body camera and an in-car video system, there is the door. We don't want to do business with you. We've got a situation now with our in-car video system, price, features, warranty it's very difficult to compete against the DVM-800. And when you tie all of those two products together with the VuLink, you basically have completed your circle. So we're very ecstatic about what 2014 has to hold for us. There is no way you're going to see any lack of enthusiasm from me in regards to what I believe we will accomplish this year, because everything that we're seeing, whether it'd would be local, international, very large departments, still has us in the game. As I mentioned maybe earlier, there's probably, six, seven different departments that are evaluating our body cameras and they're looking at individually each department in excess of 1,000 pieces. So we're very pleased with the progress we made, outstanding work by our engineering team and we look forward to introducing the couple of more new products yet this year. Anyways, I'd like to go ahead and open up the lines for any Q&A that there maybe at this time.

[Operator:]

(Operator Instructions) We have a question from Vincent Colicchio, Noble Financial.

[Vincent Colicchio:]

Stan, on the DVM-800, do you have the opportunity pipeline and it sounds like you do and the capacity to roll that product sequentially throughout the rest of the year?

[Stanton Ross:]

Yes, we do, absolutely. The supply channel was a little tough getting fired up and started. I think we've overcome those hurdles and matter of fact, feel very confident that we'll be able to meet the demand.

[Vincent Colicchio:]

And my next question is on the patent litigation situation with Utility Associates. Could you give us a sense for the magnitude, did it hurt you with one client or was it several, any color that would be helpful?

[Stanton Ross:]

The one thing I could tell you is I am aware of at least a half of dozen of our very large, including a couple of them, that we had state contracts with. I mean sole-sourced state contracts with. And they contacted us, because they had received this threatening letter. And so we were able -- those folks clearly came to us, because they had a long-term commitment still ahead of it with them. I honestly can't get my arms around that how many additional departments, where we may have lost sales, because they bought into that letter. And that's what made us get so aggravated and frustrated to where we became proactive instead of just blowing them off. And we will continue to be very active, as matter of fact, we were very disappointed to find out that an ex-employee who has a confidentiality -- sorry, a non-compete agreement with us they had hired them as well. So these individuals really, really seem to be comfortable in taking risks or maybe that's all they had left, the Hail Mary pass, and is why they're doing what they are doing. But I'm very confident that our legal team is getting our arms around those issues, those former employees and we will have this wrapped up fairly soon.

[Operator:]

Having no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Stan Ross for any closing remarks.

[Stanton Ross:]

Again, I just want to thank everyone for their time today. Let me thank all our employees for their hard efforts that they've put in. And again, I want to reiterate my confidence, 2014 being a very, very good year for us and greatly improving in regards to over '13. And I think I had sort of laid out how that going to happen with just starting new products time and time again. So anyways, thank you all very much for your time. If you would like to have any follow-up questions, Tom and I both are available. Just give us call any time. Thank you.

[Operator:]

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 12