Digital Ally (NASDAQ: DGLY) reported Q3 EPS of ($0.23), versus ($0.21) reported last year. Revenue for the quarter came in at $4.56 million, versus $4.31 million reported last year.

• Shipments of the new DVM-800 digital in-car video system, which has become the Company's "flagship" product after being introduced in the fourth quarter of 2013, accounted for 55% of the Company's total sales in the third quarter of 2014.
• Shipments of the FirstVU HD and FirstVU body cameras generated 10% of the Company's total sales in the most recent quarter, compared with 5% of total sales in the prior-year quarter.
• The Company has noticed a substantial increase in body camera pilot and test/evaluation program by police agencies since widely publicized social unrest erupted in Ferguson, Missouri in August 2014.
• The Company received its initial patent on the VuLink connectivity system, which allows Digital Ally's in-car video systems and its FirstVU HD body cameras to seamlessly work together in gathering and recording evidence collection activities for law enforcement agencies.
• In October 2014, shortly following the end of the most recent quarter, the Company introduced its VuVault.net cloud-based storage solution. This new product provides Digital Ally with a clear advantage over its competitors because VuVault.net provides cloud storage for FirstVU HD body camera systems which can be synchronized to operate simultaneously with the Company's in-car video systems by using the Company's patented VuLink product.

Management Comments

"We are pleased to report that our new products, particularly the DVM-800 in-car video system, FirstVU HD body camera, and patented VuLink connectivity device, have continued to gain traction as law enforcement agencies recognize the value of synchronized incident recording from multiple perspectives when analyzing interactions between law enforcement officers and the public," stated Stanton Ross, Chief Executive Officer of Digital Ally, Inc. "The DVM-800 and FirstVU HD combined accounted for 65% of our total sales during the most recent quarter, compared with only 5% of total sales in the prior-year period. The DVM-800 was introduced in December 2013. Additional new products developed by our research and development engineers are expected to benefit sales in the balance of 2014 and throughout 2015. These new products include our VuVault.net cloud-based storage solution, which was developed to compete with EVIDENCE.com and has already begun to attract significant interest from customers. We also introduced the MicroVU HD at the International Association of Chiefs of Police Conference last month in Orlando, Florida, where the MicroVU HD was awarded a 'Hot Product of the Year' designation."

"We have noticed a substantial increase in pilot and test/evaluation programs involving our FirstVU HD body worn cameras, especially since the civil unrest in Ferguson, Missouri in August 2014. Currently, over 1,050 FirstVU HD units are being tested and/or evaluated by over 665 law enforcement agencies throughout the U.S. These evaluation programs generally take from three weeks to nine months to complete and for contracts or purchase orders to be awarded. We believe our FirstVU HD body camera is highly competitive because it can communicate with in-car video systems through our patented VuLink connectivity device, thereby allowing both video systems to be activated simultaneously on a hands-free, automatic basis. When combined with our recently introduced VuVault.net cloud-based storage solution, we believe Digital Ally offers police departments and other law enforcement agencies a level of flexibility and cost-effectiveness that cannot be matched by our competitors. More and more of our customers are demanding an integrated solution that involves local or cloud-based storage, body-worn cameras, in-car video products, and interconnectivity from a single vendor, and we believe Digital Ally is the only vendor that can offer this end-to-end solution. We expect our decision to maintain an active research and development program when many of our competitors were cutting back on R&D spending, will pay handsome dividends in terms of improved operating results in the upcoming year."

"While international revenues were disappointing during the first nine months of 2014, shortly after the end of our third quarter we received several significant purchase orders, totaling approximately $1,450,000, from our exclusive distributor in Mexico. We have already shipped at least $550,000 of these orders in the fourth quarter of 2014, and the remaining balance of the orders should ship over the next twelve months. We expect international revenue to improve in the current quarter and throughout 2015 as we continue to ship additional orders to Mexico and other Latin and South American countries."

"Our third quarter operating results were significantly impacted by non-cash and/or non-recurring charges related to changes in warrant derivative and senior secured note payable valuations and issuance expenses," continued Ross. "On a combined basis, these expenses accounted for more than $4.9 million, or approximately 77% of our total net loss in the quarter ended September 30, 2014. While non-cash charges or income related to derivative valuations can have a positive or negative influence upon individual quarterly results going forward, we believe the magnitude of such charges in the most recent quarter was far greater than we are likely to see in future periods."

"Our operating results were also negatively impacted by a substantial increase in litigation expenses during the first nine months of 2014, when compared with the corresponding period last year. This increase was due to our ongoing litigation with Utility Associates, Stephen Gans, and DragonEye Technologies. We have been in litigation with Utility Associates, among other items, respecting its claim that our products infringe its '556 Patent. One of the actions we took was to file an action with the U.S. Patent and Trademark Office to invalidate the '556 Patent. We were notified that the U.S. Patent Office has granted our request to examine the validity of certain claims of Utility's '556 patent."

In its decision, the Patent Trial and Appeal Board declared that 'we are persuaded, on this record, that (Digital Ally) demonstrates a reasonable likelihood of prevailing in showing the unpatentability of claims 1-7 and 9-25 of the '556 patent'. Utility Associates must now appear before such Board and defend the validity of its patent. Given the strength of Digital Ally's positions, the Company is confident that the Patent Office will ultimately determine Utility's claims to be invalid. Digital Ally has also received notice that the U.S. Court of Appeals for the Federal Circuit has agreed to hear its motion on jurisdiction issues regarding Digital Ally's declaratory judgment lawsuit in the second lawsuit against Utility in the District of Kansas, necessitated by Utility's continuing, illegal interference with the Company's contracts, business expectancies and customer relationships, its hiring of a former Digital Ally employee in violation of a covenant not to compete, and its continued disparagement of the Company's products and false advertising, is being actively prosecuted. Digital Ally has not invited any of these controversies or the litigation resulting from them but, having found itself in this litigation, is determined to prevail.

"Looking forward, we believe that Digital Ally is well-positioned to increase its revenue in 2015 and future years as our customers, and our competitors' customers, recognize that we have a broad range of state-of-the-art audio/video systems and related products that can satisfy the feature and price requirements of virtually any law enforcement agency in the U.S. and abroad. Based upon information currently available to the Company, we are optimistic that Digital Ally's fourth quarter and 2015 will reflect improved results, although we will not have revenues approaching $22.5 million this year, as we had earlier expected," concluded Ross.

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