Digital Ally, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Digital Allies 2022 First Quarter Operating Results Call. At this time, all participants' lines are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words believe, expect, anticipate, intend, estimate, may, should, could, will, plan, future, continue, and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters, identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various histories and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document. and readers are cautioned not to place undue reliance on such forward-looking statements. Digital Ally will undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows, and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. If you require any further assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Stan Ross, Chief Executive Officer. Thank you. Please go ahead, sir.

Thank you. Thanks, everybody, for joining us today. I'm excited to be able to report our numbers. I have with me Tom Heckman, the company's CFO. He'll go into in-depth details of the numbers and the operation. But excited to see us come in at the first quarter numbers in excess of 10 million. That was pretty much in line with what our expectations were. which also sort of helps us validate and continue to believe in our 50 million guidance that we've given for 2022. So let's jump right into the numbers. I'll turn this over to Tom Heckman, our CFO.

Thank you, Stan, and welcome to everyone. I appreciate you joining us today. Just to let you know, we did file our Form 10-Q on Friday, and I do encourage everyone to take a look at that for a more in-depth analysis of what went on during the first quarter. My remarks here will be pretty summary in nature, and I do encourage you to look at the 10-Q for a more in-depth review of the quarter. If you look at the first quarter on the surface, the first quarter revenues increased over 300%, actually 306%. to $10.3 million in the first quarter 2022 versus $2.5 million in 2021. Obviously, the acquisitions were a big part of that as they represented $8.3 million of revenue in Q1 2022, which is over 80% of total revenue. see the serious impact that these acquisitions are having, at least on our top line, which is very favorable for us. I will speak more on a segment by segment basis a little later in this analysis. Net, excuse me, net income for the quarter showed a loss of $6.7 million versus income of $21.7 million in 2021, the first quarter of 2021. But I will tell you the primary reason for that is the derivative income that we record each quarter. And I think I've cautioned everyone previously that that's a non-cash income. kind of an accounting fiction, if you will, rather than a true analysis or review of our operating results for the quarter. The derivative income for the first quarter of 2021 was $24.5 million in 2021 versus only $150,000 in 2022. So clearly a decline of $24.3 million was attributable just to this derivative income That's representative of the change in the warrant value that are outstanding. If you exclude the derivatives, the income, our 2021 net loss would have been $2.8 million versus $6.7 million for 2022. So much more in line with what we did in 2022. Okay, let's look at the segments. Let's look at first our legacy business, which is law and commercial video systems. Revenues from products declined to $1.3 million from $1.9 million in the year-ago quarter. Service revenues were a little bit up to flat during that same period. What I attribute the change in the revenues in the legacy business really due to the introduction of new products, which we're very excited about, by the way. It's in the body cam area. We introduced the FirstView Pro and the FirstView 2 late in the fourth quarter of 2021. And as you might expect, our service channel, our inventory channels were clogged and we had difficulty getting them in. We have customers wanting to review and look at this new technology that we're putting out there, so they've delayed purchases, which we believe will come in later in the year. In fact, we're very happy with some of the pre-order sales that we're seeing in those two new products. We also continue to see a migration from outright product sales, hardware sales, up front where people are using the subscription model, which is more of a service method, which we amortize or receive payments over anywhere from 36 months to 60 months. So it really equals out the revenue stream over a longer period of time rather than having an upfront sale. So that was a contributory factor to the first quarter decline in product sales. Our gross margins also declined to 13% from 32%, which is a pretty big drop. But as you might expect, once we started introducing these new body camera models, we did take right off some older body cam inventory as well as some of the some of the older in-car video systems. We did also have some sizable write-offs in our personal protective equipment group, which is our shield business. So that's what happened to our gross margins in the first quarter for the legacy business. If you look at the ticketing segment, the ticketing segment generated $6.4 million of revenue in the first quarter of 2022. which represented 60% of our total revenues for the quarter. I mean, that's a very nice number, but we were hoping for higher revenue figures than that. And our revenues in the first quarter were challenged by a couple of factors. Obviously, the overriding concerns, the Omicron variant and the effect it had on group gatherings and cancellations of And especially some of our older audiences or customers that go to the ballet and the opera and such, which is a big segment of our ticketing business, shied away from that because of the effects of Omicron. So that did have a pretty big effect on us. But I will also say that we're seeing, we were told and now we're really seeing that the ticketing segment is very seasonal in nature. In the first quarter you have the ending of college football as well as pro football. which is a very big part of our business. And then you couple that with the fact that the Major League Baseball players' union struck during the first quarter, which delayed or actually canceled some spring training games and also delayed the regular season. So we had kind of a double whammy from the Major League Baseball. Also, you know, across the board, and I've been looking it up, and, you know, last year there was a significant increase significant decline overall in attendance in Major League Baseball. We're seeing that continue in 2022. Obviously, weather is a factor of that, and it has been cool and damp in a lot of the Major League cities, so that hopefully will bounce back for us as well, but it did have a impact on our revenues in the first quarter. Overall, we're monitoring the health of our customers with inflation and all the other matters that are hitting our customer base. And we're monitoring why the reluctance to go to some of our bigger events that we have tickets to. So we'll keep an eye on that and hopefully be able to improve our revenues from that standpoint. Our gross margins in the first quarter of 2022 was at 15%, which is also disappointing given the level of revenues that we had. We did have a higher than normal write-off of unused tickets and below sales, below cost in the first quarter, which is understandable based on what we talked about in revenues, the seasonality, the Omicron, the cancellations of baseball games. All that led to higher than normal write-offs of unused tickets and sales below cost in the first quarter. Also, I would tell you, we've entered into some rather large sponsorship deals late in 2021 and also in 2022. And I'll tell you why that matters. We did enter the USA Today Gannett contract, the iHeartMedia contract, the Sinclair Broadcasting Contract, among a bunch of others, but those are the larger ones. And the way we account for sponsorships like that, and these are significant payments, significant obligations and investments that we have made in that business. The accounting is that we amortize the cost of those sponsorships on a level basis over the terms of the agreement. The expense of those sponsorships are the same in month one versus month 12 if it's a one-year contract or month 36 if it's a three-year contract. So we level out the expense of that. However, you look at the revenues, they're much more back-end loaded as you just start on a media campaign or a location that we're advertising on and sponsoring. It takes a while for customers to get comfortable with that, see where it's at, know where it's at, and be comfortable with the click-through revenue. So the revenues are often back-end loaded, whereas the costs of it are level yield. So we do expect and have seen some losses early in these sponsorships, only to reverse in the later months of those contracts. So we're hoping that that trend continues and And we see dramatic improvements in our cost of sales and therefore gross margins on a go forward basis. If you look at our revenue cycle management segment, we did 1.9 million in revenue or 18% of total. We completed two acquisitions in entire 2021, which began I think in June of 2021. During the first quarter alone, we completed two acquisitions in 2022. One was for roughly $2 million and one was smaller at about $350,000. So we're continuing our path of acquisitions. And as we acquire new businesses, medical billing businesses, obviously revenues will continue to increase. And that's what we're looking for by doing the roll-up strategy in that area. Our gross margins were pretty strong at 37%, which is very good, but we could probably have done a little better. One of our major acquisitions early in 2022 was a dental billing company, whereas all the other ones have been medical billing. And our dental billing acquisition kind of breaks the mold a little bit in that it uses a national footprint. They're recruiting and trying to acquire new customers on a nationwide basis, whereas our medical billing companies are much more regional, local to regional businesses. And their cost of customer acquisition is much higher than the medical cost of billing. So that hit our margins in the first quarter as well. This dental billing company is a high growth, but high cost of acquisition of new customer business. So it did damage our margins and actually resulted in, I think, negative operating margins. in the revenue cycle business. But we are very, very high on that business. We believe it's headed in the right direction. And we do believe that our success with all these acquisitions really do nothing more than prove that our template, our acquisition template is good and strong and appealing to customers. And just on a general basis, we're looking for medical billing or dental billing agencies at about one times revenue and three times EBITDA. So very, very modest. purchase price template from that standpoint, which we believe that once we get them inside the business and have time, and I'm talking six, nine, maybe 12 months out, doing a full integration where we install our people, our systems and such that we'll even reap better margins and operating margins at the end of the day. So on an overall recap for the first quarter, our revenues were very good for Q1. Our gross margins were not where we wanted them to be, but we know where our problems are and why that happened. We're working on those, and we believe future quarters will prove that right with increased revenues, gross margins, and operating margins. If you look at our balance sheet, it remains very strong. We have cash balances of $20.5 million at the end of the quarter. We got positive working capital at $19.5 million and stockholders' equity at $47.5 million. So our balance sheet is very strong, and it will give us the backbone to go out and do more acquisitions on a selective basis and improve our business model. So with that, I'll give it back to Stan.