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.

Yeah, thanks a lot, Tom. And, again, I just want to reiterate some of the things that both the – medical billing division has been doing. As we mentioned on our year-end call, they have some letters of intent already out there for a couple acquisitions that they hope to get completed fairly soon. I will say on TicketSmarter, congratulations. You know, since the end of The first quarter, I think they've announced not only just recently a deal with Sporting News, but also Fan Sighted and the Professional Fighters League, which got quite a bit of exposure and press as well. I noticed a lot of the business wires picked that one up because of the attention that is given to that up and coming powerful league that's out there rivaling the UFC and others. Both those entities are really doing very well. The legacy business with the new body cameras and the in-car system is doing very well. We're seeing some good opportunities in our commercial business that we hope to be making some announcements on very soon on some strategic alignments that we're making there. So it's been an exciting year as far as 2021 and 2022. You can see why we're enthusiastic and still feel very strong about our ability to meet the guidance that we gave of $50 million for 2022. So what I'd like to do is go ahead and open up the floor for Q&A and address any questions you all may have.

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Again, that is star followed by the number one. To withdraw your question, please press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Romel Janishu with Aegis Capital. Your line is open.

Good morning. Thanks for taking my question. You know, as you guys evaluate new acquisitions and are integrating the ones you recently made, could you maybe walk us through some of the metrics you think about in terms of profit generation? You know, obviously, you know, it's a time to be investing in these newly acquired businesses and so forth. But, you know, how do you think about that, you know, getting to a break-even scenario for TickSmarter and potential future acquisitions as well? Thanks.

Yeah, thank you, Rommel. As far as TicketSmarter goes, that's a different business for us, and it really is temperamental from a customer standpoint, so it's a little more of a broncing horse to ride, if you will, to create templates and that. But we're looking at right-sizing and being very much more selective, if we can, on our sponsorship contracts that we get into that will be much more predictable, if you will, in terms of the revenues generated by it. Some of the problems we've had revolve around that and where these sponsorships that we have also provide us tickets where they provide us so much value in tickets and we pay them for the sponsorship. We turn around and have to sell those tickets. And as I mentioned in my part of the presentation, discussion here that we did incur some write-offs for unused tickets and tickets that were sold under cost. And a lot of that was from these sponsorships. So we're doing a better job in looking at the sponsorships we're getting into, the number of tickets we're getting in return, the types of tickets we're getting in terms, and really the dollar in that we're required to. As far as the medical billing business, man, that is very, I like to call it mailbox money, if you will. It's very predictable. Other than this dental billing business, the businesses we buy generally one times revenue, three times EBITDA, and we believe that once we fully integrate those, we'll be able to double the EBITDA based on the same level of revenues. So that's very exciting for us. And we're able to pretty much buy not as much as we want or every week or anything, but there are There is appeal out in the marketplace to our template and how we're going about our business. And we have a line of potential acquisitions that we're able to select from. So that's kind of the way I look at it. The ticket smarter is much more difficult to predict and not very predictable from a revenue and cost of sales standpoint. But we are taking control, more control of the sponsorships, and through that we'll be able to control better our write-offs of tickets and that medical billing we're excited about. Obviously, it's been a bright point for us.

Yeah, and I'll just add a little bit real quick on the TicketSmarter, and at least a sector that I'm really excited about, and that is that we've been going out there on some of our sponsorships, have been, let's say, not only the naming rights for amphitheaters and in stadiums along those lines to where not only we get the naming rights, but we also get the ticketing rights for all events that may be going on at that venue. And so that's one avenue that we're just there and as it happens, we're the primary ticket source and there's a little caveat that comes into play here utilizing some of our background and some of the relationships that we have. We also will be in a position to bring additional business to those venues to where again we're not only have the ticketing capabilities, but we also have the capabilities of bringing in the proper acts that we do believe would generate a lot of good revenue and profits associated in certain markets. So the TicketSmarter is a lot more opportunities than just driving traffic through sponsorships, through the relationships that we have with like iHeart and the others. but the capability of actually utilizing our relationships with acts that are out there and guiding them or being part of bringing them to venues that we have all the ticketing rights to.

Okay. And maybe one follow-up question. You guys gave us a commentary on the new product, the new BodyWorn cameras, the FirstView Pro and FirstView 2.0. I wonder if you could just give a little color in terms of, you know, the progress on that launch here thus far in 2022. You know, is that gaining some new customers for you? Is it mostly just kind of more deeply penetrating existing customers? Thanks.

Great question. I'm glad you brought that up because it is such a game changer that we are seeing new customers that we're able to – bring into the Digital Allied Network as far as our legacy business. We're seeing customers that maybe decided that they wanted to go a different path several years ago that are saying, okay, You know, you clearly have made the innovation again. We want to come back to you. So we're seeing not only our legacy customers, but, you know, some of them are returned. Some of them are also new ones that, you know, we just have never had before. So great question. Thank you. Great. Thanks so much.

The next question comes from the line of Brian Lubitz with Aegis Capital. Your line is open.

Morning, guys. Morning, Brian. All right, so sticking with the cameras Romel obviously brought up, when you go to your guys' website now, it looks like you're almost giving the cameras away for free. Can you talk about that a little bit?

Yeah, I think it looks that way, you know, maybe because, I mean, the industry has really went to more of a subscription model. And so, you know, some of the people ask us a little bit about our cash burn and everything. You know, let's just say round numbers, a small department orders a quarter million dollars worth of products. body cameras or maybe in-carb. And what we end up doing is we have a tremendous amount of that expense up front, but then they enter into a contract that has them paying $50,000 a year over five years. And so the margins are really good, but that's sort of one of the biggest things that you've got to notice is how the deferred revenue continues to improve as we continue to get these new and large contracts. I think what we'll do is, some of the larger ones, we'll go ahead and announce it and make sure and announce it that it was in a subscription format. But again, as we continue to build that up and the closer we get to the crossover number, the legacy business is just gonna be cash flowing extremely well as we build on that. So it is a very, what do you want to say, low entry model that works very, very well in today's climate and environment. It also puts us in a little bit of a league to where there's not, you know, a lot of newcomers are coming in with the capability of putting that program together. You may recall, Brian, many years ago, We battled that with Axon. I mean, they had, you know, the war chest to sit there and allow agencies a full year just trying their product. And, you know, at the end of the day, you know, they got to pay the piper. They've realized that. But we are now, you know, in a strong enough position to where we as well can offer that type of service and that kind of business model.

The business model that you're referencing is sort of like the cell phone model where you guys, with the right contract, are going to sign these guys up, I guess, with your partner, Amazon Web Services, for three to five years. Is that what you're looking to do there?

That is correct. Absolutely. That is correct.

Okay. Now, obviously, is that what's playing into your SG&A with the expenses being up around $7.5 this quarter? Yes.

Yeah, it comes into play. And then obviously when you're looking at some of the acquisitions that we do and some of the partnerships, you get a little heavy on some of the legal side of things as well that come in and some of the fees associated with that. But yeah, it's there.

Yeah, and I would say insurance continues to be an issue for us. That's a big part of the G&A increase as well as just general inflation travel. for our people is up. The cost of travel is up. So, yeah, I mean, we're getting hit from the inflationary side as well as, you know, we're reopening a business. You know, a year ago, we were mothballed, really, and doing very little travel, if at all. And now we are able to travel and go see our customers and do our technical integration and such. So, yeah, we're seeing that.

So the expansion obviously is costing more. Where do you guys look for a sweet spot per quarter for that number? Are you looking to be in that seven? Are you looking to be five? Or do you guys have an idea of where we should expect to see those expenses?

Well, there's a component, especially in the medical billing area, where you're just going to have more G&A, if you will, as you acquire more businesses. So if you exclude that, yeah, I think we're on track to maintain that line when you're looking at the legacy business plus TicketSmarter. But you got to realize that the medical billing is growing and it'll be linear, if you will, with the amount of acquisitions we do there. Okay, awesome.

And now, obviously, this quarter was hit a little bit by bad weather for the tickets and things of that nature. You guys still feel confident that you're going to look at $50 million for the year. Do you expect all the quarters to be the same, around $13 to $15 million, or do you expect it back-ended? What should we expect in terms of revenues moving forward?

I think you're going to see them first and second quarter from everything we're learning. is the weakest of the quarters when it comes to at least the ticketing side of things. Again, we think that the legacy business is our T&Es that we've had out there and the new customers and new product fill in that pipeline. We're gaining traction there. I think you got to expect it to walk up, but with the third and fourth being strong because Even in the second quarter we're here, you've still got a lot of kids in school. They're just now wrapping up. My daughter, I think, finally gets out this week. When that starts happening and everyone's out of school and they start going to the ballpark and the weather's better, you start to see that change. you know, to pick up. I mean, you'll start to see the music festivals pick up. You'll start seeing a lot more concerts and outdoor venues. So it's just, it gets stronger, you know, I would say about this time of year. June kicks in pretty good and then it should just continue to walk on up. You've got football around the corner, so... Yeah, it is what it is. I mean, in regards to the seasonality, and that's only because of the amount of events they're available to go to in which ticketing is an issue. That's why I love the fact that we're looking at the diversification. I mean, obviously, the legacy business is an essential business with law enforcement. The commercial business, when you're talking about trucking companies and fleets along those side of things. They're virtually essential. The medical billing, essential. So a little bit of the wild card would be the ticketing, but with what we're doing and picking out venues that are more stadium, maybe enclosed where weather won't come into play as much, some things along those lines,

um you know we can protect ourselves a little bit there right and and this is my last one for you guys so from when you guys acquired ticket smarter the the traffic if you will to that site was minimal and and you've expressed in the last call how much it's gone up it's dramatically gone up the thing we always talk about on these calls is is getting you guys out there you have a great story you're up 300 percent revenue year over year and things of that nature what can we do to to utilize that traffic, if you will, all of those people that are going to $2 million a month or whatever it is to TicketSmarter to try and generate marketing for Digital Ally. Do you guys have plans to utilize that data in any way for that?

Yeah, absolutely. And, again, I think when we acquired TicketSmarter, I mean, they were less than maybe a million visitors, maybe even a year, whatever, as far as organically. We're seeing north of five million a month now. We're getting the traffic. It's just, okay, are people ready to go? Are they going to buy? We're very efficient in regards to how we go about growing these relationships, these partnerships. the Professional Fighters League. I mean, I think Yahoo Finance and Bazinga and Seeking Alpha, I mean, a lot of those entities picked this up as well. And we'll be on their website and these others' website as official partners. So, you know, again, we acquired them You know, September 1, you know, we're learning their business. We've given them the capital to seek out these partnerships. And now we've got to give them a little bit of time to make sure that all the integration's in there and then continue to see the growth. But, you know, I don't know. I don't even know the multiple to use in regards to how much we've increased traffic to TicketSmarter.com.

Well, again, guys, congrats on the quarter. I'm glad to see that there's still more growth coming, and good luck in the next quarter. Thank you for your time.

Thank you, Brian. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Again, that is star, then the number one. Your next question comes from the line of Mike Albanese with EF Hutton. Your line is open.

Hey guys, thanks for taking my question. Just kind of quick follow up. You guys provide a lot of great detail today. So much appreciated. I just want to go back to the RCM business real quick and hopefully just kind of get a little bit more color and a better understanding around the medical billing versus dental billing businesses. You know, you talked about how dental billing, you know, high growth but higher cost of customer acquisition. Apologies if I missed this and kind of the prepared remarks. But just help me understand why that is and then, you know, kind of what your thoughts are on that moving forward now that you've had a chance to, I guess, kind of compare the two. Do you want to, you know, continue to add dental billing companies and maybe just add some color on that? That'd be great.

Yeah, Mike, thanks for that question. Good question. Yeah, the dental billing is new to us, new to even our nobility partners in the joint venture there. What you see there is there's so many more dental practices, individual dental practices that need our service because they don't have the volume to employ a full-time billing and collection persons, if you will, that could spend their time and expertise learning the codes and all that and getting good collection results. So we provide that. So it's a much more in-demand, if you will, and new to the business. The medical billing side is a lot of people have done this for a lot of years. It's normal. In the dental side, it's not so normal. So that's why it's a much higher growth business And they do a lot of Internet advertising and marketing that way. And you get to click through revenues or click through inquiries and that. So they're doing a national search for new customers. And to acquire those new customers is more expensive than sending somebody out to a clinic or a doctor's group to to talk to the doctors and such on a local basis so yeah we want that business it's you know the business we acquired was really overstaffed from that standpoint and and our our template as to how we service those medical billing customers will help us in the billing side, in the dental side, as we integrate that and send it overseas to our billing practitioners, if you will, our contractors. So we see great growth in there. On the medical billing side, the growth is much more slow if you will i mean they do grow but it's very hard to acquire a a new doctor practice or hospital or clinic or whatever uh for for medical billing much easier on the on the dental billing side uh and it is national in nature got it awesome thank you

Thank you, guys. I would now like to turn the call back to our speakers for any additional and closing remarks.

Well, thanks, everybody, for joining us today. Again, we're excited to have reported the first quarter numbers. We will continue to keep you aware of events that occur when they when they occur the best we can and and look forward to uh continue our conversations in the the coming months as uh we keep rolling out um making acquisitions and and uh wrapping up some quarters here so thank you all for joining us ladies and gentlemen this concludes today's conference call we thank you all for participating you may now disconnect