Digital Ally, Inc.

Good morning ladies and gentlemen and welcome to the Digital Ally Inc. 2022 Second Quarter Operating Results Conference Call. 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 belief, 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 business risks and unknown and unknown certainties, 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. I would now like to turn the conference over to Mr. Stan Ross, CEO. Please go ahead, sir.

Thank you. Thanks, everybody, today for joining us. I have Tom Heckman, our CFO, with us today. Tom will go into greater detail over all our numbers. This is one of the first time that we've really been able to break out all the entities in more of a segment reporting. We're sort of pleased to sit there and point out the ones that are really starting to get the traction that we believed in when we acquired them and or started them, and also real excited about some news work surrounding our legacy business that we look forward to sharing to you all today. Thank you for joining us and at this time I'll turn it over to Tom.

Thank you Stan and welcome everybody. I appreciate you joining us today. We did file our 10-Q with the SEC yesterday. It's available on EDGAR. I do suggest everyone take a good look at that for a more deep dive into the quarter. And what I'm about to do is a higher level, hitting the high spots in that. So please, if you can, take a look at the 10-Q and it gives a more Full analysis of the second quarter. Obviously, we continue to see the positive effects of the recent acquisitions we've done with Ticketmaster and the medical billing situation. You can see second quarter revenues increased by 5.8 million or 235%. year-over-year, so that obviously is very good. Year-to-date revenues are almost $20 million at the end of the second quarter, which is up $14.1 million from a year ago, which is 290%. So obviously the revenues are improving, and we expected that, but we like to see it on paper in the quarter. Now let's look at the gross margins. Our overall gross margin the second quarter was up $500,000. or 36% over a year ago margins. Our year-to-date margins are up 1.6 million, or 77% over the prior year period. So obviously it's going in the right direction. But when you look at the gross margin percent, it came in at 18% in the second quarter versus 50% a year ago. Some of that's a mix in the sales, obviously, but it is not what we were expecting. We were expecting higher than that. Let's look at that by segment, and it'll give you a better feel for where that's happening. First of all, I will comment that this is the first quarter that the The legacy business is the smallest segment revenue-wise than any of the other quarters. So video is 37% gross margin in this quarter versus 13% in the Q1 2022. So obviously a good move in the margin there. And that was on $2 million in revenue for the quarter. Our revenue management segment hit 45% gross margins versus 37% gross margin in the first quarter of 2022. So obviously a good move there. And that was on $2.1 million in revenues. The ticketing segment, though, the margins were nominal, 1%, you know, or about that. versus 15% in the first quarter. So obviously a wrong turn there on the gross margin. That was on 5.2 million in revenue. Obviously, we're looking at the ticket segment operations and trying to figure out where we're going with this thing. But really, if you look at it, the ticketing segment is subject to seasonal effects, their best quarters are ahead of them in the year. The first two are usually the slower quarters. The third quarter and fourth quarter are usually the best quarters in the ticketing segment. And that's generally because the pro football and college football is a forte of Ticketmaster, and that's their bread and butter. And it seems like that should turn things around in the third and fourth quarter. However, we did have a, I'm sorry, I may have said Ticketmaster. It's Ticket Smarter is our ticketing segment. Sorry about that. I always make that faux pas. One thing that happened to us as well in the ticketing segment is we did have a large number of new sponsorships that came on board subsequent to the purchase and even in the first and second quarter. And those things are like Gannett and iHeartRadio, and there's many other ones that we've jumped into. Those are rather large obligations for us, large payments, and they are not yet contributing like we hope they will longer term. So we're early in those contracts. We believe that they'll turn around on us and start providing better margins and better click-through revenues. Also, one thing, if you look at this, if ticketing segment is our largest revenue generator and it's only generating 1% or less in gross margin in the second quarter, it could be the pivot for our year. If we can get it turned around in the third and fourth quarter to just historical levels of gross margin, that will be a huge pivot for us in our quest for profitability and the longer term operating results. The revenue management, the medical billing segment is performing as expected, a little better. As we noted, the margins are improving quarter over quarter, which is always good to see. Our video is trending up. You know, and one thing that's not really showing in our revenues and even gross margins this time, we had 1.7 million more deferred revenue in June 30, at June 30 versus December 31, 2021. So, we're adding a lot of new revenues that are deferred in nature because there are three to five-year subscription agreements. that will be amortized in the future. So that's obviously a very good omen for our future quarters. So we're looking for good things there. If you look at the SG&A expense, it increased 4.5 million or 118% primarily due to the recent acquisitions. Although I will say that insurance costs seem to be at least moderating, if not abating a little bit. And that's been a big part of our increased SG&A expense in the past. We have kind of reduced our number of, or at least the amount of sponsorships that our ticketing segment is going to get into in the near term to try and smooth out the revenues and that. So I would expect that the SG&A would decline because of that. And we also have ramped up and started a new segment or a new business called Custom 440 which I think Stan will probably address in his comments later on, which didn't contribute any revenues, but we did have SG&A expense in the quarter. If you look down the P&L, the second quarter non-operating costs and income provided us $6 million of income during the second quarter. And the predominant driver now is our warrant derivatives, which contributed $5.4 million of income. And I think we talked about this previously. It's a non-cash charge when it's a charge, and it's non-cash income when it's income. So don't get real excited about it. It could change next quarter, next year, or whatever. So it's really a moving target, and it's really meaningless from a standpoint of cash flows, if you will. If you look at our net loss for the second quarter, we had $682,000 of net loss or $0.02 a share versus $5.4 million in loss in 2021, which is $0.10 a share. So obviously, we're moving in the right direction from a net income side. If you look at our balance sheet, we remain healthy with $13.5 million of cash at the end of the quarter, $15.7 million in positive working capital, and $45 million in equity. One matter that was disclosed in the 10-Q I just want to touch on briefly. We did get a notice of possible delisting from the NASDAQ due to our share price being less than a dollar. Management is certainly addressing that matter. We're talking with our board of directors as well as our advisors on the best ways to to regain compliance. And we have until January 3rd, 2023, to regain compliance with that standard. We may or may not have to make some corporate moves in order to reach that. We hope that just organically we can provide better results in the third and fourth quarter that will result in us regaining compliance. So that is an issue that we'll carry over in the third quarter, and we will certainly report to our shareholders on that. So with that, I'll turn it back to Stan. Thanks, Tom.