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.

Yeah, a couple things, you know, I guess addressing, you know, Nobility, our medical billing company, very pleased with its performance and profitability and excited about what the remainder of the year has in store for it. Along with Law, as Tom mentioned, you know, our subscription model and the bookings continue to grow quite well. And that has a lot to say with the new products, with our body cameras, the new one that came out. And then also we continue our in-car system still has been great. continuing to do very well. So I think the law side of things are going to be very solid. The video solution side, which is more of the commercial divisions, continues to get traction. So I've been very pleased with those areas. Tom touched on TicketSmarter and the weakness that it had and And he hit it right on the head in regards to a lot of our upfront costs associated with IHAR, USA Today, Valleys, and some of the other big media outlets that we have partnered up with and are starting to move forward with and look for great things to come of that. But you also got to remember that we also had baseball had a rough start with no spring training. late start, and so there was quite a bit of revenue and ticketing that did not occur there. We do anticipate, you know, with the college seasons and football and everything coming back, that the third and fourth quarter would dramatically change for TicketSmarter. That being said, you know, there was a little bit of weakness in regards to just the overall economy. So, you know, for us to sit there and feel comfortable with the $50 million in guidance, is a little bit more challenging now. I think, you know, we're probably a lot more comfortable, you know, somewhere around, you know, another double year over year like we had last time. So something closer to the 40 million number would be more in line. I may be a little bit conservative there. If we really do see the ticket smarter, things start to pick up in regards to this year in the football and college basketball and stuff as such. Also, the other thing that Tom mentioned about was custom 440. Many of you may not be aware of this, but we do have a very strong background in in the music entertainment business, not only from our situational security, but obviously just from some of the life experiences a lot of us have had. And with us having our own ticketing platform, and actually not only ticketing platform, but numerous amphitheaters and ballparks and such that are named after Ticket Smarter, we have the booking rights. And so we look to start to actually be the primary ticketing agent and the ones putting on particular entertainment throughout the country as well. Very similar to what you're seeing out there, you know, in the industry right now with, I can't think of their name. Anyways, that too should be able to add both some revenue and, I believe, profitability into the company through Custom 440. So pretty excited about that. All right, let's go ahead and open this up for Q&A.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Please stand by for your first question. Your first question comes from Rommel Dionisio of Aegis Capital. Please go ahead.

Good morning. Thanks for taking my question. Just to delve into the gross margin on the TicketSmarter business a little bit, I think in your prepared comments you guys talked about how it was relatively tight I realize that's a tight gross margin business just overall, but was it just kind of a lack of cost absorption? You know, appreciating your comments, Stan, about, you know, the late baseball season and weather and all that. So is it just kind of a lack of fixed cost absorption that's kind of causing those margins to be tight? In other words, you know, if you can grow those revenues in the back half of the year with the college sports and all that coming back, can you kind of get some operating leverage there in the gross margin? Thanks. Yeah.

Yeah, Denny, absolutely. This, Tom, I think you're headed in the right direction there. There was a cost absorption issue. But also, to be honest with you, the COVID situation did change the landscape of some of the tickets that he had in inventory and its saleability, the marketability of it. So he did take some write downs on some tickets that were sold for less than cost or not sold at all. So, a big part of the gross margin issue was caused by that.

This is Stan giving you an example. What we found is like, I mean, you still got all the You know, the kids going out and young adults and stuff wanting to go to concerts and to particular events that are out there. But we've seen a big drop in like theater. I don't know if it's, you know, the reason for that. But, you know, tickets for, you know, people going to shows and, you know, the theaters and stuff. That was a big decline.

Okay, that's very helpful. And I guess that that helps you, I mean, that knowledge helps you kind of fine-tune the model to what you're going to be purchasing going forward. And how do you guys kind of think about that? You're just kind of mitigating that risk going forward? Correct.

Correct. We learned from our past, and that's certainly something we're looking at here, at more actively manage the inventory of tickets on the books and proactively marking them down if we have to. But that did have an effect in the second quarter, obviously.

Okay, that's helpful. Thanks very much, guys.

Your next question comes from Mike Albanese of EF Hutton. Please go ahead.

Yeah, I stand in Tom. Thanks for taking my question here. And just to kind of follow up, you know, regarding TicketSmart, what we were just talking about. Just from my understanding for these partnerships, are you basically booking the entire cost to cost of goods sold, essentially? And that's part of the cost absorption that you were alluding to? Or just help me kind of understand what you're referring to there.

No, that goes to the SG&A and promotional expenses as we amortize those over the lifetime of the contract. Got it.

I think, again, Mike, the biggest thing, like I said, were some of the ticket sales or lack of there, you know, was a big piece of his margins.

Yeah, these contracts, you don't just turn them on like a Gannett or a USA Today or iHeart. You don't turn them on and immediately get revenues from them. It takes some time to condition their audience and such things like that, that it really just didn't happen in the second quarter. And we're hoping that we'll get more penetration, more click-throughs, you know, be more sticky, if you will, in future quarters as everybody gets more comfortable with it.

Yeah, yeah, that makes a lot of sense to me. I mean, do you have any expectation on really what to, on that acceleration, I guess, or it's probably pretty hard to tell, but.

Well, I'll be honest. I think, Mike, you're going to start to see some stuff here in the third quarter. You know, there was quite a bit of integration that needed to be done, some tweaking that needed to be done to make sure that our platform, their platform, was working well together. You know, some of this stuff you just don't learn until you go live, but there's been constant tweaking. And so I think the third quarter, you'll start to, we'll start to see something. I think what we'll also do to try to help give some clarity is we'll try to give you a little bit of an idea of what the beginning of the third quarter looks like and the end of the third quarter looked like. So you start to see the traction that it would be taken. But obviously with the, you know, just the hundreds of millions of followers collectively they have. It doesn't take much of a follow through and a click through that it really would reap some benefits. Right, right.

Yeah, obviously it's a concern, and yet it's our biggest opportunity. You know, if you look at it, we get that right, we get that head in the right direction, get the revenues up, the margins up, do a better job selecting ticket inventory, this thing can come roaring back very quickly, and we hope it does, and we believe it will.

Yeah, okay, awesome. And then you guys have made, you know, some of a push, I think, to get into the primary market, right? I mean, do you have Can you give me an idea of what the breakdown is between, you know, your presence in primary versus secondary, you know, and what that constitutes? Yeah, I mean...

Yeah, absolutely, Mike. I mean, we're very, very thin on the primary. I mean, we're just now starting to get there because, you know, he's not been in a position before to step up and do some of the things necessary to become primary. So very thin there. So that will help our margins out considerably as well, along with custom 440 when we're actually doing the events. right so that that that'll be quite interesting as well I mean much like you know Live Nation they they're anticipating a record year and there's still people that you know that an audience that wants to go out and have a good time here's some good music or nice festivals and and so with us having the custom 440 entertainment sector that we can set there and have as a tentacle to TicketSmarter, we really think we're going to be able to enhance it. And those take time to plan, I'll tell you that. I mean, if we get, if we pull one off in the fourth quarter, I'll be very pleased, but I anticipate multiple events in 2023. Okay, great, thanks.

And then my last question, and my previous question was really kind of just a segue into this, but are you seeing any Or I guess they say, what are you seeing in the industry regarding dynamic pricing? Are you feeling any impacts of that? I know Ticketmaster, and I think just most notably in the news recently regarding the Bruce Springsteen concert, you know, they implemented dynamic pricing, and that's kind of taken the economics out of the secondary market. And I'm just curious what you're seeing on your end or if you're feeling any impacts from that or any general thoughts around it.

Yeah, not much of an impact. I mean, there's just too much out there. It's going to take a while. It's going to take blockchain or something along those lines. It'll be a while before that comes into play. And then at the end of the day, you know, I don't think it's the case in his scenario, but I mean... There are some artists that are really just mad because they sold their tickets too inexpensively when the market was that good. Well, hell, why am I getting only what I'm getting? So I think it's a combination thereof, but we're not – there's just too much out there right now. It'll be a long time before that really comes into play. Okay, awesome.

All right, guys, thank you very much. That's really it from me.

Listen, we're going to wrap this up, but I also wanted to make sure that everyone, we also have with us present our Chief Accounting Officer, Brody Green. And Brody's going to start jumping in and assisting us a little more in the future. He's the one that's been getting his arms, him and his team around the 10Qs and Ks recently. We're very excited to have him as part of our team and And Brody will start being on some of these calls as well. He's obviously along with Tom's supervision in the trenches. And if we ever have any really challenging accounting questions, we'll make sure and have the team here to answer them for you. So thank you all for your time today. We really appreciate it and look forward to our next call.

Ladies and gentlemen this does conclude your conference call for today. We would like to thank you all for participating and ask you to please disconnect your lines.