Digital Ally, Inc.

Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc. 2022 Third 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. We may use words and other expressions that are predictions of or indicate future events and trends and do not relate to historical matters. Rather, they represent 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, unknown and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements expressed in this conference call, and be sure to caution not to place undue reliance on such forward-looking statements. We generally do not publicly update or revise any forward-looking statements expressed in this conference call, whether as a result of new information, future events, or otherwise. There can be no assurance that 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 Stan Ross. Please go ahead.

Thank you very much. Thanks, everybody, for joining us today. I appreciate your time. With me today is Tom Heckman, the company's CFO, and also Brody Green, our Chief Accounting Officer. What we'll do today, just to give you a little insight, Tom will go over the operations, and Brody as well will be contributing with his input, and then I'll be sharing some new events that have occurred and some things that we're looking forward to finishing up 2022 and also some insight on how 2023 looks. So with that being said, Tom, turn it over to you.

Thank you, Stan. And good morning, everybody. Welcome to our call. We did file our 10-Q on Monday, so hopefully everyone's had a chance to at least look at it and see the details behind the numbers for our third quarter ended September 30th, 2022. First, I'd like to start out with talking about several corporate events or matters, which you may or may not have seen Form 8Ks and other filings on. before we get into the actual operating segments, the results of the operations. The first one I'd like to talk about is the Form 8K that we filed back in July regarding the NASDAQ delisting notice that we received for the minimum bid price being under $1. That delisting notice gives us until January 3rd of 2023 to rectify that situation. We are, however, we believe we're eligible for an additional 180-day grace period in which to meet the minimum requirements, which would actually put us out to July of 2023. Now, that's not a given, but we believe we are eligible for that additional 180 days. Obviously, the whole delisting notice matter is of great importance to management and, obviously, the shareholders. So we have been dealing with this issue and are talking about several alternatives, which leads me to the following matter. We filed a Form 8K in October 22, so it's after the September 30 quarter ended. wherein we issued $15 million worth of Series A and B preferred stock, redeemable preferred stock. The Series A preferred stock votes on specific matters only on an as-converted basis, and the Series B votes on a mirror basis only. And a mere basis, meaning the exact percentages of the other votes, including the preferred Series A, as well as the common stock. And it votes on a 2,500-share-to-one basis. And there's 100,000 shares of Series B issued. So obviously a big matter and probably of importance to you all. And hopefully you've had a chance to read that 8K. The proceeds, the $50 million proceeds of that issuance is an escrow pending redemption. And there is a 5% premium on the redemption. There was a 5% discount on the issuance. The redemption period starts on the date of the shareholder meeting, the annual shareholder meeting, and ends 90 days thereafter. So that's what you might ask, why did we do this? And there's simply one answer to that. we needed to get our voting quorum and majority at our annual meeting. You probably and hopefully have received a proxy statement from us for our annual meeting dated December 7th, 2022, which is coming up rather quickly. And the reason we did the preferred stock is that if we are providing voting matters that actually amend the company's articles and incorporation Per our bylaws and articles in corporations, it requires over 50% vote of all outstanding shares, not just those shares voted. So, in other words, if we got 53 million shares outstanding, we got to get at least 53, half of that 26, 27 million shares voting yes on that matter, even though, you know, usually not that many people vote on matters. So what we've done is, in the past, we've tried to raise our authorized shares and a couple other matters for the last four or five years that required over a 50% vote of outstanding shares. And we always received a majority of the shares voted, but we never did reach the point where we got more than 50% of all shares outstanding. Hence, that is the reason we did this preferred stock, so we can ensure ourselves that, A, we're going to get a quorum for the meeting, and, B, that we've got enough votes to equal 51% or just over 50% of all shares outstanding, not just those that are voted. There are several reasons that we're going to this lunch to get the quorum and the shares voted. by issuing the preferred stock. First is there's been a rise in the non-interested shareholders that don't vote. You know, it's kind of what I call the Robin Hood type shareholders that just don't have the interest in voting. So they leave it unvoted, their shares unvoted. And also there's been several major brokers, including Charles Schwab and TD Ameritrade, that no longer vote non-voted shares. In the past, they usually voted non-voted. those non-objecting beneficial owners, what we call no-go votes, on their behalf. And in that way, we got to quorum and to 50% vote majority. So without them doing it at this point, you know, it makes it very, very difficult to reach quorum, much less 50% of all shares outstanding. So the preferred stock is out there merely to help us get to the 50% quorum and voting majority in order to get some issues passed. Now let's look at the matters that are going to be voted at at the annual meeting. Again, the meeting is December 7, 2022. It's coming up shortly. I encourage everybody to vote their shares. Please vote your shares because it's important to us, and we need to get a couple of these matters voted in. There's a total of six items on the agenda, two of which require 50% voting majorities of outstanding votes. In other words, these are the two items that are going to be voted on by the preferred shareholders. The first is to approve an amendment to increase capital stock from $110 million to $210 million. You might ask why we've only got 53 or 54 million shares outstanding now. why we need to go to $210 million. But we do have, from time to time, warrants outstanding, sometimes convertibles debt, so on and so forth. So those have to be reserved for in our capital stocks. So very important for us to get up to $210 million in total approved capital stocks. So that's item number one that's going to be voted on by the preferred shareholders as well as the common shareholders. The second one is to pre-approve the Board of Directors' decision and discretion on whether reverse split is needed to meet the NASDAQ delisting requirement. In other words, in order to get up to the $1 minimum bid, the board may have to at last resort do some type of reverse split in order to get there and we're asking for pre-approval of their voting for this. That doesn't mean it's going to happen. It will only happen if it's needed and necessary. But we need that matter voted and approved upon at the annual meeting. So those are the two items that are very important to us, the board, and hopefully to all shareholders. And you guys, everyone understands the reasons we're doing this. It's in order to get matters passed at the annual meeting. Again, and I can't stress this enough, I encourage all shareholders to vote their shares. I know sometimes it's a pain to do it. Sometimes you'll lose the proxy control number or whatever. But please call us and get the voting instructions or even come to the annual meeting itself if you have to. But we want everyone to vote in order to get these matters passed. The other item that happened during a quarter, a corporate item that happened during a quarter that I'll mention is we extinguished pretty much all our warrant derivative liabilities in Q3. It resulted in a $3.6 million gain on the books. And if you remember, the previous investor calls I've always expressed that You know, there's a $3 million gain or there's a $6 million loss, non-cash. It's funny money. It's accounting gymnastics because of the way you have to treat warrant derivative liabilities. So we got rid of all those warrant derivative liabilities in Q3, recorded a $3.6 million gain, and hopefully we don't have to run into that issue again. But number one, it's hard to explain, and number two, it's hard to understand for a lot of people, a lot of investors. So, okay, let's move on to the operating segments and how they did for the third quarter. First of all, the video solution segment, revenues increased 65,000 in Q3 2022 over 21, or about 3% increase. Not a huge increase, but it's important because it shows our subscriptions revenues are increasing. And quite frankly, the traction that our new FirstView models are receiving in the marketplace, we're getting a lot of new subscriptions versus hardware sales. And I call that mailbox money. It's very steady. It comes in. It's predictable. And you don't have the ups and down movements. of hardware sales, whether it closes the before quarter ends versus the day after, so on and so forth. So we're happy with the improvement and the migration to the subscription agreement. Also, I will say that deferred revenue, which is basically these subscription agreements, increased to $7.2 million at the end of September, September 30th, 2022. Again, $7.2 million of deferred revenue, which means that we'll recognize that as it rolls off in what I call mailbox money, the subscriptions. If you look at 1231... December 31st, 2021, we only had 4.3 million of deferred contract revenues. So we've increased that in a matter of nine months by 2.9 million or 67%. So we're very pleased with the growth in the subscription model and how it's affecting our video segment. The margins for the quarter were down slightly to 24.6% versus 29.1% the year prior. And really, I think it really reflects the fact that we are moving to this subscription model versus a one-time hardware sale. Normally, a one-time hardware sale up front yields very good margins. But that's it. There are no continuing impacts. So I think this is indicative of us moving to a subscription model, and we're very pleased with it. Okay, let's move on to the revenue cycle management segment. That is our medical billing segment, which we have started a roll-up strategy. I think we started that last year, second and second or third quarter. Our revenues were down slightly in Q3, $2,015,022 versus $2,050,021, which is a very slight decrease. However, if you look at the margins generated by those sales, it increased dramatically in 2022 versus 2021. We reached $866,000 of positive gross margins. or 43% gross margin percentage versus 197,000 or 9.6% gross margin percentage in 2021. And really, this reflects the synergy. We're getting the synergies that are the heart of a roll-up strategy and the consolidations of the acquisitions we made previously. We did not make any acquisitions in Q3, so we had time to concentrate on assimilating. and consolidating and achieving those synergies, and I think the gross margins are testament to that effect. It is working. Our roll-up strategy is working, and it's growing into a very steady, profitable business for us, and we look forward to further growth down the road. Okay, now let's go to the ticketing segment, which is our Ticket Smarter business. Revenue increased to $4.4 million in 2022 versus $560,000 in 2021. Obviously, a huge increase. But remember, we bought TicketSmarter effective September 1st, 2021. So there was only one month of revenue in the 21 period. But even if you take that time straight, it's a heck of an improvement year over year in revenues. Now let's look at the bad news. The gross margins were disappointing. We had negative gross margins in 2022 of $786,000 versus $612,000 in 2021. The reasons for this margin issue that we're dealing with is we had unanticipated write-off of unsold tickets. And really, you know, there's a hundred reasons for that, but I'll tell you one. We have generally received a lot of ticketing revenue for on-Broadway shows and ballets and such up in New York. And really, the whole COVID thing has changed the buying patterns of many people and predominantly the older generation. And I'm one of those, obviously, but... But anyway, the older generation has really shown a popular interest in those shows and that. And with COVID, they just haven't come back the way we thought they would. So that's just an example, and there's probably four or five other ones similar to that that we can go over. The second area is our strategy that we implemented last year to do in a sponsorship relationship really is not working very well. And I'm talking about things like iHeartRadio contract, the Gannett slash USA Today contract, There's several others. This sponsorship model did not pan out the way we thought, and obviously the click-through revenues did not reach the levels that we expected. We're hearing the same sort of problems being raised. experienced by other tech companies such as Facebook and such that the click-through revenues are not there like they have been in the past. So what we've done is we have decided to end this strategy and this model and therefore started in the third quarter to reduce, non-renew, or terminate existing contracts that are out there. So in other words, we're going to let these things run out. If they haven't run out, terminate early if we can. and non-renew, obviously, in order to get away from this model. We believe this will restore profitability of the ticketing segment within the near future. So we've got a plan to fix the ticketing segment. You know, it's generating revenues, obviously, very good revenues, but we've got to fix the gross margins because we obviously do not want those – margins to go negative on us like that. Okay, let's look a little bit at the balance sheet. At September 30th, we had roughly $6.3 million of cash on the balance sheet, $21 million of positive working capital. We have only $1.2 million in interest-bearing debt obligations. And remember, those are primarily earn-out notes and the roll-up strategy for the the medical billing segment. So it's $1.2 million of interest-bearing debt obligations, and we have $48 million in equity. So balance sheet remains strong. We intend to continue the positive trends in our video and revenue cycle segments and go ahead and make the necessary changes in the ticketing segment to get the profitability that we all would like to see and expect. With that, I will turn it over to Brody. He's probably got some more insight into the operating segments and what happened to us in the third quarter and what to expect in future quarters.