Q1 2021 Digital Ally Inc Earnings Call

Wow.

Ladies and gentlemen, thank you for standing by and welcome to the digital ally 2021 first quarter operating results call.

At this time all participants are in listen only mode. After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time. Please press star one on your Touchtone phone.

Okay.

Okay.

Sure.

Okay.

Yeah.

Okay.

Yeah.

Okay.

Okay.

Yeah.

Okay.

Okay.

The calendar year.

Okay.

Good morning from foster.

This conference call may contain forward looking statements within the meaning section of 27, a of the Securities Act of 1933 and section 21 E 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 or.

All of or indeed 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 known and unknown uncertainties, a number of which are beyond our control there.

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 of revenues profitability.

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 will now turn the call over to Stan Ross. Please go ahead.

Thank you thanks, everybody for joining us today for our call I've got Tom Heckman, the company's CFO with me as well Tom will do.

The recap of our first quarter numbers also get a little bit more in depth in regards to some of the operations that are currently going on.

From potential acquisitions, and such and also tried to lay out some of the new accounting.

Requirements that are being apposed upon us.

Debt.

You can make it to help you try to I guess better understand our numbers in the the growth prospects that we've got going on so with that being said I'll hand, it over to Tom and then I will join me here on the second alright. Thank you Stan and welcome to everyone. I. Appreciate you joining us. This morning, I will tell you that we have.

Filed our 10-Q last evening.

My remarks here will be brief but I do suggest that if you have questions or want to know more of what happened during the first quarter. Please take a look at the 10-Q that is now on file with the SEC.

[laughter] excuse me overall, the first quarter.

2021 operating results do show some recovery, but we are seeing the.

Still seeing the continuing impact of the COVID-19 pandemic.

If you look at overall revenues, we did have an increase of of about 110000 of 5% year over year.

If you dig down on the detailed product revenues increased by 8% year over year, which reflects the success of our subscription program.

The and the effects of that on revenue, but our service revenues went down 5% year over year, and that's primarily due to the travel restrictions and.

Some of the other.

That's around the COVID-19.

The pandemic that affected our installation revenue and in particular situational security revenues.

For the first quarter.

You look at the cost of sales, we had a large job cost of sales as a percentage of revenues overall went to 68% from 48% of 20% increase which is quite substantial.

You dig down on the detail of our service cost of sales remained steady at 26%.

So that was steady product revenues cost of sales from products. So increased from 56% in the year ago quarter to 82% this year.

And really what Youre seeing there is the inflation.

That I think is now becoming apparent in the industry.

<unk> on <unk>.

Salary costs as well as product cost.

And that's somewhat attributable to COVID-19 pandemic.

Hope, it's transitory in nature, but we really saw an increase on our product hardware shipping costs as well as shortages overall shortages in some of the the component inventory in particular, the chips and micro.

Microprocessors that we use in some of our products again, our hope is that this inflationary trend in cost of goods sold as transitory and not permanent.

We'll keep everybody apprised of that if you look at the SG&A expense overall, an increase of 485000.

And again, we did have a small increase in wages and salaries inflationary increase there.

We did however, see a huge increase in our overall insurance expenses.

And we're blaming the add on COVID-19, as well as some of the in particular of general liability carriers and personnel related coverages.

Increase our premiums is to cover any COVID-19 related expenses so.

That really took a took hold in the first quarter compared to a year ago and was the primary driver in the U S.

Overall the increase in SG&A, we are in fact looking at different ways.

Handling insurance programs, including potentially captive our shores and net but we were on it were going to try and contain.

The price price increases on the insurance and hopefully be able to drive it down somewhat.

The remainder of 2021 overall, our operating income dropped 938000 year over year and again the support of 50000.

Drop in our gross margins regardless of the 10th.

And overall, 5% increase in revenues and a $490000 increase in SG&A expense. So operating income was down year over year.

If you look at non operating income, though it increase the income of $224 6 million versus the loss of 400000 a year ago.

<unk> like Stan mentioned Theres some requirements that the FCC has come out with some clarification on regarding detachable warrants.

Debt were issued with a registered direct offerings with the public offering that debt that.

We did in the first quarter.

The required mark to market accounting, so we fair value the liability under the Black Shoals method and the Mark to market goes through the P&L. Thus you saw 24 to <unk> 24, and a half million dollars.

Income from the change in the fair value of those warrant derivative liabilities I will caution you, though that that is a highly volatile items that will be in our P&L until the the warrants either get amended to fix the the some of the.

Drivers of its causing this accounting or they get exercised in total so we will see some volatility it could very easily be the other way the next quarter and in a perverse way as.

As operations improve hopefully our stock prices improve and as our stock price has improved so will the increase in the fair value of those warrants because its equity linked.

No.

I just caution everybody that will be of volatile item in our P&L from.

For the foreseeable future overall, our net income was $21 7 million for the quarter of 449.

Our best showing in a long long time versus a loss of $2 3 million or 17th of share a year ago quarter and again that was driven primarily by the mark to market accounting for the derivatives that we were required to do in the first quarter.

If you look at our balance sheet, our balance sheet has improved dramatically from.

From year end of $12 31 2020.

And that's primarily because we raised 66 and a half million dollars in two public offerings that were off the shelf registered direct with the <unk>.

With investors.

So we raised $66 5 million of.

Cash.

If you look on our cash balance, we got $67 6 million of <unk>.

Cash at the end of the quarter versus $4 3 million a year ago, we of positive working capital of $51 $5 million versus $14 million, a year ago, and our equity improved to $51 8 million versus $14 for me in a year ago. So you can see the dramatic improvement.

In our balance sheet.

Primarily due to the the.

Two public offerings that we did during the first quarter.

With the balance sheet of improvement it does allow us a lot of flexibility.

In terms of looking at and where we positioned the company down the road.

In that respect we did just recently after the quarter close.

We closed on the new office build office and warehouse building here in the Kansas City area for about.

Roughly a little over $5 million, we're cautiously looking at enhancing our current product lines doing some organic investments if you will to improve.

Our product lines and hopefully revenues there from and we're also looking at several potential acquisitions.

We have nothing definitive we have no commitments no term sheets nothing of that nature, nothing thats binding at all but we are looking for potential acquisitions, both within our industry and maybe adjacent industries.

Help us provide more value to two of our investors.

And of course, we will keep you.

Informed as we go down.

The path on any of these potential acquisitions or enhancements of the line and we'll keep everybody fully informed of that.

With that Stan I'll send it back to you. Thanks, a lot of Tom Yes, I think thats one of the the key points there at the last that Tom was talking about is some of the.

<unk> growth that we're looking at in regards to the expansion of our current product line and whether that be with our electrostatic sprayer design that we came out with an array of patents filed on the uniqueness of it.

Also.

Some of the.

Let's see.

Adjacent potential acquisitions debt.

It could come into play if not.

We think that may be something that we still can do organically for us the growth sometimes good.

Good acquisition has helped you out a little quicker to get.

Were you wanting to eventually end up.

The new facility will help us out quite a bit is a lot of room for growth. There and then we also of.

<unk> been able to really take off.

The study into the insurance side of things that we believe also could.

Assist us in the bottom line instead of the seven such a deficit to sit there and start with each year just for of.

Of the high cost of of insurance and it's industry wide.

We're not being picked on here for us.

On the digital ally of the industry itself is seeing it mainly because of I think of lot of concern with the pandemic and COVID-19 and the companies that have had to shut the doors because of.

On the capital position they were in so we're pretty blessed to be where we're at we're very excited to continue to see how well the the evo.

<unk> system in car system has been received in the marketplace.

We have our next version of our body camera that is we are starting to market that.

That is getting very very.

Good.

Reviews of being received really well so we feel that the law enforcement side of things will continue to grow we'll be able to continue to.

Possibly get quite a bit more market share because of the uniqueness of our of our items on the patents surrounding them.

So then we go to the shield products line and of that two continues to have quite of bit of.

Potential EBIT as we start to see the the concerns around the COVID-19 lightened up the fact that we do have a very strong disinfecting cleanser.

You've been wound care type of product that does not.

Contain chemicals and alcohol.

It's a much safer.

Call it the food friendly kid friendly pet friendly.

The disinfectant.

People are starting to learn that know and understand the importance of of <unk>.

We will stay in sort of the green type of.

The environment, so very very pleased with the product lines that we have right now that the improvements we made to the product lines and the excited to.

The continued to be looking for opportunities on the on the acquisition front that would end.

The enhance our current portfolio of products so.

At this time I think I'll go ahead, and we'll open up the floor for Q&A.

At this time, if you would like to ask an audio question. Please press star one on your Touchtone phone.

Once again that is star one to ask on audio question.

Your first question comes from the line of the male Dan <unk> with <unk> capital.

Thanks, Good morning, everyone.

Well on.

On the inflationary pressures that you guys talked about on the gross margin side.

Obviously youre.

You're not alone in terms of facing the inbound freight costs.

As the prices for components and chips and that sort of thing, but to what degree the sink.

You and the rest of the industry you might be able to pass some of those price.

The price increases to offset those rising.

The cost pressures and was it the situation where in the first quarter of these.

These margin pressures just kind of hit you all of a sudden you werent able to sort of pass along or I Wonder if you could just give us a little more color on that please.

Yeah the.

Inflationary pressures were kind of building throughout 2020 late late in 2020 and really came to ahead in the in the first quarter share.

As the economy started opening back up the competition to get on ships from the Orient and the Pacific rim.

Really really caused havoc with the shipping lanes and the shipping costs in that.

And we are transitioning to newer products being the evo system as well as we've repackaged start DBM to 50, and we now have a new version of our body cameras, so well with the updates in those those systems were not using older components. These are newer components.

On high demand from a number of different vendors and a number of different industries for for that matter. So we're not.

Competing with other other vendors in our in our industry, but but the.

The other people in other industries so.

In any event in terms of passing it along we're always looking to do that.

But we are in a very competitive.

The industry here and were going up on on many times.

Of the bid bid situations that were were hemmed in and some are longer term commitments and pose in that that we can't break. So yes, we're trying to pass those increases on but.

With.

A little to no no effect at this point, but we're always going to be try on.

Okay fair enough and really just the follow up question I know in the past you've talked about of a pretty significant opportunity that you had for the.

For an overseas based.

The law enforcement agency I Wonder if there was any sort of update on that or is that kind of still on hold for now. Thanks.

Yes that was the one that was sitting on our dock ready to go out with.

The COVID-19 hit last year right at the end of the first quarter of 2020.

We continue to work with that police department or actually it's the National Police agency.

It's not of debt deal. It has obviously been delayed and they've got some other other priorities right now that they are dealing with so I do believe that it's a situation where it's the delay not a cancel.

But we'll see as we as we go down and I can't really predict when that might hit.

This is this is of foreign country that is dealing with with COVID-19 on its own it's not the same situation as we're seeing here in the United States. So I just can't can't predict when that might hit if it does hit.

Okay fair enough. Thanks, so much.

Thank you.

Your next question comes from the line of Charles Macchiato with G. T M capital.

Good morning, gentlemen, thank you for taking my call.

Just have two simple questions. The first one is about Europe on a legacy product you police product I know you guys in the industry actually your main competitors of switching over to the subscription model are you finding more customers wanting to do that or you're just finding more of that wanted to just buy it outright or is it mainly just the cost efficient for them to do that what's the app.

Actual color on that.

Yes, I think we're seeing quite a bit more going to the subscription model.

Obviously 2020 was pretty tough on them in regards to the tax roll in.

The budget cuts and the happen to look at how they're going to be able to stretch. The dollar. So we have been again very fortunate to have the capital position to where we can.

Come in with the subscription model.

And provide them the needs of outfitting their whole department instead of them happened the piecemeal it and therefore is making the complete acquisition at once now I'll say this that every once in a while we we've started down the path of the subscription model and all of the sudden they may have received some grant money or.

Some capitals came into into the coffers.

They have went ahead and stepped up and went ahead and paid in full but yes.

Yes, we're seeing a lot of very.

The encouraging and long term growth on the subscription model.

I would say and Tom you probably know this but I mean almost.

You know of 15% to 20% quarter over quarter growth on that subscription side of things. So it's been very very well received.

So thats, telling you it's going to be long term revenue snuck in the revenue upfront, which isn't going to show right on the first on the quarter, which saw that's just going to be spread out all the time is that correct.

That is correct.

And the next question I have is obviously the I know you guys have your thermal line.

The system out there on everything and I know the you were involved with the cruise lines and a lot of the sporting events.

The summer starting the opening up now have you seen any leeway any interest in coming back to you guys for that is that stuff.

Yes, absolutely matter of fact, we have had in regards to of our situational security on what I talked about situational security on basically talking about where you where you have the outside venues or any type of venue that is starting to conduct whether it be of concert or sporting event and they need to outfit. The 100 individuals with body cameras for that particular.

And we're starting to get quite a few of inbound calls concerning that and surrounding those opportunities. So that has definitely picked up without a doubt.

And as far as your cash situation do you feel that it's it's.

Sufficient enough to take you where you want to go at this moment right now I know you like the.

Basic on your balance sheet, you had $67 million.

Do you find that sufficient to going forward.

Yes, we do.

Okay, great great. So what can you tell some investors out there actually what to look forward to as far as going forward. What are the next products of coming out I know you guys are looking at other alternatives.

Buying something merits of what something do you guys have all options open on that stay on that position, yes, I think it's best to sit there and say we do have all options open I mean, we're not trying to.

All of a sudden get into the heating and air conditioning market or something along those lines, but I think we're seriously looking at.

All of our opportunities that have some type of ability to utilize the infrastructure, meaning the.

On the network that we already have and again that network is quite broad if you look at not only law enforcement, but you know we're in the fleet the tremendous amount of fleets throughout the country. We're in the whether it be taxi cabs ambulances buses.

We have because of the thermal view that has really opened up quite a few avenues within several large corporations and government buildings.

Uh huh.

Hospitals have been.

A lot of them on our local children's Mercy Hospital utilizes the thermal view here. So what we're trying to do is recognize the the infrastructure in regards to our network. What we have and then look at opportunities that could be plugged in and immediately be funneled throughout that network.

And.

Be able to be.

The positive to have a positive impact day, one once we make that acquisition of <unk> new product launch.

Great sounds great. So the final question would be obviously as I got I know you just got picked up in the warehouse.

What is the purpose of that is that going to actually help you with your manufacturing.

The distribution and the last question I have is have you guys ever consider the share buyback program with the kind of cash on the books right now and those of the final questions and thank you very much of doing a great job for everything.

I appreciate it very much but I'll address the building I mean, right now were on top of each other I don't know that we have of single cubicle.

Available within the two buildings that we have so this will allow us to get it into one building and it gives us a little more area of definitely a lot more area for expansion and some of the other products that we do have in mind.

Whether it be for the shield branch of the company or even law enforcement. The additional space will come in very handy. So it's we're not we're not doing this just in anticipation of of.

Maybe a potential acquisition that would fold into it we're really looking at it also is the need for our existing product lines and expanding on those product lines for this particular facility, including bringing in some more very talented engineers in the personnel.

But we just don't have the room for right now on an.

I know that so many people work, so well from home and on site locations.

Unfortunately, one of those guys that I like to.

B and a in the boardroom around very talented people and have a real.

Think tank type of scenario and the whiteboard in and the.

Be able to be innovative in that way. So on one of those who prefer to have one.

In the building.

Where I can where it's needed in regards to the buyback on the.

Well in terms of where we're putting our cash and equivalents were looking at anything with original maturities of less than 90 days, we want to keep it in cash and cash equivalents.

Within the bounds of safety and we have place that with several banks to.

To try and limit the individual exposure at those banks, but again.

With the the interest rate climate, we have back there are out there right now it's hard to get a lot of yield but.

But if you look at the first quarter. We did we did make 40 almost 42000 in interest earnings.

And that was primarily from the idle funds from the two offerings and again at one offering was in the middle of January and the second one was at the beginning of February so they weren't out there the whole quarter. So I would expect that interest income will improve as the quarters go by.

But we're we're bounded by the rules of safety and we're not going of good out there and get into the anything real exotic in terms of.

Net short term.

Investments.

Yields from some earnings so that's that's where we're at on the cash.

Well. Thank you very much it looks like you've got everything in place now all of the guys who was actually just get motivate and get everything moving fast and again I know the COVID-19 said at the went back in the especially you guys by the time it sounds like the new warehouse will be of peak out of love everything consolidate and they're getting on one place hopefully you can move forward and not get some good revenue gets out there. Thank you very much keep up the great work guys.

Thank you very much.

Your next question comes from the line of Bryan Lubitz with the Ges capital.

Good morning, guys. Good morning, Brian for you Brian.

The nice quarter.

Yes.

I'm not sure if it coincides with the the last quarter or if it came right. After the last quarter of finished but one of the things I noticed that you guys recently announced was the lidar product.

And that's something that you guys have had a patent on for it feels like the least of Europe not too but.

But we've never seen any type of color in terms of sales is that of new release of new revenue stream for the company.

No. The Lidar is been out there for some time and again.

It's one of those products that.

And as you know very well Brian.

Agencies.

Priorities have strongly ship.

The shifted towards the body cameras and in car video systems, So where we are.

Used to.

One of the let's say.

And really be able to get out there and market. The lidar in the one the I think you were talking about in regards to our patented the scanning lidar.

Had the sort of put those on the backburner due to the fact that the just the demand I mean, I'm, telling you right now and as you know and it's getting mandated out there that the agencies have to get their officers outfitted with in car and body cameras.

Or they're not going to let them out on the street, so that that focus on that.

The level of interest by the agency is trying to figure out how the come up with the capital has been their primary focus not so much on speed detection.

So that being said.

The demand has got to be there and obviously, we're still waiting for the federal money to get turned on if you will I'll hopefully the Senate passed is that this quarter.

Have you guys have the internal discussions of I know you have a no down payment leasing type of option of financing option for these guys I'm just giving the camera away just to get that long term residue in terms of the sticky business have you guys thought about that.

Well our subscription model is a very fair model I mean again, what we will do is let's say a.

Let's say department has a little bit of.

I'd say of budget restraints and debt. They know that 2021 is going to be a little tight.

For them to recover 2022 of the anticipate being better 2023 things should be back to normal.

In there.

For being able to absorb the cause.

Associated with.

Our subscription model. So when we talk about the subscription model, we don't have to have okay.

<unk>.

Five even payments over five years I mean, we can sit there and say, okay. We're going to be light on the front end to try to help you and then we'll make up for it on the backend.

So not only as of our subscription model been very well received with just being the straight type of financing package, but the fact that we have the flexibility to.

Meet their abilities in regards to their capital needs really comes into play.

The departments are grateful to the.

We have such a quality product and have such a.

Financing structure that they can live up to so I don't want to say it's like.

When you go buy a new truck the first six months free or something like that but.

We can tell a package for them to meet their needs.

So you have flexibility.

You are of great package by the way that the package for the subscription model. That's view volt, that's partnering with Amazon If I'm right correct.

Correct, we utilize the Amazon the AWS for us the cloud storage and.

The management, yes, okay. So now you've got cash of the bank, where you guys are flush compared to where you've been in the last let's say five or six years probably longer.

<unk> got a new warehouse is going to help you for expansion.

With that cash in the bank of you guys looking at doing a new marketing program I know that you guys have been doing these webinars and things like that but you have such good product and you have so many of them the.

Sales just not translating to what you guys should be doing and we know you have COVID-19, but what are you doing to get out there and get digital name more in the forefront if you will right.

And so I'm glad to say that Brian. So, yes, we're definitely going to be getting out there more on the forefront in regards to.

The name for his R. R.

Let's say for on behalf of the shareholders.

And the.

To make sure to draw from attention to our company. The thing that I think youre going to see Brian Thats going to really open up the eyes of the lot of people is when we start making some very strong.

Inroads into the commercial fleet market with very recognizable national names that are outfit in let's say 1000 vehicles and possibly even two.

And 3000 individuals with body cameras.

To help them manage their fleet and the personnel.

That will take us to a whole new level in regards to.

As shown that we're not only of player just in law enforcement in the first responders, but the impact we can have on the commercial market.

That would get you a national name National brand.

Of the exposure of that that we're working on very hard in.

We've got some very talented engineers that are helping the.

Design.

Different products and mainly the software that meets the needs of some.

Very large companies.

Okay that sounds exciting and those of the.

The Big fleet trucks, like Penske and guys of that caliber is what you're talking about exactly exactly Brian alright.

Alright last thing that I have for you guys and again congratulations on the quarter.

Very happy to see that you guys are flushed with cash and that's great for us for moving forward.

I have a lot of clients, the calling me up and they're asking specifically about the proxy information they've just received for your shareholders for the.

The annual voting and things of that as such.

We've talked about it before you guys got 67 million in cash in the hand, you've got a market cap.

The north of that I mean slightly north of that.

Can you talk about what you're trying to do with the poison pill and how it will protect shareholders.

Yes.

The I think you're specifically talking to the blank check preferred that we've put on the balance for.

Approval by the shareholders. Unfortunately at the non routine items and you not only have to get a majority of those that voted you have to get a majority of all of the shareholders outstanding regardless of the voted or not so it's a very difficult.

The task to get done and we have not hired solicitors to go out and try to gather votes and convince people, but in reality that the blank check preferred would be a poison pill type situation. If there is.

On.

A hostile tender or of tender at all of that the board has not approved.

Obviously that would give us the the the.

On the flexibility to issue shares to the.

On the gate that debt tender offer so.

We're trying to put in defenses. It's unfortunate we haven't been able to in the past we've had debt on our our proxy gosh, probably three or four years on row, and we've always had a plurality of the majority of those of voted voted yes for it we just never had the.

The more than 50% of all share or shares outstanding.

So it's been a it's been a tough fight I don't hopefully we can get it done this year I just don't know it's early in the in the tabulation process.

My hope is that it will be in fact passed this year.

Brian you actually it's at the I'm, sorry, and it's essentially the tire.

Some of them from acquiring you guys on the open market is that what you're looking to do.

Well I mean look we want what's best for the shareholders.

To maximize our value, but I mean.

The he'd say it but even the we're almost in a position where with as much cash as we have in.

As you mentioned, where our market cap is that some of them there are some clever.

Entities out there that you can almost use our own cash the to leverage us and bias out and so we just think we really are starting to see some some.

Coming out of out of out of the whole pandemic and COVID-19, our customers' longtime customers that we've had that had been shut down or are.

Coming back to the the workforce in and.

Or being able to get bring us more opportunities let alone we didn't sit on our hands and we've designed some really unique products for for new markets that we're going to be able to get into them. So that we ensure like.

To the continued to.

Build on that and improve the.

Value organically and not have someone else come in the step in and and reap the benefits. When we've had such a great group of shareholders that are sort of bias for so long that we wanted to we wanted to pull this together for them.

Well I wish you guys best of luck to get the votes in anything I could do to help you guys know I'm here. Congrats again on the quarter will speak soon guys.

Sounds good Brian. Thank you and thanks, everybody for joining US today, we're going to go ahead and wrap up this call.

Really appreciate it we're really excited.

Glad to see that hopefully things are coming back to it a little bit more of a norm.

We're looking forward to the the.

The finish of.

2021, and also I think that the.

We're going to be able to introduce and bring some good things.

Yet this year to two digital ally in the into our shareholders. So thank you all so much and everyone. Please be safe and talk to you soon.

This concludes today's conference call you may now disconnect.

Okay.

Okay.

[music].

Okay.

Yes.

And of course.

[music].

Yes.

Yes.

Yes.

[music].

Yes.

For us.

On the.

The team.

Okay.

Hi.

Okay.

Of course.

Okay.

[music].