This conference call may contain forward-looking statements with 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 forecast 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. 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. Ladies and gentlemen thank you for standing by and welcome to the 2020 First Quarter Operating Results Conference Call. At this time all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker for today. Mr. Stan Ross, CEO. Thank you. Mr. Ross, you may begin.

Thanks, Tammy. Thanks, everybody for joining us today. I have Tom Heckman with us, our CFO. I know we had our year-end call not too many weeks ago, but we do want to make sure and touch on some of the new events that have occurred. With the launch of our new disinfected sanitizer, also update everybody on some of the litigation matters, but probably more importantly make sure and share with you the financial side of things for the company and how things are continuing to see progression of improvements in that forefront. So, with that, I'll turn over the call to Tom Heckman.

Yes, thank you, Stan, and welcome to everyone. I'm very happy that you're able to spend some time with us this morning. We did file the 10-Q with the SEC this morning. So it is available and I do refer you guys to that website for a full depiction of what happened in the first quarter, as far as the company goes. So with that, you know, obviously the world changed in the first quarter 2020 with the coronavirus, you know, we started seeing effects of that middle part of the quarter and certainly towards the end it had a very large impact on the company and certainly our first quarter earnings. If you look at it, you know, our law enforcement customers, especially new ones generally require onsite training and installation. So, that obviously got cut short towards the end of the quarter. So that had an impact on our revenues. And then you look at our commercial customers, some of our very largest commercial customers like the cruise ships, the taxi cabs, the parking spots in the world, and NASCAR virtually shut down. You know, we're – and they are our largest commercial customers. So, it obviously had an impact on us. One thing that really turned the quarter for us was our inability to ship the first order on our large international body camera order. I will tell you we had it stacked up on pallets ready to go out the door, and then we got the call that the country had shut down incoming and outgoing, people and that, so we obviously couldn't ship that down there and especially because you know our installers would not be able to get in or we couldn't train them and all that. So, that obviously had a very large…

Thanks a lot Tom. And just to continue on the disinfectant line or lines that we may be carrying, we are now currently working with one of the largest manufacturers in the country and working with them directly with some of the products that we would like to see being able to offer to our existing customers and hopefully new customers as well. We have seen quite a bit of a pickup over the last, you know, two weeks even. We now have a major, I guess chain that as approximately 140 stores that are starting to get out there and do a little bit of the marketing of the product. So, those orders have started rolling in on a daily basis, which is very encouraging. And so, just like Tom said, while, you know, we have our guidance out there at the 13.5 million that we would try to exceed, there's just too many headwinds for us to go ahead, and keep that number out there until we know for sure, you know, how quickly things do turn back around and get back to normal we hope. So, we're going to have to pull that from, you know, as a target, but at the same time, you know, I say that and I look at the growth that we're having on the disinfectant and the other products that we're looking to introduce, including the breathalyzer that we have been continuing to work on in additional opportunities. We may be well surprised in regards to how this plays up. So, there's a lot of encouraging things and we have made a lot of the right moves to sit there and preserve cash and to sit there and look for business opportunities in this environment. So, Tammy, I think we'll go ahead and open up the floor for Q&A now.

Thank you. [Operator Instructions] Your first question comes from the likes of Bryan Lubitz with Aegis Capital.

Good morning, guys.

Good morning, Bryan.

Let's dive right into it. So, obviously corona has, you know, caused a monkey wrench in pretty much everyone's plans over the course of the last three months where, you know, even though we deal with first responders, we're not, I guess immune to it. What I want to focus in on is the 5,000 body camera order that you guys announced earlier in the year, obviously, they – you know and I think you guys alluded to this on last quarter as well, we had, you know, the product at the shipping yard, and then, we had to pull it off. Are we getting any feedback from this, I guess, customer in regards to when we can actually ship these out? And it's only delayed, it's not canceled, am I right in that?

Right. Where we're at right now is, you know, we still are talking to them. There's another opportunity within the country that is still wanting to continue to move forward, and you know, maybe a little more aggressive than what the federal police are wanting to, so we still see this starting to pick back up and I would anticipate it – you know maybe some sign of it beginning here in this quarter since things are opening back up. So, we have not had a scenario where they're just up and walking away, if that's what you're curious about Bryan.

Yes. I wanted to make sure that the contract is still, you know, valid, if you will. Can I ask, Stan, in the delay, are you guys loading up so that when we can actually ship out, you know, it wouldn't be a miss in terms of the amount of cameras we sent out?

Yes. I mean, I think – honestly, I think we're just sort of still being cautious because we want to make sure and watch the cash and make sure that this thing continues to move forward. So, you know, we haven't gotten overly aggressive in regards to stocking up the inventory at this point in time, but we also are very much aware that the long-term items that would be needed, those – we're very comfortable that we have those available to us. So, we wouldn't be [indiscernible] where we're waiting 90 days on the long lead item parts.

Okay. Tom, this one's for you. Obviously, it's awesome that we're seeing our margins go from 46% to 52%. I mean, that increase is solid. Do you have an idea – you know, obviously, again, and all this is assuming we're back to normal, but do you have an idea where we can kind of get on top line for margins?

Well, our stated goal has been for some time to get to 60% overall gross margins. I think that's a very attainable target, especially with the service aspect of things and the very nice margins thrown off by that. So, I think 60% is a good goal, but it may be even low – too low given where we're headed with the service piece.

Okay. When you say service, are you lumping in the data storage part of it as well? Or is that separate?

Yes, that's included in there. That's cloud storage, that’s installation, that's maintenance contracts, you know so on and so forth.

Okay. Sticking with you Tom, you know, obviously, we've issued new shares, we have some warrants out there etcetera. You had mentioned earlier in the call that you're looking for us to get, you know to profitability for earnings per share. What do we need for revenue with the shares that are new out there for us to kind of break a profit? Do you have that number in mind?

Well, I do, but we can't really project that, that'd be a forecast. You know, we're not that far away from it in reality, Bryan. We’ve cut a lot of SG&A out and that obviously lowers our breakeven from the revenue side. And then, you couple with the fact that, you know, this disinfectant line, the margins that'll be thrown off by that are quite nice, how big part of that will be. So, you know, I think the cost side is the big driver though. SG&A is going to continue to trend down and hopefully rather sharply because of some of the actions we've taken already.

Okay. And I have two more questions, guys. Sticking with Danolyte since you brought it up, Stan, you had said in the past that you guys are exploring all options in terms of other vendors, other suppliers and potentially even having your own label, if you will, for Digital Ally itself. Do we have any type of an update on how we're doing sales wise with Danolyte that we can kind of share at this time?

Yes. Not right now, for a couple of reasons, Bryan. I want to make sure that we are able to secure a few things in regards to that area that we're focusing on without tipping our hands too much. And – but I would anticipate a full blown update on the next quarter call and can share some numbers with you. And not only…

Okay.

…by then, I would anticipate some of the things that we're exploring will be finalized and we will be able to talk about and/or you'll see in the form of a release.

Well, piggybacking and off of that, Stan, you had mentioned earlier in the call that we’re dealing with a chain and they've started to, obviously, get some orders that are a little bit more steady. You mentioned in the last call grocery store chain, you know, I don't know if this is the grocery store chain or if this is a different chain. But that being said, if you were to secure that contract with those guys before the quarter conference call next quarter, is that something that you would let us know about?

Yes, I think so. And again, the bottom line is they've already started doing a real preliminary looking into the product, and they basically have over 300 – this particular contract, over 300, let’s call it, storefronts. And they did a real quick, you know, circle with everybody, and 140 of them said, hey, we're interested in this product. Let's start getting it in here and see what we can do. And that just started occurring here in the – obviously, in the second quarter. So, if they'll continue to build on what they've already got going on and get the other, you know, let's call it, 160 plus stores come on board, that'll be a very, very nice relationship. And what would make it nicer is, us being able to continue to move towards possibly our own label and even greater margins in regards to the product itself. So – but I'll – it definitely will be a main topic in our second quarter call.

Okay. Tom, the money on the books at the end of the first quarter was – you know it's eye opening, if you will, only $300,000. Am I right, we've got roughly another $3 million on the books since then, the $1.6 million in promissory the $1.4 million for the PPP, so we're closer to $3 million on hand right now?

Yes. I can't give exact numbers, Bryan, but you're right. We raised $1.5 million of cash in the convertible note deal and we raised, between the two different loan programs with the SBA, about $1 million, [$550,000] or roughly in that neighborhood. So yes, we added a pilot cash to the books and – but I can't tell you exactly where we're at right now.

Okay. And last thing, Stan, is there any update you can give us on the mobile insight data partnership that you guys had announced earlier in the year? Are we getting any traction with that partnership?

Yes. It’s still – it has come along real nicely. And again, with everything being sort of shut down, we haven't had a real opportunity to go out and get in front of a lot of people. But we are absolutely poised to go and start talking to some of these vendors that we've been talking, our potential customers, for over the road opportunities. And with NASCAR getting fired back up, that's a positive. The Indy, you know, Series is getting ready to go. So, you know, we're going to be able to see and have the opportunity to start getting in front of these customers right away.

Super. Alright. Well, Tom, Stan, thank you guys for your time and wish you guys the best of luck in your next quarter and hopefully we see some of these contracts materializing soon.

Absolutely. Thanks, Bryan.

Yes. Bye, bye.

[Operator Instructions] Your next question comes from the line of Mike [indiscernible] share holder.

Stan, Tom, a couple of quick questions. So, the entity has been public now for 11 years, is that correct?

Well, we've been public since 2005. We've been on the NASDAQ since 2008. So, we were public before that, but we went on the NASDAQ January 2008.

Have we ever turned a profit?

Oh! Yes. We – our first 12 quarters were all profitable sequentially.

Okay, so the first 12 and then since then no profitability?

No, we've had sporadic quarter here, quarter there type earnings.

So, I'm just trying to understand we're not executing and what we're doing to identify that and what immediate changes are being implemented besides cutting costs and diversifying the business into PPE and some of the niche markets you mentioned?

Yes. Mike, it was a couple of things. You know, obviously, you know, you're very much aware of the history we've had in regards to the body camera and some of the litigation side of things, and also, the launching of our new EVO product. The EVO product, we probably should have had out a good year, year and a half before its current launch, so that should help us out quite a bit in just the markets we're looking at right now. Now, the service side of things continues to grow, and as we've had pretty good growth there, year-over-year, and the service model is a lot more, you know, profitable to us than just the straight sale to law enforcement. So, we have been making that transition along with the hopeful introduction to new products that would be to our existing clientele, you know, the customers that we have, such as the breathalyzer, you know, obviously, the disinfectant and some of those low-hanging fruit opportunities. The situational security side of things evaporated with, you know, everything being shut down, but we do anticipate that starting to pick back up and that was a very nice entity for us as well.

And what's our burn rate right now per quarter?

Well, we're roughly a [million, million two short] if you look at the cash flow statement, but I would tell you that, you know, our trend line is much improved and a lot of that is because the cost containment, the headcount reductions, and – you know we're looking at our occupancy costs dropping to a third of what it is now. So, I expect improvement throughout the balance of 2020 in our cash burn.

So, call it, 2.5 to 3 months of cash available, how are we going to bridge that gap?

I'm not following you there, but, you know, our quarterly burn is about a 1 million.

Oh! Your quarterly, I thought you said monthly.

Oh! No, no, no, no. And that – it's spreading [indiscernible].

So that’s 2.5 to 3 quarters, how do you plan on bridging that gap?

Well, we're adding a disinfecting line; we're migrating customers over the service model; we're cutting costs. I mean, we've got a plan and we're executing right now.

But I mean, in all fairness, I'm sure everybody on this call has received countless PPE opportunities from domestic and abroad providers, so the competition is going to be fierce, which already is – [I probably] received personally a half dozen or more a day. So that's kind of difficult to see a company more from law enforcement products into PPE and then into some of the niche markets that you mentioned that have a finite growth capability, so I'm just concerned that you're going to run out of cash.

Yes. I mean, one thing though, Mike, you got to realize when we've got – you know as far as law enforcement, we've probably sold over half of the agencies out there, you know, of the 18,000, about 9,000 we've sold to, and we still have active, you know, 5,000, 6,000 that are out there that we sell to. And so, while you’d probably heard the – you know this comment before too, I mean; we truly have that last mile that touches the end user. So, we have a very good relationship with our, you know, customer base. And so, these products that we're talking about, there's already a tremendous amount of confidence and trust in Digital Ally to where, you know, we're seeing them being very receptive into giving us a shot and trying – you know trying our product. And so, hopefully it will turn into increasing the top line which, again, will go and help the bottom line and the burn rate, which you're referring to.

So, it seems to me you'd probably run multiple things in tandem, obviously, trying to run the business profitably, but also consider M&A. Are you considering M&A? And if so, where are you?

So, that's actually a great question, Mike. The industry, just like back in 2009, 2010, you know, 2011 when things were pretty tough as far as the economy, there was a lot of consolidation and/or companies that just went by the wayside. I do anticipate there being opportunities out there and there may be some consolidation whether or not we're on – what end we're on, who knows? But I do see the consolidation and do see that there's going to be some opportunities, especially if they're not – they do not have access to capital. There's some out there that are just really going to have challenging times. So that's a great question, Mike, and our eyes are wide open to – for opportunities along those lines.

And do you see the value of the enterprise greater than what the market value is currently at, call it $13.5 million?

You know, it's so frustrating when you sit there and you see other entities out there that are trading at, you know really big multiples of whether it be revenue or whether it be, you know, earnings, whatever. So, I – you know right now, we're keeping our head down and going to try to make sure and do what we can do to get to profitability, and, you know, the stock should take care of itself, but we definitely will make sure that the news about the successes and the progress we make will get out to the shareholders in the street.

Thank you.

Thank you, Mike.

Your next question comes on the line of [Patrick Gatard], Private Investor.

Good morning. I was wondering, were you guys possibly looking into offering you’re disinfected to the airlines besides the cruise lines also?

Yes, absolutely. You know, we're talking to them all and, you know, one of the things that – you know, we’re pretty well – we have a pretty good relationship with the airline industry because of NASCAR and Indy. They both have airlines that they work with real closely. So, we're looking at not only the product because we feel like the product clearly will meet their needs, but even also some of the equipment for such as electrostatic sprayers and other dispensary type of stuff that will be needed for that fluid, but absolutely, airlines is definitely on our radar, no pun intended.

And what about the other smaller businesses like the restaurants, and you know, the hair salons and other businesses like that, are you trying to set something up where they can order directly from you? Or how are you planning on getting into that section of the business too?

Yes, we are. And what we'll do is we'll definitely – we already have a little bit of an e-commerce platform on our website. They can get online and order directly, but we look to actually have a much more – I want to say stronger, I guess, platform for this particular product and/or products to be talked about, and haven't really focused on disinfectants, sanitizers, you know, cleansers, stuff along those lines. So, it definitely – we don't want it to be a situation where people look at this and see a company that's involved in video solutions [indiscernible] and doing disinfectants. I mean, we absolutely are working with premium top notch manufacturers, scientists, you know, all the above to be able to deliver, you know, the – a strong line of products and we will have the platform in which an individual can go or a store can go or a company can go and buy from. But yes, we're working on that and I would hope to have it all up and flying within the next 10 days.

Oh! Okay, very good. Thank you very much. I appreciate the information.

Good, thank you.

Well, listen, we want to thank everybody for their time again today. You know, again, I know this was sort of a short-term from our year-end call, but we do feel, you know, really good about the direction of where we're going with our product lines, with our expenses, and do believe that we are going to get back to a level of normalcy to where the top line should start improving as well. And therefore, we, we can all hopefully, meet the goal of stock appreciation and earnings from this company. So, thanks everybody so much for your time, be safe, and we'll be talking soon.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.