Ladies and gentlemen, thank you for standing by and welcome to the 2021 Second Quarter Operating Results Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 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 that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of events can be affected by inaccurate assumptions and are subject to various business 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 reason of new information or 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 assumption assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. At this time, I would like to turn the call over to Stan Ross, Chief Executive Officer.

Thank you, and thanks, everybody, for joining us today. What we hope to do today is give you a good clear understanding of our -- and a recap of the second quarter numbers. Also give you some insight to all the different divisions within the Digital Ally family, including our most recent acquisition of our medical billing company and also give you some insight on some of the other opportunities that we are seeing that we hope to be able to complete yet this year. So with me today is also Tom Heckman, our CFO, and I'll have Tom go over the numbers.

Thank you, Stan, and welcome, everyone. I appreciate you joining us today. We have not yet filed our 10-Q, but I expect to be filing that shortly. So my comments here will be at a high level, and I do recommend that you do review the 10-Q for a more in-depth look at what went on during the second quarter. Again, that will be filed shortly. Based on the second quarter close, our second quarter was very good. It was impacted both positively and negatively by COVID-19 and we'll get into that a little bit later. But at a high level, let me give you some numbers and some percentages. Revenues bounced back. Total revenues were up 44% year-over-year and up 21% year-to-date. Gross margins, more importantly, gross margins improved to 51% from prior year's 23%, so a very nice pickup in gross margins. On the downside, our SG&A expenses increased to 53% year-over-year and 32% year-to-date, but we'll go through that in a little more detail. And I think it will make sense when we tell you some of the details behind the increase in SG&A and that -- what to expect on a go-forward basis. Looking closer to revenues. Our product revenues in the second quarter increased 63% year-over-year. And the most important thing to pull out of that is, our EVO-HD, our new modular in-car law system has really gained traction. It represented 25% of all revenues, not just product, but all revenues in the second quarter of 2021 versus 9% last year. So obviously, we're gaining traction. Customers are excited and attracted to the features that it represents, and we believe that it will be the flagship model going forward and somewhat taken over the DVM-800. The DVM-800 was -- remained steady at about 18% of…

All right. Thanks a lot, Tom, and a very good job and thorough going over the numbers. I think that very well explained where we're at and how we got here. And right now, I want to elaborate on where we're going. Tom did, since we stay on the medical side of things, I have talked to the principles that are of our medical billing side of things. They do have a letter of intent and an acquisition that they're trying to get closed here in the third quarter. And you will see some contributions from their efforts in our third quarter numbers. More importantly, I think they've identified several more that they are very close to and are in negotiations with and doing some due diligence on. So I would anticipate, hopefully, they'll get this one completed here in the third quarter. And I would not be surprised if they were able to get maybe another two more by the end of the year. I think the anticipation and the goal is for them to get somewhere north of $7 million in a run rate by the end of the year that would be associated to the Company. So pretty excited about the efforts, love the template, love the numbers, love the way that we can take advantage of their expertise and enhance the EBITDA that will be reflected in their numbers. Also, Tom mentioned that we have identified, and I'm hopeful to be able to announce another acquisition, nonmedical related, by the end of the quarter. All of these that we're looking at should be very accretive to the Company. None of them are biting off so much of our cash that we would need to be putting ourselves in a weak spot by any means. And we look for these to be generating and kicking off cash quickly. We're not looking at catching falling knives. We're not looking at turnarounds. We're looking at opportunities that we can utilize a couple of things, one being our Rolodex, whether that be law enforcement or other areas in the commercial areas that we're very strong in. utilize our capital and utilize our support that we can bring into these companies so that we can help expand their growth more than worrying about trying to find someone that we're going to turn around. So, very excited about Digital Ally, Digital Ally's future, Digital Ally's subsidiaries that we're looking at; and I do believe that with the COVID and the schools opening back up, and we're seeing the new strand of COVID that's out there that the ThermoVu and the other Shield products will continue to see some good growth between now and the end of the year as well. So, I'd like to go ahead and open up the floor for Q&A at this point.

[Operator Instructions] Your first question comes from the line of Rommel Dionisio with Aegis.

Your comments on FirstVU, looking forward to seeing the impact of that product, historically, the new products you've launched in that segment have been higher margin. Is that also true for FirstVU as that starts to roll out to the commercial and eventually the law enforcement channels?

Yes. Yes. The body camera is a high-margin product for us. But remember, the body camera is generally done on a subscription basis. So it's not really counted as a hardware sale upfront generally. There are some. It's usually done on a month-to-month lease kind of basis. So it generally ends up into our service income at the end of the day, but it is one of our highest margin products upon sale.

Okay. And just a second question, if I could. I think, Tom, in your comments, you talked about the potential opportunity for Shield and ThermoVu as the schools start to open. But as we see, I think, ThermoVu, maybe in the prior conference call, Stan, you discussed that product had some opportunities in theaters or stadiums or something, and then, of course, the return to the workplace for many companies. I know the timing of that is somewhat uncertain. But eventually, as people get back in the office. Do you see potential for a ThermoVu in those two particular fields whether it'd be the office or the workplace or theaters that mass gathering type of places?

Yes, absolutely. I mean I can see it at, like you said, large gatherings to try to make sure and not have what do I say, the big breakouts because that concert, let's say, or movie theaters.

Super spreaders.

Yes, super spreaders, that's what I'm looking for. Yes, absolutely. I mean the ThermoVu, we've already seen it, for instance, here in Johnson County Community College, bought 110 of them for their the schools and classrooms. And we've seen it in everywhere from beauty salons to restaurants. So a lot of people, not just offices and professionals are seeing it as a method of keeping their customers safe. You really don't want someone coming in that is carrying a fever and could be contagious. So we're seeing it in all aspects, but you will see the larger numbers coming from these bigger opportunities, much like a stadium to where they would have them at every gate and at every entrance going into those stadiums.

Your next question comes from the line of Bryan Lubitz with Aegis Capital.

So revenue was up 44%. And Tom, you attributed that to the growth of the EVO-HD. Alongside the EVO-HD, are you guys still looking to package that with the reoccurring revenue model with data storage? Is that where you're also factoring in to 25%? Or are you guys counting as a separate business?

No, the cloud revenue is reported down in service revenue. So that's not part of the 25%. That's the hardware sales piece of it. So, if you add the cloud service, it's even higher than that.

Okay. And I didn't see anything for reoccurring revenue, guys. Sorry, this morning, it was having a hard time getting the actual report up. Is that growing year-over-year as well quarter-over-quarter? Are we still having growth in that segment?

Well, there's been some challenges with the commercial cloud usage because of the -- obviously, the Royal Caribbean cruise lines and so on and so forth that they are heavy users on the commercial side. have not ramped up their business yet. So the recurring revenue piece has not grown like we'd like it to, but we do expect it to return to normal growth patterns once the COVID-19 stuff is behind us.

Yes. Brian, if you just sit there and carve out, let's say, the law enforcement side of things, those recurring revenues have continued to grow.

Commercial is not there yet because of COVID.

Correct. Correct.

Okay. Now staying with the commercial part of it, you guys over the course of the last several years have been able to grow that into many different areas. We've heard about the stadiums. We've heard about the local businesses. We hear about the hospitals. This is kind of a true part. Is the medical billing acquisition company, is that to grow the Company and get more of that ThermoVu and more of that product to the hospitals? Is that really what your end game is with those acquisitions?

Well, first of all, the numbers are good to begin with. So we like the overall numbers. And then this is where I talked earlier about our target, and that being our Rolodex. I mean we're in Children's Mercy here in town, and I think St. Lopes and numerous hospitals that we're in, in clinics and dental offices and stuff like that. So we can open up the door for the billing side of things to a lot of different customers that we currently have associations with. As well as they can open up doors that we can get in there and talk about the ThermoVus and the Shield products. So it's a situation where each other's Rolodex helps each other out quite a bit. And that was the reason for that particular target there. I will say, though, again, I'm just still pressed with of our talented engineering team and sales support and all the above. We're going to continue to be able to branch in areas and sectors that are going to be new to this industry. Body cameras are starting to pop up in a lot of different areas. And obviously, you can see the need for them on airplanes as of recently. But there'll be a lot of different areas where body cameras were coming to play and also the commercial in-car systems.

You literally just stole my second part. I was going to ask about commercial with the airlines that has been very hectic recently. So I don't know if we're connected with ESP or something, but you literally just stole my second part. Tom, this is a question for you. The SG&A obviously, it aid into our bottom line this past quarter. I mean your numbers look great. Your gross revenues are up to 51%. That's back to normal. We're obviously hoping to get to 60%, if I remember correctly, with what you said in the past. And obviously, the revenue was up significantly year-over-year, excuse me, as well. Do you see those SG&A charges as onetime charges? Or do you expect that to be the norm moving forward?

Well, I certainly hope that the insurance piece of it moderates some as this COVID-19 stuff gets behind us. The largest driver was the professional fees, and that was driven by acquisition-related costs. So it's really nonrecurring in the sense that we're not buying Elite again. But we do anticipate buying other ones, and we have one in the hopper right now. So to a certain extent, there will be some lasting effect of that as we do these acquisitions. But as far as the R&D side, it was up about $100,000 year-over-year. We continue to bring out new products, Bryan. And this commercial body camera is exciting to us, and I think it's going to excite the market as well. We've already got some pretty sizable opportunities that have asked us to customize that unit and that cost R&D. So I guess to wind it up, yes, there's a certain part of that is nonrecurring, but there is a -- for the -- to the extent that we do continue to acquire companies, there is going to be an increase in professional fees.

Okay. The marketing aspect of it, are you guys doing more radio spots? Are you guys doing local advertising? Obviously, we've heard of you guys up here in New York in the radio and things of such with the connections with MetLife. We're all anxious and looking for the next video to be shown on whatever goes viral to have the Digital Ally stamp to have your guys' logo there. So what are you guys doing to try and spread the word more about these products because obviously, they are so good?

Yes. And you're right. I mean, early on, I thought it was a little bit distracting to be sitting there and having your watermark in every frame of videos that are out there because you're really trying to attempt to collect the video. You don't want to have an obstacle in the way that may end up the turn from the video that you're trying to I guess, shoot. But it is something that we could do. We have been able to start putting that in all of our videos. We keep it fairly small, but it is there. And if there is a video that goes viral and of the new units, the Digital Ally name will be in there.

Alright, guys. Well, listen, thank you for your time. Good luck on next quarter. Hopefully, we get the acquisition buttoned up and hopefully, the growth stays in the sales as well.

Thank you, Bryan.

Your next question comes from the line of Numin Latange, private investor.

I would like to ask you a couple of questions. Firstly, about the contracts, and do you have any future plans? What's going on exactly with you? And how can you exactly make a Digital Ally a better company because currently, we have noticed to poor communication from your behalf? We don't know what you are doing or if there are any significant sales, especially because normally, the new President is encouraged to promoting made in America products and companies, while other companies are working on hunting big contracts, guys, I'm an investor, and I feel that you are not doing anything. We feel that you are just going after selling cleaning and sanitizing products, which is not what we ran for or rolled for the first time when we invested in Digital Ally. I mean, besides the stock has been declining in a terrible way, which reflects like a very declining work from your behalf. I'm sorry to be very tough and firm, but we believe in Digital Ally, we hope things are going to change for the stocks, and we're going to be able to earn and gain money, which is happening in major companies currently, but not in Digital Ally, unfortunately. And thank you. Thank you.

I hope you feel better. I mean, we just announced increases year-over-year. We have continued to elaborate on the opportunities that we're seeing. And I assure you, we are changing not only the small agencies, but the large agencies. The commercial side of our business are very, very large opportunities out there in the numbers in excess of 1,000 units potentially. So we are doing what needs to be done to get out there and get into the market side of things for as the selling of the products and also are capable of, as Tom and I've mentioned, the capability of tweaking devices to go after these much larger opportunities. So, we're clearly chasing and have made improvements on our gross margins, the overall revenue, and we'll continue to try to build and make Digital Ally a very profitable company.

Next question comes from the line of Mathew Perry, shareholder.

My question is not a question, it's a statement. Not a question. I've got a few questions relative to the purchase of the 71,000 square foot office warehouse. Approximately how many employees do we have in-house? Number one. Number two, is the building sub-dividable? And do we have an intent to either use all of it or sublease some of it? And what was the logic and thinking behind purchasing that building?

Yes. Great question, Matt. First of all, this particular -- let's just deal with the easy stuff. It's roughly 71,000 square feet, probably has, correct me wrong, maybe 25,000 in office space and then the rest would be able to be utilized for manufacturing and for warehousing. We do intend to -- we have about 100 employees local. With some of the acquisitions that we're looking at, we could continue to bring them over and facilitate their needs at the new facility. Another thing that's very exciting about this particular facility, it's right at the Northwest corner of I-35 and 435. You have approximately 0.25 million cars go by there every day. So again, the ability to sit there not only have a great facility that is going to be able to accommodate us and accommodate our growth in the coming years, you also have an unbelievable ability to go ahead and market not only the Digital Ally but the Shield brands and some of the other things that we would be bringing into the fold of the Digital Ally family. So we're very excited about getting into this facility. It will have us all in one building, it has growth for us and the visibility of it, I think, will be very impressive, and we will definitely win. We get in it, get a fixed up. What I mean by that is a little bit of landscaping and the ability to put up signage and everything else. We will post that on our Internet or the website and everything. So you can understand the -- maybe a little bit of the logic in it. But we're very excited. We think it will help us on a lot of efficiency side of things.

Okay. Just a follow-up question. What was the logic or the thinking in purchasing the building for cash versus financing given the interest rates are as low as they are these days?

Yes. I mean it's one of those deals. Again, when they're looking at our, I guess, our income statement over the last couple of years and obviously with COVID, banks would have to hit us with something probably around the 4% to 5% interest. And it just -- we felt like that we didn't need to borrow the money to do it with the amount of money, the amount of cash we had set in there. So we did look into it real briefly, but it was going to be a situation where, yes, great, the assets clearly worth the money we paid for it, and they would probably wanted another $2 million or $3 million set aside and some CD to guarantee it, and we're paying interest on it. So it really started tying up more and an interest, I guess, debt that we just didn't need.

Got it. It makes sense, and it sounds like a good decision based on what you've said. Congratulations on the quarter, and let's get the share price up.

Absolutely, thanks, Matt.

We have a follow-up from Bryan Lubitz.

Real quickly, I was just going over the numbers again, and I alluded to this in the last conference call as well. Right now, the balance sheet is showing $58 million in cash, and you guys are showing total assets of $83 million. Do you have a comment on your market cap only being roughly $60 million?

Yes. I mean, Brian, I did, Matt, we were even talking about last night and you're sitting there looking at the assets versus our liabilities. And again, you got to remember that there's, those derivatives in there that just don't come into play. It has it below what our market cap is right now. I mean we're literally -- I guess I'd call it our book value is higher than our market caps. So some people just got to do the math, and I think they'll see that they should be able to establish a floor. But the key is going to be, I think, this third quarter when they start seeing some of the things that we've done, you'll get to see the contributions of the new acquisitions and the fourth quarter, clearly, you'll get to see because we've been able to get some momentum behind these acquisitions as well. So I think that's what people want to see. I try to give -- I try to pay attention to the stock and do the best we can for stock value for our shareholders. At the same time, I know that at the end of the day, the numbers will speak loudest and so really focusing in on running the business correctly.

To piggyback that, do you plan on going on road shows? I mean, right now, we have one firm with coverage on you. You guys have had other firms, the mid-tiers in the past that did give you coverage. Now that COVID's kind of, I don't want to say an rearview mirror, but things are opening up more. Do you guys plan on doing your road shows? Are you planning on coming to New York because we need to get the word out more?

Yes, absolutely. We have being seeing a lot more invitations coming to us to get out until the story and to do some road shows just to go around and tell the story. And so that is definitely on our calendar.

Alright, thank you very much for the follow-ups.

Thank you. I want to thank everybody for joining us today. We're going to go ahead and wrap this up. Again, we're very excited about the second quarter and how we have seen things changing in momentum in the right direction. We're excited about what we see in our future. And hopefully, that will relate in our stock price in the very near future as well. So again, thank you, guys, everyone, for your time today. We really appreciate it. We'll talk to you soon.

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