Digital Ally Inc (DGLY) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Digital Ally 2021 First Quarter Operating Results Call. (Operator Instructions)

This conference call may contain forward-looking statements within the meaning Section of 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 or -- of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events can be affected by inaccurate assumptions and are subject to various business risks and 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.

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. And Tom will do a 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, potential acquisitions and such and also trying to lay out some of the new accounting requirements that are being opposed upon us that make it -- to help you try to, I guess, better understand our numbers and 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 you here in a second.

All right. Thank you, Stan, and welcome to everyone. I appreciate you joining us this morning. I will tell you that we 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 what happened during the first quarter, please take a look at the 10-Q that's now on file with the SEC.

Overall, the first quarter 2021 operating results do show some recovery, but we are seeing -- still seeing the continuing impact of the COVID-19 pandemic. If you look at overall revenues, we did have an increase of about $110,000 or 5% year-over-year. And if you dig down in the detail, product revenues increased by 8% year-over-year, which reflects our -- the success of our subscription program and the effects of that on revenue, but our services revenues went down 5% year-over-year and that's primarily due to the travel restrictions and some of the other events around the COVID-19 pandemic that affected our installation revenue and, in particular, our situational security revenues for the first quarter.

If you look at cost of sales, we had a large jump. Cost of sales as a percent of revenues overall went to 68% from 48%, a 20% increase, which is quite substantial. And if you dig down in the detail, our service cost of sales remained steady at 26%. So that was steady.

Product revenues -- I mean, cost of sales for products though increased from 56% in the year ago quarter to 82% this year. And really, what you're seeing there is the inflation that I think is now becoming apparent in the industry and effects on salary costs as well as product costs, and that's somewhat attributable to COVID-19 pandemic. And we hope it's transitory in nature, but we really saw an increase in our product, hardware shipping costs as well as shortages -- overall shortages in some of the component inventory, in particular, the chips and microprocessors that we use in some of our products. Again, our hope is that this inflationary trend in cost of goods sold is transitory and not permanent. We'll keep everybody apprised of that.

If you look at SG&A expense, overall, it increased $485,000. 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 that on COVID-19 as well as some of -- in particular, our general liability carriers and personnel-related coverages increase their premiums to cover any COVID-19-related expenses. So that really took hold in the first quarter compared to a year ago and was the primary driver in the overall increase in SG&A.

We are, in fact, looking at different ways of handling insurance programs, including potentially captive offshores in that, but we are on it. We're going to try and contain the price increases on our insurance and hopefully be able to drive it down somewhat in the remainder of 2021.

Overall, our operating income dropped $938,000 year-over-year. And again, it's $450,000 drop in our gross margins, regardless of an overall 5% increase in revenues and a $490,000 increase in SG&A expense. So operating income was down year-over-year.

If you look at nonoperating income though, it increased the income of $24.6 million versus a loss of $400,000 a year ago. And like Stan mentioned, there's some requirements that the SEC has come out with some clarification on regarding detachable warrants that were issued with our registered direct offerings, which is a public offering that we did in the first quarter.

It requires mark-to-market accounting as we fair value the liability under the Black-Scholes method and the mark-to-market goes through the P&L. Thus, you saw $24.5 million income from the change in the fair value of those warrant derivative liabilities.

I will caution you though that, that is a highly volatile item that will be in our P&L until the warrants either get amended to fix the -- some of the drivers that's 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 in a perverse way. As operations improve, hopefully, our stock prices improve. And as our stock prices improve, so will the increase in the fair value of those warrants because it's equity linked. So I just caution everybody, that will be a volatile item in our P&L from -- for the foreseeable future.

Overall, our net income was $21.7 million for the quarter or $0.49, our best showing in a long, long time versus a loss of $2.3 million or $0.17 a 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 year-end 12/31/2020. And that's primarily because we raised $66.5 million in 2 public offerings that were off-the-shelf registered directs with investors. So we raised $66.5 million of cash.

If you look at our cash balance, we got $67.6 million of cash at the end of the quarter versus $4.3 million a year ago. We have positive working capital of $51.5 million versus $14 million a year ago and our equity improved to $51.8 million versus $14.4 million a year ago. So you can see the dramatic improvement in our balance sheet, primarily due to the 2 public offerings that we did during the first quarter.

With the balance sheet improvement, it does allows us a lot of flexibility in terms of looking at where we position the company down the road. In that respect, we did just recently, after the quarter closed, we closed on a new office or warehouse building here in the Kansas City area for about roughly a little over $5 million.

We are 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. Again, we have nothing definitive. We have no commitments, no term sheets, nothing of that nature, nothing that's binding at all. But we are looking at potential acquisitions, both within our industry and maybe adjacent industries that could help us provide more value to our investors. And of course, we will keep you informed as we go down the path on any of these potential acquisitions or enhancements line, and we'll keep everybody fully informed to that.

With that, Stan, I'll send it back to you.

Yes. Thanks a lot, Tom. Yes, I think that's one of the key points there at the last that Tom was talking about is some of the organic 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 and have patents filed on the uniqueness of it.

Also some of the, let's say, adjacent potential acquisitions that could come into play, if not, we think that may be something that we still can do organically as far as the growth. Sometimes a good acquisition is -- helps you out a little quicker to get to where you're wanting to eventually end up.

And so the new facility will help us out quite a bit. There's a lot of room for growth there. And then we also have been able to really take a hard study into the insurance side of things that we believe also could assist us in the bottom line instead of us having such a deficit to sit there and start with each year just for the high cost of insurance. And it's industry-wide. We're not being picked on here as far as, I mean, at Digital Ally. The industry itself is seeing it mainly because, I think, a lot of concern with the pandemic and COVID and the companies that have had to shut their doors because of 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 EVO-HD 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 is getting very, very good reviews and being received real 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 items and the patents surrounding them. So then we cover the Shield products line and that, too, continues to have quite a bit of potential, even as we start to see the concerns around COVID lightened up, the fact that we do have a very strong disinfectant cleanser, even wound care type of product that does not contain chemicals and alcohol, it's a much safer, call it, food friendly, kid friendly, pet friendly disinfectant.

People are starting to learn that now and understand the importance of still staying sort of a green type of environment. So very, very pleased with the product lines that we have right now, the improvements we've made to the product lines and excited to continue to be looking for opportunities on the acquisition front that would 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.

(Operator Instructions) Your first question comes from the line of Rommel Dionisio with Aegis Capital.

So on the inflationary pressures that you guys talked about on the gross margin side, obviously you're not alone in terms of facing inbound freight costs and rising prices for components and chips and that sort of thing. To what degree do you think you and the rest of the industry might be able to pass some of those pricing -- or pass through price increases to offset those rising cost pressures?

And was it the situation where in the first quarter, these margin pressures just kind of hit you all of a sudden, and you weren't able to sort of pass that along? I wonder if you could just give us a little more color on that, please?

Yes. The inflationary pressures were kind of building throughout 2020 -- late in 2020 and really came to hit in the first quarter 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 our DVM 250, and we now have a new version of our body cameras.

So with the updates in those systems, we're not using older components. These are newer components that are in high demand from a number of different vendors in a number of different industries for that matter. So we're not only competing with other vendors in our industry, but 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 industry here, and we're going up on many times bid situations that we're hemmed in and some are longer-term commitments and POS in that, that we can't break. So yes, we're trying to pass those increases on, but a little to no effect at this point, but we're always going to be trying.

Okay. Fair enough. And maybe just a follow-up question. I know in the past, you talked about a pretty significant opportunity that you had with a foreign -- an overseas-based law enforcement agency. I wonder if there was any sort of update on that or is that kind of still on hold for now?

Yes. That was the one that was sitting on our dock ready to go out when COVID hit last year right at the end of the first quarter of 2020. And we continue to work with that police department or actually, it's a National Police Agency. It's not a dead deal. It has obviously been delayed, and they've got some other priorities right now that they're dealing with.

So I do believe that it's a situation where it's a delay, not a cancel. But we'll see as we go down. Now I can't really predict when that might hit, this is a foreign country that is dealing with COVID on its own. It's not the same situation as we're seeing here in the United States. So I just can't predict when that might hit if it does hit.

Your next question comes from the line of [Charles Lechaido] with GTM Capital.

I just have 2 simple questions. The first one is about your legacy product, your police product. I know you guys in the industry, actually, your main competitors are switching over to the subscription model. Are you finding more customers wanting to do that or are you just finding more that want to just buy it outright or is it mainly just the cost-efficient for them to do that? What's the 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 their tax role and budget cuts and having to look at how they're going to be able to stretch a dollar. So we have been, again, very fortunate to have the capital position where we can come in with the subscription model and provide them the needs of outfitting their whole department instead of them happen to piecemeal it and therefore is making a complete acquisition at once.

Now I'll say this that every once in a while, we've started down the path of a subscription model. And all of a sudden, they may have received some grant money or some capitals came into their coffers, and they have been ahead and stepped up and went ahead and paid in full. But yes, we're seeing a lot of very encouraging and long-term growth on the subscription model.

I would say, and Tom, you probably know this, but I mean, almost 15%, 20% quarter-over-quarter growth on that subscription side of things. So it's been very, very well received.

So that's technical. It's going to be long-term revenue. It's not going to be revenue upfront, which isn't going to show right on the first -- on the quarter. It's so -- it's just going to be spread out over time. Is that correct?

That is correct.

And the next question I have is obviously the -- I know you guys have your thermal system out there and everything. And I know that you're involved with the cruise lines and a lot of the sporting events. Some are starting to opening up now. Have you seen any leeway, any interest in coming back to you guys for that stuff?

Yes, absolutely. Matter of fact, we've had -- in regards to our situational security, and when I talk about situational security, I'm basically talking about where you have outside venues or any type of venue that is starting to conduct, whether it be a concert or a sporting event, and they need to outfit 100 individuals with body cameras for that particular event. We're starting to get quite a few 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 sufficient enough to take you where you want to go at this moment right now? I know you -- basically on your balance sheet, you had $67 million. Do you find that sufficient to going forward?

We do. Yes, we do.

Okay. Great. So what can you tell some investors out there actually what to look forward to as far as going forward products with the next products coming out? I know you guys are looking at other alternatives, either whether buying something, merging with something. Do you guys have all options open 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 some along those lines. But I mean, I think we're seriously looking at all opportunities that have some type of ability to utilize the infrastructure, meaning the network that we already have. And again, that network is quite broad. If you look at not only law enforcement, but we're into fleet -- a tremendous amount of fleets throughout the country. We're into -- 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. Hospitals have been -- a lot of them are local Children's Mercy Hospital utilizes the thermal view here.

So what we're trying to do is recognize 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 positive -- have a positive impact on Day 1 once we make that acquisition and/or new product launch.

Great. Sounds great. So the final question will be, obviously, I know you just got a new pickup in the warehouse, what is the purpose of that? And is that going to actually help you with your manufacturing and distribution? And the last question I have is, have you guys ever considered a share buyback program with the kind of cash you get on the books right now? And those are the final questions. And thank you very much for doing a great job with everything.

I appreciate it very much. But I'll address the building. I mean, right now, we're on top of each other. I don't know that we have a single cubical available within the 2 buildings that we have. So this allows us to get into 1 building and gives us a little more area -- 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 doing this just in anticipation of maybe a potential acquisition that would fold into it. We're really looking at it also as the need for our existing product lines and expanding on those product lines for this particular facility, including bringing in some more very talented engineer and personnel that we just don't have the room for right now. And again, I know that so many people work so well from home and offside locations.

I'm unfortunately, one of those guys that I like to be in a boardroom around very talented people and have a real think-tank type of scenario and the white board and able to be innovative in that way. So I'm one of those that prefer to have everyone in the building where I can, where it's needed.

In regards to the buyback...

Yes, on the -- well, in terms of where we're putting our cash and equivalents, we're 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 placed that with several banks to try and limit individual exposure to those banks. But again, with the interest rate climate that we have back there or out there right now, it's hard to get a lot of yield.

But if you look at the first quarter, we did make 40 -- almost $42,000 in interest earnings, and that was primarily from the idle funds from the 2 offerings. And again, that one offering was in the middle of January, and the second 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 bounded by the rules of safety, and we're not going to get out there and getting anything real exotic in terms of letting that short-term investments yield some earnings. So that's where we're at on the cash.

It looks like you get everything in place. Now only go do is actually just get motivated and get everything moving fast. And again, I know the COVID set everyone back and especially you guys, but it sounds like the new warehouse will be a big help. You'll have everything consolidating, everything in one place. Hopefully, you can move forward and get some good revenues out there. Keep up the great work, guys.

Thank you very much.

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

A nice quarter. I'm not sure if it coincided with the last quarter, if it came right after the last quarter finish, 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 at least a year, if not 2, but we've never seen any type of color in terms of sales. Is that a new release, a new revenue stream for the company?

No. The LiDAR has been out there for some time. And again, it's one of those products that -- and as you know, very well, Bryan, agencies' priorities have strongly shifted towards the body cameras and in-car video systems. So where we used to -- what I want to say, really be able to get out there and market the LiDAR and the one that I think you're talking about in regards to our patented scanning LiDAR, we've had to sort of put those on the back burner due to the fact that it's just the demand.

I mean, I'm telling you right now, and as you know, and it's getting mandated out there that 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 focus and that level of interest by agencies trying to figure out how to come up with the capital has been their primary focus, not so much on speed detection.

Okay. So that being said, demand has got to be there and obviously, we're still waiting for the federal money to get turned on, if you will, hopefully, the Senate passes that this quarter. Have you guys had internal discussions of -- I know you have a no down payment leasing type of option or financing option for these guys. 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, department has a little bit of, I'd say, budget restraints and that they know that 2021 is going to be a little tight for them to recover. 2022, they anticipate being better. 2023, things should be back to normal and therefore be able to absorb the costs associated with a subscription model.

So when we talk about a subscription model, we don't have to have, okay, 5 -- even payments over 5 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 back end. So not only is our subscription model been very well received with just being a 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. And the departments are grateful to have such a quality product and have such a financing structure that they could live up to.

So I don't want to say it's like when you go buy a new truck, first 6 months free or something like that. But we can curtail a package for them to meet their needs.

So you have flexibility. You have a great package. And by the way, that package for the subscription model that's view vault, that's partnering with Amazon, if I'm right?

Correct. We utilize Amazon, the AWS as far as the cloud storage and management, yes.

Okay. So now you've got cash in the bank where you guys are flush compared to where you've been in the last, let's just say, 5 or 6 years, probably longer and you've got a new warehouse that's going to help you for expansion. With that cash in the bank, are 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 a good product and you have so many of them. The sales is not translating to what you guys should be doing. And we know you have COVID, but what are you doing to get out there and get Digital's name more in the forefront, if you will?

Right. And so I'm glad to say that, Bryan. So yes, we're definitely going to be getting out there more in the forefront in regards to the name for us as far as our let's say, on behalf of the shareholders and to make sure to draw some attention to our company.

The thing that I think you're going to see, Bryan, that's going to really open up the eyes of a lot of people is when we start making some very strong inroads into the commercial fleet market with very recognizable national names that are up in, let's say, 1,000 vehicles and possibly even 2,000 or 3,000 individuals with body cameras to help manage their fleet and their personnel. That will take us to a whole new level in regards to showing that we're not only a player just in law enforcement and first responders. But the impact we can have on the commercial market, that will get you a national name, national brand type of exposure. And that we're working on very hard, and we've got some very talented engineers that are helping design different products and mainly the software that meets the needs of some very large companies.

Okay. That sounds exciting. Those are the big fleet trucks like Penske and guys of that caliber is what you're talking about?

Exactly. Exactly, Bryan.

All right. Last thing 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 that are calling me up and they're asking specifically about the proxy information they've just received for your shareholders for the annual voting and things of that such. We talked about it before. You guys got $67 million cash in the hand. You've got a market cap just 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 ballot for approval by the shareholders. Unfortunately, that's a non-routine item. And you not only have to get a majority of those that voted, you have to get a majority of all the shareholders outstanding regardless of they voted or not. So it's a very difficult to have to get done. And we have not hired solicitors to go out and try to gather votes and convince people.

But in reality, that blank check preferred would be a poison pill type situation. If there's a hostile tender or a tender at all that the Board has not approved obviously, that would give us the flexibility to issue shares to negate that 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 that on our proxy, gosh, probably 3 or 4 years in a row. And we've always had a plurality or a majority of those voted yes for it. We just never had the more than 50% of all shares outstanding. So 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 tabulation process. My hope is that it will be, in fact, passed this year.

And potentially its -- I'm sorry, Stan. It's essentially to deter someone from acquiring you guys in the open market, is that what you're looking to do?

Well, I mean, look, we want what's best for the shareholders, and we want to maximize our value. But I mean, I hate to say it, but we're almost in a position where with as much cash as we have and as you mentioned where our market cap is that someone -- there's some clever entities out there that, they can almost use our own cash to leverage us and buy us out.

And so we just think we really are starting to see some momentum. We're coming out of the whole pandemic and COVID, our customers, long-time customers that we've had that have been shut down are coming back to the workforce 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 new markets that we're going to be able to get into. And we'd sure like to continue to build on that and improve value organically and not have someone else come in and step in and reap the benefits when we've had such a great group of shareholders that have stood by us for so long that we want to pull this together for them.

Well, I wish you guys best of luck to get the votes, and anything I can do to help you guys know I'm here. Congrats again on the quarter. We'll speak soon, guys.

Sounds good, Bryan. Thank you, and thanks, everybody, for joining us today. We're going to go ahead and wrap up this call. We really appreciate it. We're really excited and glad to see that, hopefully, things are coming back to a little bit more of a norm.

We're looking forward to 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 Digital Ally and to 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.