Digital Ally - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $4.4M, down 19% year-over-year; gross margin expanded to 35.8%, and operating loss improved 73.2% to $(0.97)M. EPS swung to $1.41 versus $(27.48) in Q1 2024 on significant non‑operating gains and cost reductions.
• Non‑operating gains totaled $5.24M, driven by gains on extinguishment of debt ($1.25M), extinguishment of liabilities ($2.2M), and warrant derivative value ($2.5M), enabling positive net income of $4.26M.
• Liquidity and balance sheet strengthened: cash rose to $3.8M, working capital turned positive at $3.4M, and equity improved to +$11.6M vs. a $(9.0)M deficit at year‑end; AP reduced by $6.7M and debt by $5.1M.
• Management highlighted ~$2.0M firm backlog to be worked down across Q2–Q4 and “in excess of $10M” deferred revenue tied to subscriptions; entertainment revenue expected to improve around the late‑June Country Stampede festival.
• Corporate actions: completion of ~$15M capital raise in February, and reverse stock splits in May to regain Nasdaq compliance; shares outstanding ~1.67M post‑splits, trading above the $1 minimum bid threshold during the 10‑day compliance window.

What Went Well and What Went Wrong

What Went Well

• SG&A declined materially: Q1 SG&A was < $1.0M vs. $3.6M last year; annualized SG&A reduced by nearly $7M, supporting the 73% improvement in operating loss.
• Strong non‑operating contribution post‑offering: $1.25M gain on extinguishment of debt, $2.2M gain on extinguishment of liabilities, and $2.5M warrant derivative value gain drove positive net income and equity turnaround.
• Management quote (operating focus): “Operating leverage… from substantial decreases in overhead… focus on our subscription based sales model… successful restructuring of our law enforcement products sales organization.”

What Went Wrong

• Top‑line decline: Revenue fell 19% YoY to $4.4M due to video product sales softness and supply chain catch‑up, though service revenue improved.
• Negative operating income persisted despite improvement: Q1 2025 operating loss remained $(0.97)M, reflecting still‑challenging law enforcement budgets and competitive market dynamics.
• Prior backlog build and supply constraints: Firm backlog exceeded $2M entering Q2, indicating fulfillment delays from earlier operational challenges (management working to resolve through supply chain improvements).

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Digital Ally First Quarter Earnings and Corporate Update Conference Call. At this time, all lines are in listen-only mode. If at any time during this call you require immediate assistance, please press star zero for the operator. Note that this call is being recorded on Wednesday, May 28, 2025. This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We may use words and other expressions that are predictions of or indicate future events and trends, and that do not relate to historical matters. Rather, they represent forward-looking statements.

These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements expressed in this conference call, and readers are cautioned not to place undue reliance on such forward-looking statements. We generally do not publicly update or revise any forward-looking statements expressed in this conference call, whether as a result of new information, future events, or otherwise. There can be no assurance that forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I would now like to turn the conference over to Mr. Stan Ross, CEO. Please go ahead.

Stan Ross (CEO)

Thank you. Thanks, everybody, for joining us today. I also have Tom Heckman, the company's CFO, with me today. Tom certainly will go over a little bit of a recap of our first quarter numbers that we put out last week. Probably this is going to be a great time for finally for us all to get on a call. It's been some time since we've been able to. The last couple of years have been a little bit of a challenge. It would be an understatement what Digital Ally has been through.

I think with the moves that have been made over the last six months, the numbers reflected, and we are getting into a scenario where hopefully we've done a lot of the things that were attempted and were unsuccessful in the past behind us, and we can look forward to the things that we have set out to achieve and rebuild the company to its more of its glory days, not only with video solutions sector of our company, but the custom entertainment side as well. I know we do still have on the books our medical billing entity, which I think has been in print that we have had discussions about allowing it to be sold off. That is still a possibility that we will entertain conversations on.

We're really focused on the core businesses and not have as many of the other issues that we've had out there. Anyways, we're really appreciative of everyone getting on here. We have quite a large audience today, which is really good. We'll try to address all open items and give you a real quick picture of where we believe we're able to be heading and the accomplishments we should be setting our goals for for 2025 and beyond. That being said, I'll turn it over to Tom.

Tom Heckman (CFO)

Thank you, Stan. Good morning, everybody. I appreciate you joining us today. We did file our full 10-Q for the first quarter on May 20th, and I really encourage everyone to take a good look at that. Many, many things changed, and gladly for the better. I'm going to hit the highlights in this presentation. If you really want to see everything and go through the details, obviously the 10-Q is the place to do that. Right off the bat, I'd like to acknowledge that we've received many calls and emails from interested investors in the last several weeks. Unfortunately, we just cannot answer all those, and particularly the ones that are requesting public, material, non-public information. We just cannot piecemeal information like that out to individual shareholders without holding a public forum like today.

We'll be talking about a lot of the information requests that have been coming in on shares and reversals and all that stuff. We'll talk through that today in a public forum. As I look at the first quarter, it really looks to me like it was a watershed quarter for us, wherein we're moving on from the SPAC days, which consumed us for probably the last two years, and really got us unfocused on the legacy business. The SPAC deal died in the third quarter last year in 2024. The first quarter is the first quarter we really got a chance to focus back on the legacy business and really make some improvements and changes. I think the first quarter Q really shows the progress we've made in that regard. Anyway, what I'm going to do on the P&L, I'm going to compare year-over-year numbers.

First quarter of 2025 ended March 31 versus the first quarter of 2024 ended March 31, 2024. At the top, the year-over-year revenues were down a little over $1 million or 19%. Here's really the story on that. If you look at the video product sales, it was down significantly year-over-year. At the same time, our backlog was over $2 million, our firm backlog. We had to get our supply chain back in order to get us product to be able to fulfill backlog. There's $2 million of backlog that we're going to be able to work off in the second, third, and probably even the fourth quarter of this year that would have really changed the complexion of the revenue figure. The video product sales was down, but the service was up. It was a good trend from that standpoint.

If you look at the entertainment segment, we focused TicketSmarter, our ticketing solution business, to shed some of the uneconomical sponsorships that we got involved in. We really paired some non-gross margin providing, generating businesses, sponsorships out of TicketSmarter. The revenues were down, but the profits were up. Obviously, Kustom 440, which is our event production group in the entertainment segment, has not had any 2025 events yet. The first one coming, the Country Stampede, which I am sure Stanton will talk more about, is June 26th to 29th. The second quarter is going to be impacted heavily by the first Kustom 440 event called the Country Stampede. We think the second quarter revenue figures will turn around immensely and show a very good comparative year-over-year number increase.

Even though we dropped 19% in revenue, our gross margin dollars improved by $78,000 or 5%. You can tell that the refocusing of the TicketSmarter business into economical and efficient sponsorships, as well as paring down some of the P&L, some of the video segment overhead that hits us and costs that sold has come back. The overall gross margin percentage improved to 36% versus 28% last year. We are going in the right direction on the gross margin dollars. If you look at the SG&A expenses, you will notice that there was a very large decline across the board in all areas and all segments. In sheer dollar value, last year's SG&A was a total of $3.6 million. This year was less than $1 million. That is a $2.6 million pickup or 72% improvement in our SG&A dollars. We focused on pretty much everything in the SG&A line items.

We reduced headcount across the board. We improved our facilities expense. We sold our building and moved into smaller quarters. And then just our general overhead items, we really improved the efficiency of those. We believe that year-over-year, we have cut out almost $7 million of SG&A costs. That is on an annualized basis. You look at it, I mean, $7 million out of the SG&A line item is pretty impressive, and we are very happy with that. We believe we have been very successful in reducing our SG&A overhead. As a result of the improved SG&A expense as well as the gross margin, our operating loss improved to almost $1 million from the $3.6 million in the prior year. That is a 73% improvement year-over-year. Obviously, we are seeing some good results from that standpoint.

If you walk down to the non-operating items, really the factors that hit us there or not hit us, but provided non-operating income was influenced by the liquidity that came in on our $14 million public offering that we closed in February of 2025. As a result of that, we had funds and liquidity to make offers and to extinguish debt or gain from extinguishment of debt was $1,250,000 during the first quarter of 2025. The gain on the extinguishment of liabilities, that counts payable, accrued expenses, what have you, was $2.2 million in the first quarter. Our warrant derivative value gain was $2.5 million. That is the change in the value of the warrant derivative liabilities, which is kind of a fictional accounting number, but it really recognizes a solution from the offering that occurred.

From a net income standpoint, we had net income of $4.2 million in the first quarter of 2025, or $1.41 per share, versus a $3.9 million loss in 2024 of $27.48 a share. We had a turnaround of $8 million plus in the net income line. We are very happy with that. Really, as I said before, I think it was a watershed moment in the first quarter. Hopefully, we can build on those results for the rest of the year. I know Stan will be talking about some of the initiatives and the focus we are planning on for operations in the remainder of 2025. If you turn over to the balance sheet, our balance sheet really reflects the liquidity injection we got from the $14 million offering that closed in February of 2025.

As we sit now, at March 31, we had $3.8 million of cash on the balance sheet versus $400,000 at the end of the year. I'm comparing the March 31, 2025 balance sheet to the December 31, 2024 balance sheet. Just in one quarter's time, three months' time, we went from $400,000 of cash to almost $3.8 million of cash on the balance sheet. Our working capital is now positive at $3.4 million versus a deficit of $19.4 million at the end of the year 2024. That is an improvement of almost $23 million. Very much a turnaround in terms of the complexion of our balance sheet. Our liquidity now is probably better than it has been for several years, and we're looking to build on that strength. If you look at our accounts payable, we paid off $6.7 million of accounts payable during the quarter.

We're now down to $4.8 million of accounts payable. Our overall debt level is down over $5.1 million to $2.7 million at March 31. Obviously, we used the offering dollars to come in and fix our pay down our debt and pay down our payables, and really is resulting in a good working capital position. Our equity is now +$11.6 million versus -$9 million at the end of 2024. That's an improvement of over $20 million. Now, remember, we only received $14 million in the offering, so there was another $6 million of improvement in the equity based on our operations from 2025. With the influx of liquidity over our balance sheet is now very strong. We believe it gives us a good financial backing to implement our operating plans for the rest of 2025 and beyond.

We really needed to get that done, and we were able to accomplish that in the first quarter. Now, there are a couple of other items of interest I want to go over in more detail. I know this was a subject of discussion and questions from emails and telephone calls and such. We have made a lot of progress with the NASDAQ. The NASDAQ issued a non-compliance notice to us, several of them, during the quarter. We met with them in April of 2025 and discussed our plans to regain compliance, and they agreed to give us that time. The items of non-compliance were that we had a late filing of our Form 10-K from year-end, as well as our 9-30 10-Q. Both of those were filed, and now we are in compliance on that. We were below the $2.5 million equity threshold required for continued listing on the NASDAQ.

We're obviously much better than that now. We're almost at $12 million of positive equity. So we're certainly in compliance with that. The last item is the item that we're still working on. It's the $1 minimum bid price, which we have to show for 10 consecutive days, 10 consecutive business days. So we're now above that with the reversals that we administered in the last several weeks. We're trading around $4.5 now. So we believe that that non-compliance issue is also going to be taken care of. But we're what, three or four days into that 10-day period? So we got to wait another seven or eight trading days to show compliance to the NASDAQ. And hopefully, we can get clearance from them that we now are in compliance and will be continuing with the listing on the NASDAQ exchange.

Here's the split numbers that a lot of people have asked about. We effected two splits. One on May 7, it was one share for every 20 outstanding. Then on May 23, we issued a second reverse for one for 100 shares. It was very painful. Obviously, we understand that. We recognize that it was necessary in order to regain compliance with the $1 bid price with NASDAQ. Had we not done that, we probably would not meet that requirement and be delisted and not on the exchange. It was to avoid a very bad outcome from that standpoint. As we sit today, our total common shares outstanding is 1,668,735 shares. Again, 1,668,735 shares. If you do the math, our market capitalization is a little north of $7 million as we sit today.

Obviously, we wish we did not have to do the reverse split, but it was the only responsible thing to do in order to get back into compliance with the NASDAQ. I appreciate everyone's patience during the quarter and waiting until the public disclosures we made today. With that, I'll send it back to Stan.

Stan Ross (CEO)

Yeah. Thanks, Tom. Yeah. Obviously, we've seen some pretty dramatic changes that have been made and the effect they've had on not only the balance sheet but the income statement. We're real pleased with that, but also very excited about what we've got ahead of us because, as Tom mentioned, we had almost $2.2 million in back orders. When we did the raise, we were able to start getting components in and fulfill those orders.

We still have, Tom, correct me if I'm wrong, but an excess of $10 million in deferred revenue.

Tom Heckman (CFO)

Yes.

Stan Ross (CEO)

Yes. So that's still out there, which is the subscription model. That's still very, very attractive and growing. We're happy about that. We continue to look at and exploit some of the new products and patents that we have in our portfolio. Those products will be being announced over the coming quarters as well. From what we can see and from what the market is requesting, they ought to be very, very well received, not only in the, let's call it, the long functional side of things, but also in the commercial markets. The video solutions side is really starting to be able to get a lot of momentum behind it again. We have a lot of great hopes for it moving forward.

In regards to the entertainment side, we're also very excited because we now have a real clear path on how to go ahead and develop custom entertainment inside the bit. And just to give you an example on how some of this works, for instance, our focus on Country Stampede because it's an event that's held annually. This is its 29th year. And over the last, let's say, six years, they have not been able and not been in the position where, at the event, they were able to announce the following year's headliners. That's a big step. I mean, they went through two different moves from Manhattan, Kansas, to Topeka, Kansas, and to Bonner Springs, Kansas.

That, along with some other issues, they just never had it laid out to where you could take advantage of it like they were in the past when they were at Manhattan. Very pleased to announce that going into this year's 2025 Country Stampede, we have, just as of yesterday, secured our 2026 headliners. I mean, for all three days. That is very exciting, very dramatic in regards to how it plays out also through your cash flow. The way it works, at least at Country Stampede, is while you're there, if you're participating in that particular festival and you like the headliners that you're seeing that are going to be performing the following year, you have the ability to renew your seats right then and there.

Otherwise, if you elect not to, then they'll go on sale to the general public the following couple of weeks. This is going to be the first time, at least since Digital Ally has owned Country Stampede, that that has got put in place. We also now have created a pretty good, a lot of respect in the industry, and to have other venues contacting us, wanting us to bring Kustom 440 and production to their sites. While we anticipate only doing maybe eight different events here in 2025, that number is going to be multiples bigger in 2026 as we now have a little bit of runway to work with. There should be some good growth that you can see from 2025 to 2026 along those lines too. You can tell there's a lot of excitement going forward.

We regret the money curve and some of the pain of the past, but that's not where our focus is. We're looking forward to accomplishing some things and continuing to build on a lot of the legacy that we originally established and how we can expand on that. I think you'll see that in the coming quarters. We will be doing more of these calls. You'll see myself and others out there participating in conferences that we have not been able to participate in while we were associated with the past, the staff, and such. We just were somewhat, our hands were sort of tied on what we could get out there and be talking about. A lot of that is behind us, and we couldn't be more excited.

There's a lot of companies out there that you can take a look at if you want to try to get comps and understand a little bit about the business, whether it be Live Nation or Venue. Obviously, on the law enforcement side, there's video solutions. There's still the Axons in the world that are out there as well. We're excited about the future. We've got a lot to still accomplish, and we're ready to take on that task. With that being said, I want to thank you all again for attending today and look forward to you guys participating in the second quarter call when we announce it.

I will tell you one more thing before parting is that it is anticipated that next year, which will be the last weekend of June, we will be holding a shareholder conference next year in Kansas City. Therefore, when we have the shareholder meeting here in Kansas City, hopefully, everyone can stick around a few days and participate in the Country Stampede event and sort of see firsthand what it looks like for a Kustom 440 production. Wish you all the best. Thank you again for your time today. Look forward to talking soon. Thank you.

Operator (participant)

Thank you. This concludes today's call. Thank you for participating. You may now disconnect.