UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022. or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________. Commission File Number: 001-33899 Digital Ally, Inc. (Exact name of registrant as specified in its charter) Nevada 20-0064269 (State or other ...

Digital Ally, Inc. (NASDAQ:DGLY) Q1 2022 Earnings Conference Call May 24, 2022 11:15 AM ET Company Participants Stan Ross - Chief Executive Officer Tom Heckman - Chief Financial Officer Conference Call Participants Rommel Dionisio - Aegis Capital Bryan Lubitz - Aegis Capital Mike Albanese - EF Hutton Operator Ladies and gentlemen, thank you for standing by, and welcome to Digital Ally’s 2022 First Quarter Operating Results Call. At this time, all participants lines are in a listen-only mode. After the speak ...

Revenue Performance - Total net revenues for the three months ended March 31, 2022, were $10,294,781, a significant increase from $2,535,829 in the same period of 2021, representing a growth of approximately 305%[201]. - Total revenues for the three months ended March 31, 2022, increased by $7,758,952 (306%) to $10,294,781 from $2,535,829 in the same period of 2021[228]. - Ticketing segment revenue reached $6,380,775, indicating a strong performance since its establishment[201]. - Revenue Cycle Management segment generated $1,903,957 in revenue, reflecting the company's recent entry into this market[201]. - Video Solutions segment revenue decreased to $2,010,049 from $2,535,829 year-over-year, a decline of about 21%[201]. - Product revenues for the three months ended March 31, 2022, were $2,410,060, an increase of $497,483 (26%) compared to $1,912,577 in the same period of 2021[219]. - Service and other revenues surged to $7,884,721 for the three months ended March 31, 2022, an increase of $7,261,469 (1,165%) from $623,252 in the same period of 2021[224]. - The new ticketing operating segment generated $5,306,945 in service revenues for the three months ended March 31, 2022, compared to $0 in the same period of 2021, marking a 100% increase[226]. - The revenue cycle management operating segment generated $1,903,957 in service revenues for the three months ended March 31, 2022, also a 100% increase from $0 in the same period of 2021[227]. Profitability and Loss - The company reported a net loss of $6,698,242 on revenues of $10,294,781 for the first quarter of 2022, compared to a net income of $21,721,858 in the same quarter of 2021[204]. - Operating loss for the first quarter of 2022 was $6,803,338, compared to a loss of $2,865,693 in the same period of 2021[201]. - The company experienced a gross profit margin decrease to 19% in Q1 2022 from 32% in Q1 2021, attributed to increased cost of revenue[207]. - Operating loss for Q1 2022 was (66)% of total revenues, an improvement from (113)% in the same quarter of 2021[207]. - Gross profit for Q1 2022 was $1,939,619, an increase of $1,127,737 (138.9%) compared to Q1 2021[237]. - Selling, general and administrative expenses for Q1 2022 were $8,742,957, an increase of $5,065,382 (137.7%) compared to Q1 2021[238]. - Operating loss for Q1 2022 was $6,803,338, an increase of $3,937,645 (137.4%) compared to Q1 2021[242]. - The company reported an income/(loss) before income tax benefit of ($6,698,242) for Q1 2022, a decrease of $28,420,100 (130.8%) compared to Q1 2021[249]. - Net income for the three months ended March 31, 2022, was reported at a loss of $6,698,242, a decrease of $28,420,100 (130.8%) compared to the same period in 2021[252]. - Net loss attributable to common stockholders for the three months ended March 31, 2022, was ($6,600,148), a deterioration of $28,322,006 (130.4%) from $21,721,858 in 2021[254]. - Basic and diluted loss per share was ($0.13) for the three months ended March 31, 2022, compared to $0.49 in 2021[255]. Assets and Liabilities - Total identifiable assets as of March 31, 2022, were $79,026,018, down from $82,989,197 at the end of 2021[201]. - Cash and cash equivalents decreased to $20,561,116 as of March 31, 2022, from $32,007,792 at December 31, 2021, reflecting a net decrease of $11,446,676[260]. - The company had approximately $81.4 million of net operating loss carryforwards available as of March 31, 2022[250]. - Total outstanding debt obligations amounted to $1,912,064 as of March 31, 2022, with long-term debt obligations at $1,249,347[266]. - The company had $19,483,613 in net positive working capital as of March 31, 2022, with accounts receivable representing $5,602,094 of this amount[263]. Cash Flow - Net cash used in operating activities was $6,055,672 for the three months ended March 31, 2022, an increase of $2,848,828 compared to $3,206,844 in 2021[260]. - Cash used in investing activities was $3,195,346 for the three months ended March 31, 2022, compared to $99,274 in 2021[261]. - Cash used in financing activities was $2,195,658 for the three months ended March 31, 2022, down from cash provided of $66,570,600 in 2021[262]. Inventory and Reserves - Total inventories as of March 31, 2022, amounted to $9,405,920, a decrease from $9,659,536 as of December 31, 2021[286]. - The reserve for obsolete and excess inventories was $3,896,460 as of March 31, 2022, representing 29.3% of the gross inventory balance[288]. - Raw materials and component parts increased by $777,750 (25%) from $3,062,046 as of December 31, 2021, to $3,839,796 as of March 31, 2022[288]. - Finished goods decreased by $1,050,051 (10%) from $10,512,579 as of December 31, 2021, to $9,462,528 as of March 31, 2022[288]. - Warranty reserves decreased to $10,582 as of March 31, 2022, compared to $13,742 as of December 31, 2021[298]. New Products and Market Strategy - The company has introduced new product lines, including ThermoVu® temperature monitoring stations and Shield™ disinfectants, to diversify its offerings[191]. - The company introduced new products, including the FirstVu Pro and FirstVu II body-worn cameras, which are expected to gain traction in the market[221]. - The company is transitioning customers from hardware sales to a service fee model, which is anticipated to reduce product revenues but increase recurring service revenues over the next three to five years[222]. - The Ticketing Segment is expected to generate higher revenues in the second half of the calendar year compared to the first half[307]. Tax and Valuation - The company has fully reserved all deferred tax assets as of March 31, 2022, with a valuation allowance of $16,980,000[304]. - The company expects to maintain a full valuation allowance until it can demonstrate a sustainable level of profitability[304]. - The company has generated substantial deferred income tax assets primarily from stock options, tax credit carryforwards, and net operating loss carryforwards[306]. - The realization of deferred income tax assets is contingent on generating sufficient taxable income in future periods[306]. - As of March 31, 2022, the company has no recorded liability representing uncertain tax positions[305]. Interest and Financial Instruments - Interest income increased to $71,362 in Q1 2022 from $41,686 in Q1 2021[243]. - Interest expense for Q1 2022 was $17,009, an increase from $1,428 in Q1 2021[245]. - The company recorded a net loss of $56,050 related to changes in fair value of contingent consideration promissory notes in Q1 2022[247]. - The company issued warrants to purchase a total of 42,550,000 shares of Common Stock, which are treated as derivative liabilities[299]. - The fair value of warrant derivative liabilities was calculated using a volatility range of 106.6% to 166.6% at issuance and 104.1% as of March 31, 2022[300]. Cost Structure - Overall cost of product revenue for Q1 2022 was $2,822,051, an increase of $1,260,741 (81%) compared to Q1 2021[230]. - Cost of service revenue for Q1 2022 was $5,553,111, an increase of $5,370,474 (3,302%) compared to Q1 2021[233].

Part I [Business](index=5&type=section&id=Item%201.%20Business.) Digital Ally, Inc. diversified into Revenue Cycle Management and Ticketing segments in 2021, significantly increasing revenue while continuing its legacy Video Solutions business - The company expanded into **Revenue Cycle Management** and **Ticketing** as new operating segments, alongside its legacy Video Solutions business[21](index=21&type=chunk) Net Revenues by Segment (2021 vs. 2020) | Segment | 2021 Net Revenues ($) | 2020 Net Revenues ($) | | :--- | :--- | :--- | | Video Solutions | $9,073,626 | $10,514,868 | | Revenue Cycle Management | $1,630,048 | — | | Ticketing | $10,709,760 | — | | **Total Net Revenues** | **$21,413,434** | **$10,514,868** | - The Video Solutions segment offers **in-car video systems**, **body-worn cameras**, the **VuLink auto-activation system**, and **health safety products**[22](index=22&type=chunk) - The **Revenue Cycle Management** segment, established in Q2 2021 through acquisitions, provides **billing and back-office services** to healthcare organizations[23](index=23&type=chunk)[24](index=24&type=chunk) - The **Ticketing** segment, formed in Q3 2021 via the **TicketSmarter acquisition**, operates an online marketplace for **over 125,000 live events** with **over 48 million tickets** for sale[26](index=26&type=chunk)[28](index=28&type=chunk) - As of December 31, 2021, the company had approximately **146 full-time employees** across its segments[80](index=80&type=chunk)[84](index=84&type=chunk) - In December 2021, the company formed **Worldwide Reinsurance Ltd.**, a Bermuda-based captive insurance subsidiary for liability coverage[70](index=70&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors.) This section is not applicable - Not applicable[92](index=92&type=chunk) [Unresolved Staff Comments](index=16&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments.) The company reports no unresolved staff comments - None[94](index=94&type=chunk) [Properties](index=16&type=section&id=Item%202.%20Properties.) In 2021, the company acquired a **71,361 sq. ft. commercial building** for **$5.3 million** in Lenexa, Kansas, for its future headquarters, and assumed operating leases from recent acquisitions - On April 30, 2021, the company purchased a **71,361 sq. ft. commercial office building** in Lenexa, Kansas, for approximately **$5.3 million** in cash[97](index=97&type=chunk) - The company assumed operating leases for office spaces from recent acquisitions, with terms ending between **December 2022 and July 2024**[98](index=98&type=chunk)[99](index=99&type=chunk)[100](index=100&type=chunk) [Legal Proceedings](index=16&type=section&id=Item%203.%20Legal%20Proceedings.) The company's primary legal proceeding, a patent infringement lawsuit against Axon, concluded with appeals denied and no material adverse effect expected from ongoing litigation - The company's patent infringement suit against Axon, filed in January 2016, resulted in a summary judgment for Axon in June 2019[104](index=104&type=chunk)[107](index=107&type=chunk) - Appeals to the U.S. Court of Appeals were denied in April 2020, and the company has abandoned further appeal rights[108](index=108&type=chunk) - The company records legal liabilities when probable and estimable, with no material adverse effect expected from current proceedings[109](index=109&type=chunk)[110](index=110&type=chunk) [Mine Safety Disclosures](index=18&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) This section is not applicable - Not applicable[112](index=112&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=19&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities.) The company's common stock trades on Nasdaq under 'DGLY', initiated a **$10 million** share repurchase program in Q4 2021, has not paid dividends, and maintains equity compensation plans Quarterly Stock Price Range (High/Low) | Period | 2021 High ($) | 2021 Low ($) | 2020 High ($) | 2020 Low ($) | | :--- | :--- | :--- | :--- | :--- | | 1st Quarter | $3.98 | $1.51 | $2.02 | $0.64 | | 2nd Quarter | $2.24 | $1.56 | $7.10 | $0.67 | | 3rd Quarter | $1.83 | $1.17 | $4.43 | $1.80 | | 4th Quarter | $1.60 | $0.97 | $3.19 | $1.91 | - On December 6, 2021, the Board approved a share repurchase program for up to **$10 million** of common stock, expiring December 31, 2022[119](index=119&type=chunk) Share Repurchases in Q4 2021 | Period | Total Shares Purchased | Average Price Paid ($) | Approx. Dollar Value Remaining in Program ($) | | :--- | :--- | :--- | :--- | | December 2021 | 1,734,838 | $1.14 | $8,024,921 | - The company has not declared or paid cash dividends and intends to retain future earnings for business operations[120](index=120&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2021) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights ($) (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 1,086,064 | $2.37 | 915,845 | [Reserved](index=21&type=section&id=Item%206.%20%5BReserved%5D.) This section is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operation.) In 2021, total revenue more than doubled to **$21.4 million** driven by new segments, leading to a **$25.5 million** net income primarily from non-cash gains on warrant derivatives, and significantly improved liquidity to **$32.0 million** cash from **$66.4 million** in offerings Consolidated Results of Operations Summary | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Revenue | $21,413,434 | $10,514,868 | | Gross Profit | $5,663,775 | $4,062,594 | | Operating Loss | ($14,760,910) | ($7,663,651) | | Net Income (Loss) | $25,530,961 | ($2,625,881) | | Basic and Diluted EPS | $0.51 | ($0.12) | - The significant increase in total revenue was driven by the new **Ticketing** and **Revenue Cycle Management** segments, established through acquisitions in the second half of 2021[162](index=162&type=chunk) - Net income resulted primarily from a **$36.7 million** non-cash gain on warrant derivative liabilities and a **$3.7 million** gain on contingent consideration from acquisitions[230](index=230&type=chunk)[231](index=231&type=chunk) - SG&A expenses increased **74.2%** to **$20.4 million** in 2021, driven by new acquisitions, increased promotional activities, and higher professional fees[213](index=213&type=chunk)[214](index=214&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk) - The company raised approximately **$66.4 million** in net proceeds from two registered direct offerings in Q1 2021, significantly strengthening liquidity[247](index=247&type=chunk)[251](index=251&type=chunk)[255](index=255&type=chunk) - Cash and cash equivalents increased to **$32.0 million** at year-end 2021 from **$4.4 million** in 2020, primarily due to financing activities[265](index=265&type=chunk) [Results of Operations (2021 vs. 2020)](index=24&type=section&id=Results%20of%20Operations) Total revenues surged **103.6%** to **$21.4 million** in 2021, driven by new segments, resulting in a **$25.5 million** net income despite increased operating loss and SG&A, primarily due to non-cash gains Revenue by Type and Segment (2021 vs. 2020) | Revenue Type / Segment | 2021 ($) | 2020 ($) | % Change | | :--- | :--- | :--- | :--- | | **Product Revenues** | | | | | Video Solutions | $6,393,050 | $8,029,457 | (20.4)% | | Ticketing | $2,787,237 | — | 100% | | *Total Product Revenues* | *$9,180,287* | *$8,029,457* | *14.3%* | | **Service & Other Revenues** | | | | | Video Solutions | $2,680,576 | $2,485,411 | 7.9% | | Ticketing | $7,922,523 | — | 100% | | Revenue Cycle Management | $1,630,048 | — | 100% | | *Total Service Revenues* | *$12,233,147* | *$2,485,411* | *392.2%* | | **Total Revenues** | **$21,413,434** | **$10,514,868** | **103.6%** | Gross Profit by Segment (2021 vs. 2020) | Segment | 2021 Gross Profit ($) | 2020 Gross Profit ($) | | :--- | :--- | :--- | | Video Solutions | $2,002,345 | $4,062,594 | | Revenue Cycle Management | $521,047 | — | | Ticketing | $3,140,383 | — | | **Total Gross Profit** | **$5,663,775** | **$4,062,594** | - SG&A expenses increased by **$8.7 million (74.2%)** to **$20.4 million**, driven by new acquisitions, increased promotional expenses, and higher payroll[213](index=213&type=chunk) - A non-cash gain of **$36,664,907** from the change in fair value of warrant derivative liabilities was the primary driver of net income[230](index=230&type=chunk) - A gain of **$3,732,789** was recognized from the change in fair value of contingent consideration related to acquisitions[231](index=231&type=chunk)[232](index=232&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity significantly improved in 2021, with cash increasing to **$32.0 million** from **$4.4 million**, primarily due to **$66.4 million** in net proceeds from direct offerings, despite substantial cash usage in operating and investing activities - The company raised approximately **$66.4 million** in net proceeds from two registered direct offerings in Q1 2021, providing adequate liquidity for the foreseeable future[247](index=247&type=chunk) Summary of Cash Flows (2021 vs. 2020) | Cash Flow Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($17,825,108) | ($13,274,715) | | Net Cash Used in Investing Activities | ($19,124,379) | ($1,499,189) | | Net Cash Provided by Financing Activities | $64,595,521 | $18,775,977 | - Investing activities in 2021 included approximately **$5.3 million** for a new building and cash payments for three acquisitions[269](index=269&type=chunk)[270](index=270&type=chunk)[271](index=271&type=chunk)[272](index=272&type=chunk) - Financing activities in 2021 were dominated by **$66.6 million** gross proceeds from two public offerings, offset by approximately **$2.0 million** in share repurchases[263](index=263&type=chunk) - As of December 31, 2021, the company had net working capital of **$33.1 million**, a significant improvement from the prior year[264](index=264&type=chunk) [Critical Accounting Policies](index=48&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies involve significant judgment, including Revenue Recognition, Allowance for Excess and Obsolete Inventory (**$3.9 million** reserve), Goodwill and Intangible Asset impairment, Warranty Reserves, Stock-based Compensation, and Income Taxes with a full valuation allowance against deferred tax assets - Key critical accounting policies include **Revenue Recognition**, **Allowance for Excess and Obsolete Inventory**, **Goodwill and other intangible assets**, **Warranty Reserves**, **Stock-based Compensation Expense**, **Fair value of warrants**, **Fair value of assets and liabilities acquired in business combinations**, and **Accounting for Income Taxes**[289](index=289&type=chunk) - Revenue for the ticketing segment is recorded on a **gross basis** for inventory sales and a **net basis** for marketplace transactions[298](index=298&type=chunk)[299](index=299&type=chunk)[300](index=300&type=chunk) - The reserve for excess and obsolete inventory was **$3.9 million** as of December 31, 2021, up from **$2.0 million** in 2020, primarily due to older product obsolescence and new ticketing segment reserves[312](index=312&type=chunk) - The company maintains a full valuation allowance of **$17.0 million** against its net deferred tax assets as of December 31, 2021, due to recurring operating losses[327](index=327&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=53&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This section is not applicable - Not applicable[332](index=332&type=chunk) [Financial Statements and Supplementary Data](index=53&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data.) This section presents the consolidated financial statements for 2021 and 2020, along with RBSM LLP's unqualified audit opinion, which highlights critical audit matters regarding **goodwill and intangible valuation** and **inventory reserves** - The independent auditor, **RBSM LLP**, issued an unqualified opinion on the consolidated financial statements[387](index=387&type=chunk) - Critical Audit Matters included the valuation of **goodwill and intangibles** from the TicketSmarter acquisition and the valuation of **inventory reserves** due to estimation uncertainty and complex judgment[392](index=392&type=chunk)[399](index=399&type=chunk) Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Assets | $82,989,197 | $20,797,527 | | Total Liabilities | $27,125,958 | $6,441,021 | | Total Equity | $55,863,239 | $14,356,506 | - **Warrant derivative liabilities** of **$14.8 million** were recorded as a current liability in 2021, not present in 2020[410](index=410&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=53&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure.) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[336](index=336&type=chunk) [Controls and Procedures](index=54&type=section&id=Item%209A.%20Controls%20and%20Procedures.) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, excluding recently acquired businesses, with integration ongoing - Management concluded that **disclosure controls and procedures** were effective as of December 31, 2021[338](index=338&type=chunk) - Management's report on **internal control over financial reporting** concluded that controls were effective as of December 31, 2021[342](index=342&type=chunk) - The evaluation of internal control over financial reporting excluded the **TicketSmarter** and **Goody Tickets** acquisitions from September 2021[341](index=341&type=chunk) [Other Information](index=54&type=section&id=Item%209B.%20Other%20Information.) The company reports no other information - None[345](index=345&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=55&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections.) This section is not applicable - Not applicable[347](index=347&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=56&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance.) Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the **2022 Proxy Statement**[350](index=350&type=chunk) [Executive Compensation](index=56&type=section&id=Item%2011.%20Executive%20Compensation.) Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the **2022 Proxy Statement**[352](index=352&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=56&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters.) Information for this item, including equity compensation plans, is incorporated by reference from the company's definitive proxy statement and Part II, Item 5 of this report - Information is incorporated by reference to the **2022 Proxy Statement**[354](index=354&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=56&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence.) Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the **2022 Proxy Statement**[357](index=357&type=chunk) [Principal Accountant Fees and Services](index=56&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services.) Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the **2022 Proxy Statement**[359](index=359&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=57&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules.) This section lists documents filed with the Annual Report on Form 10-K, including consolidated financial statements starting on page F-1, omitted schedules, and a comprehensive list of exhibits - The consolidated financial statements required by Item 8 are included starting on **page F-1**[362](index=362&type=chunk) - All financial statement schedules have been omitted as not applicable or included elsewhere[363](index=363&type=chunk) - Key exhibits include **stock option plans**, **placement agency agreements**, the **real estate sales contract**, and agreements for the **Nobility and TicketSmarter acquisitions**[364](index=364&type=chunk)[365](index=365&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Title of each class Trading Symbol(s) Name of exchange on which registered Common stock, $0.001 par value per share DGLY the Nasdaq Capital Market LLC FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021. or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ t ...

Digital Ally, Inc. (NASDAQ:DGLY) Q3 2021 Earnings Conference Call November 17, 2021 11:15 AM ET Company Participants Stanton Ross - Chief Executive Officer Tom Heckman - Chief Financial Officer Conference Call Participants Rommel Dionisio - Aegis Capital Bryan Lubitz - Aegis Capital Patrick McGrady - Stonefish Capital Operator This conference call contains forward-looking statements within the meaning of Section 27E of the Securities Exchange Act of 1934 as amended relating to Digital Ally's future business ...

Financial Data and Key Metrics Changes - Total revenues increased by 44% year-over-year and 21% year-to-date [8] - Gross margins improved to 51% from 23% in the prior year [9] - SG&A expenses increased by 53% year-over-year and 32% year-to-date [9] Business Line Data and Key Metrics Changes - Product revenues rose by 63% year-over-year, with the EVO-HD system accounting for 25% of total revenues compared to 9% last year [10] - DVM-800 maintained a steady contribution of about 18% of revenues [11] - FirstVU body cameras contributed approximately 12% of total revenues, with a new version expected to launch soon [12] - DVM-250 commercial product dropped to about 2% of revenues due to COVID-19 impacts [13] - Service revenues increased by 14% year-over-year, while cloud revenues faced challenges [16] Market Data and Key Metrics Changes - Rental revenues increased significantly due to a sublease on a newly acquired building [17] - Overall gross margins increased primarily due to a shift towards higher-margin EVO products [18] Company Strategy and Development Direction - The company is pursuing a roll-up strategy in the medical billing industry, with the recent acquisition of Elite Medical [28] - Plans to close additional acquisitions in the medical billing sector and other areas by the end of Q3 [30] - The company aims to enhance EBITDA through strategic acquisitions and leverage existing relationships in law enforcement and commercial sectors [35] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about growth opportunities as schools reopen and COVID-19 vaccinations progress [36] - The company anticipates continued demand for ThermoVu and Shield products in various sectors [36] Other Important Information - The company reported a strong balance sheet with $58 million in cash and minimal debt [27] - SG&A expenses were driven by professional fees related to acquisitions and increased insurance costs due to COVID-19 [19][24] Q&A Session Summary Question: Impact of FirstVU product on margins - Management confirmed that FirstVU is a high-margin product, typically sold on a subscription basis [37] Question: Opportunities for ThermoVu in large gatherings - Management acknowledged potential for ThermoVu in theaters and workplaces as they reopen [39] Question: Growth of recurring revenue - Recurring revenue has faced challenges due to commercial clients not ramping up post-COVID, but law enforcement side has continued to grow [45] Question: Medical billing acquisition's role in growth - The acquisition is expected to open doors for ThermoVu and Shield products in hospitals and clinics [48] Question: SG&A charges and future expectations - Management indicated that some SG&A increases are nonrecurring, but ongoing acquisitions will lead to continued professional fees [51] Question: Marketing efforts for product awareness - The company is increasing visibility through various marketing strategies, including branding in videos [53] Question: Future roadshows and investor outreach - Management confirmed plans for roadshows to increase awareness and communicate the company's story [69]

PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements.) The company's liquidity improved dramatically from financing activities, though it reported a Q2 net loss while initiating a new healthcare venture [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet reflects a surge in assets and liabilities, driven by significant financing activities and new warrant derivative liabilities Balance Sheet Comparison (Unaudited) | Financial Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $58,276,178 | $4,361,758 | | Total current assets | $72,997,645 | $17,830,106 | | Total assets | $83,099,135 | $20,797,527 | | **Liabilities & Equity** | | | | Warrant derivative liabilities | $29,527,224 | $0 | | Total current liabilities | $32,787,911 | $3,720,608 | | Total liabilities | $36,392,340 | $6,441,022 | | Total stockholders' equity | $46,706,795 | $14,356,505 | - Total assets surged to **$83.1 million** from $20.8 million, primarily driven by a more than **13-fold increase in cash** and cash equivalents resulting from financing activities[14](index=14&type=chunk) - A new significant liability, **Warrant derivative liabilities**, was recorded at **$29.5 million** as of June 30, 2021, contributing to a substantial increase in total liabilities[14](index=14&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Revenue and gross profit grew, but a Q2 net loss widened while H1 net income was achieved due to a large non-cash gain Three Months Ended June 30 (Unaudited) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total revenue | $2,493,671 | $1,732,192 | +44.0% | | Gross profit | $1,260,800 | $392,758 | +221.0% | | Operating loss | ($2,616,884) | ($2,143,154) | +22.1% | | Net loss | ($5,382,487) | ($497,894) | +981.0% | | Diluted EPS | ($0.10) | ($0.03) | - | Six Months Ended June 30 (Unaudited) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total revenue | $5,029,501 | $4,157,936 | +21.0% | | Gross profit | $2,072,683 | $1,657,788 | +25.0% | | Operating loss | ($5,482,578) | ($4,070,519) | +34.7% | | Net income (loss) | $16,339,371 | ($2,832,004) | - | | Diluted EPS | $0.34 | ($0.17) | - | - For the six months ended June 30, 2021, the company reported a **net income of $16.3 million**, primarily driven by a non-cash gain of **$21.7 million** from the change in fair value of warrant derivative liabilities[17](index=17&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity (Deficit)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Deficit)) Stockholders' equity increased substantially, primarily due to direct offerings, warrant exercises, and net income for the period - Total stockholders' equity increased significantly from **$14.4 million** at December 31, 2020, to **$46.7 million** at June 30, 2021[19](index=19&type=chunk)[21](index=21&type=chunk) - The increase in equity was primarily driven by **registered direct offerings**, the exercise of pre-funded common stock purchase warrants, and a **net income of $16.3 million** for the six-month period[19](index=19&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) A significant net increase in cash was driven by strong financing activities, which offset cash used in operations and investments Cash Flow Summary for Six Months Ended June 30 (Unaudited) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($6,149,773) | ($4,057,003) | | Net cash used in investing activities | ($6,506,407) | ($163,109) | | Net cash provided by financing activities | $66,570,600 | $20,025,977 | | **Net increase in cash** | **$53,914,420** | **$15,805,865** | - Financing activities provided **$66.6 million in cash**, primarily from registered direct offerings ($13.3M) and the exercise of pre-funded warrants ($53.2M)[24](index=24&type=chunk) - Investing activities used **$6.5 million**, including **$5.5 million** for purchases of property, plant, and equipment and **$1.0 million** for a business acquisition[24](index=24&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Notes detail significant financing events, the accounting for warrant liabilities, a new healthcare venture, and the conclusion of patent litigation - The company formed **Digital Ally Healthcare, LLC** in June 2021 to enter the medical billing market and subsequently acquired Elite Medical Billing Specialists[44](index=44&type=chunk)[147](index=147&type=chunk) - Warrants issued in Q1 2021 are classified as **derivative liabilities** and measured at fair value, with changes reported in earnings, due to a net cash settlement provision[68](index=68&type=chunk)[124](index=124&type=chunk) - The company's appeal in its patent infringement lawsuit against Axon was denied, and the company has **abandoned any further appeals**[111](index=111&type=chunk) - In Q1 2021, the company completed two registered direct offerings, raising combined net proceeds of approximately **$66.4 million** through the sale of common stock, pre-funded warrants, and common stock purchase warrants[134](index=134&type=chunk)[140](index=140&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management discusses revenue growth, wider operating losses, strategic expansion into healthcare, and a significantly improved liquidity position [Results of Operations for the Three Months Ended June 30, 2021 and 2020](index=38&type=section&id=Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20June%2030,%202021%20and%202020) Q2 2021 revenue grew 44% and gross margin improved to 51%, but higher SG&A expenses and a large non-cash loss widened the net loss Q2 2021 vs Q2 2020 Performance | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Total Revenue | $2,493,671 | $1,732,192 | | Gross Profit | $1,260,800 | $392,758 | | Gross Margin | 51% | 23% | | Operating Loss | ($2,616,884) | ($2,143,154) | | Net Loss | ($5,382,487) | ($497,894) | - Product revenues increased by **63% ($665,751)**, partly due to the launch of new product lines (ThermoVu™ and Shield™) in response to the COVID-19 pandemic[173](index=173&type=chunk) - Selling, general and administrative (SG&A) expenses rose by **53% ($1,341,772)**, driven by increased travel, promotional activities, and higher legal and professional fees as business activities resumed post-COVID restrictions[192](index=192&type=chunk) [Results of Operations for the Six Months Ended June 30, 2021 and 2020](index=45&type=section&id=Results%20of%20Operations%20for%20the%20Six%20Months%20Ended%20June%2030,%202021%20and%202020) H1 2021 revenue grew 21%, but a significant non-cash gain on warrant liabilities turned an operating loss into a $16.3 million net income H1 2021 vs H1 2020 Performance | Metric | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Total Revenue | $5,029,501 | $4,157,936 | | Gross Profit | $2,072,683 | $1,657,788 | | Gross Margin | 41% | 40% | | Operating Loss | ($5,482,578) | ($4,070,519) | | Net Income/(Loss) | $16,339,371 | ($2,832,004) | - The company achieved a **net income of $16.3 million** for the six-month period, reversing a $2.8 million loss from the prior year, primarily due to a **$21.7 million gain** on the change in fair value of warrant derivative liabilities[261](index=261&type=chunk)[264](index=264&type=chunk) - SG&A expenses increased by **32% ($1,826,954)**, fueled by higher promotional costs as NASCAR/IndyCar seasons resumed, and increased legal fees related to offerings and acquisitions[241](index=241&type=chunk)[244](index=244&type=chunk)[245](index=245&type=chunk) [Liquidity and Capital Resources](index=52&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity improved dramatically, with cash rising to $58.3 million after raising $66.4 million from offerings to fund operations and acquisitions - Cash and cash equivalents increased by **$53.9 million** during the six months ended June 30, 2021, reaching a balance of **$58.3 million**[270](index=270&type=chunk)[273](index=273&type=chunk) - The company raised approximately **$66.4 million in net proceeds** from two registered direct offerings of common stock and warrants in Q1 2021[266](index=266&type=chunk)[272](index=272&type=chunk) - Significant capital expenditures included the acquisition of a new **$5.3 million commercial office/warehouse building** and the acquisition of Elite Medical Billing for approximately **$1.4 million**[275](index=275&type=chunk)[276](index=276&type=chunk) [Critical Accounting Policies](index=55&type=section&id=Critical%20Accounting%20Policies) Key policies require significant judgment, particularly for warrant derivative liabilities, while a full valuation allowance is maintained for deferred tax assets - Key critical accounting policies involve significant estimates for **revenue recognition, inventory and warranty reserves, stock-based compensation, and income taxes**[291](index=291&type=chunk)[292](index=292&type=chunk) - The valuation of **warrant derivative liabilities** is a new critical policy, requiring the use of a Black-Scholes model with subjective inputs like stock volatility[309](index=309&type=chunk)[310](index=310&type=chunk) - The company maintains a **full valuation allowance of $24.6 million** against its net deferred tax assets, as it has not yet demonstrated a sustained level of profitability to ensure their realization[315](index=315&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=60&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) The company has indicated that this section is not applicable - Not Applicable[320](index=320&type=chunk) [Item 4. Controls and Procedures](index=60&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's **disclosure controls and procedures were effective** as of June 30, 2021[322](index=322&type=chunk) - **No changes in internal control** over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[324](index=324&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=61&type=section&id=Item%201.%20Legal%20Proceedings.) The company has abandoned its patent infringement appeal against Axon and expects no other material impact from legal matters - The company's appeal in its patent infringement lawsuit against Axon Enterprise, Inc. was denied, and the company has **abandoned its right to any further appeals**[111](index=111&type=chunk) - Management believes that the final outcome of other various claims and legal proceedings will **not have a material adverse effect** on the company's consolidated financial condition, results of operations, or cash flows[327](index=327&type=chunk) [Item 1A. Risk Factors](index=61&type=section&id=Item%201A.%20Risk%20Factors.) As a smaller reporting company, Digital Ally, Inc is not required to provide the information for this item - As a smaller reporting company, **this section is not required**[328](index=328&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=61&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) The company has indicated that this section is not applicable - Not applicable[330](index=330&type=chunk) [Item 3. Defaults Upon Senior Securities](index=61&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company has indicated that this section is not applicable - Not applicable[332](index=332&type=chunk) [Item 4. Mine Safety Disclosures](index=61&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company has indicated that this section is not applicable - Not applicable[334](index=334&type=chunk) [Item 5. Other Information](index=61&type=section&id=Item%205.%20Other%20Information.) The company has indicated that this section is not applicable - Not applicable[336](index=336&type=chunk) [Item 6. Exhibits](index=62&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Interactive Data Files (XBRL) - The report includes **CEO and CFO certifications** pursuant to Rule 13a-14(a) and 13a-14(b) of the Securities and Exchange Act of 1934, as well as Interactive Data Files[339](index=339&type=chunk)

Financial Data and Key Metrics Changes - Overall revenues increased by approximately $110,000 or 5% year-over-year [8] - Product revenues increased by 8% year-over-year, driven by the success of the subscription program [9] - Service revenues decreased by 5% year-over-year, primarily due to COVID-19 related travel restrictions [9] - Operating income dropped by $938,000 year-over-year, with a $450,000 drop in gross margins despite a 5% increase in revenues [15] - Net income was $21.7 million for the quarter, or $0.49 per share, compared to a loss of $2.3 million or $0.17 per share a year ago [19] - Cash balance improved significantly to $67.6 million from $4.3 million a year ago [21] Business Line Data and Key Metrics Changes - Service costs of sales remained steady at 26%, while product costs of sales increased from 56% to 82% year-over-year [10] - SG&A expenses increased by $485,000, attributed to higher insurance costs and inflationary wage increases [13] Market Data and Key Metrics Changes - The company is experiencing inflationary pressures affecting gross margins, particularly in shipping and component costs [11][12] - The demand for newer components in high demand across various industries is impacting the company's ability to pass on costs [36] Company Strategy and Development Direction - The company is looking to enhance core product lines and explore potential acquisitions to provide more value to investors [23][24] - A new office and warehouse building was acquired to support growth and expansion of product lines [22] - The company is focusing on organic growth through product improvements and exploring adjacent market opportunities [26][30] Management's Comments on Operating Environment and Future Outlook - Management noted that the inflationary trends in costs are expected to be transitory [11][12] - The law enforcement sector is anticipated to continue growing, with positive reception of new products like the Evo HD system and body cameras [30][31] - Management expressed optimism about the recovery from COVID-19 and the potential for increased market share due to unique product offerings [31][32] Other Important Information - The balance sheet has improved dramatically due to $66.5 million raised in public offerings [20] - The company is cautious about insurance costs and is exploring different ways to manage insurance programs [14] Q&A Session Summary Question: How do you plan to pass on inflationary cost increases? - Management indicated that inflationary pressures have been building and they are attempting to pass on costs, but competitive pressures limit their ability to do so effectively [36] Question: Update on foreign law enforcement agency opportunity? - Management confirmed that the deal is delayed but not canceled, as the agency is dealing with its own COVID-related priorities [40] Question: Are customers shifting to subscription models? - Management noted a significant shift towards subscription models, with 15% to 20% quarter-over-quarter growth in that area [48][49] Question: Interest in thermal systems for events? - Management reported an increase in inquiries for situational security products as events begin to reopen [51] Question: Is the current cash sufficient for future plans? - Management confirmed that the current cash position is sufficient for their needs [52] Question: Plans for marketing and product launches? - Management is focused on increasing visibility and marketing efforts, particularly in the commercial fleet market [76][78] Question: Discussion on poison pill strategy? - Management explained that the Blank Check Preferred is intended to protect against unsolicited takeover attempts, but achieving shareholder approval has been challenging [82][84]

Financial Performance - Total revenue for Q1 2021 was $2,535,829, a decrease from $2,798,291 in Q4 2020, reflecting a decline of approximately 9.4%[153] - Gross profit for Q1 2021 was $811,882, resulting in a gross profit margin of 32.0%, down from 43.0% in Q4 2020[153] - The company reported an operating loss of $2,865,693 for Q1 2021, compared to a loss of $1,749,174 in Q4 2020, indicating a worsening of operating performance[153] - Net income for Q1 2021 was $21,721,858, a significant improvement from a net loss of $321,318 in Q4 2020[153] - Total revenues for Q1 2021 were $2,535,829, an increase of $110,084 (5%) compared to $2,425,745 in Q1 2020[176] - Product revenues for Q1 2021 were $1,912,577, up $146,041 (8%) from $1,766,536 in Q1 2020, driven by new product lines generating over $141,309 in revenue[176] - Cloud service revenue increased to $241,653 in Q1 2021, a rise of $14,529 (6%) from $227,124 in Q1 2020[172] - Extended warranty service revenues decreased by $78,676 (24%) to $254,692 in Q1 2021 from $333,368 in Q1 2020[173] - Gross profit for Q1 2021 was $811,882, down $453,146 (36%) from $1,265,028 in Q1 2020, primarily due to increased inbound freight costs[182] - Operating loss increased by $938,325 (49%) to $2,865,693, with operating loss as a percentage of revenues worsening to 113% from 80%[190] - Net income improved by $24,055,968 (1,031%) to $21,721,858 for the three months ended March 31, 2021[197] Expenses and Costs - Total selling, general, and administrative expenses for Q1 2021 were $3,677,575, representing 145% of total revenues, an increase from 132% in Q1 2020[158] - Selling, general and administrative expenses rose to $3,677,575 in Q1 2021, an increase of $485,179 (15%) from $3,192,396 in Q1 2020[183] - Research and development expenses totaled $448,965 in Q1 2021, a decrease of $36,783 (8%) from $485,748 in Q1 2020[183] - Cost of product revenue increased by $572,063 (58%) to $1,561,310 in Q1 2021 from $989,247 in Q1 2020, attributed to higher inbound freight costs[177] - Total cost of sales as a percentage of revenues was 68% in Q1 2021, compared to 48% in Q1 2020, indicating a decline in gross margins[179] - Other selling, general, and administrative expenses increased by $751,222 (78%) to $1,715,119, mainly due to increased travel costs and insurance expenses related to COVID-19[189] - Professional fees and expenses decreased by $107,015 (32%) to $232,577 for the three months ended March 31, 2021, primarily due to the termination of the Axon lawsuit[187] - Executive, sales, and administrative staff payroll expenses decreased by $36,619 (5%) to $684,159, attributed to a reduction in technical support staffing due to the COVID-19 pandemic[188] Cash and Debt Management - The company has no off-balance sheet debt and recently acquired a commercial office building for approximately $5.3 million to support future operations[155] - Interest income rose to $41,686 from $6,263, reflecting increased cash levels and net proceeds of approximately $66.4 million from registered direct offerings[191] - Interest expense decreased significantly to $1,427 from $307,560, due to the elimination of most interest-bearing debt using proceeds from registered direct offerings[192] - Cash and cash equivalents increased to $67,626,240, up from $4,361,758 at December 31, 2020, with a net increase of $63,264,482 during the three months[203] - The company has outstanding debt obligations totaling $160,000, with maturities spread across 2021 to 2026 and beyond[215] Inventory and Reserves - As of March 31, 2021, the company had a reserve for excess and obsolete inventory of $2,388,256, representing 21.2% of the gross inventory balance[232] - The company reported a decrease in warranty reserves to $9,243 as of March 31, 2021, down from $31,845 as of December 31, 2020[237] - The company’s finished goods inventory increased by 17% to $8,128,666 as of March 31, 2021, compared to $6,974,291 at December 31, 2020[232] - The company’s total raw materials and component parts decreased by 1% to $3,141,836 as of March 31, 2021[232] Future Outlook and Strategy - The introduction of the EVO-HD, ThermoVU™, and Shield™ product lines is expected to help diversify and increase revenues in the law enforcement and commercial markets[152] - The company aims to increase recurring cloud and service revenues as part of its growth strategy[150] - Total revenue for 2022 was $184,145, an increase from $133,260 in 2021, while revenue for 2023 is projected at $184,241[215] - The company expects to maintain a full valuation allowance on net deferred tax assets until it can demonstrate a sustainable level of profitability[244] - The realization of deferred income tax assets is contingent upon generating sufficient taxable income in future periods[247] Market and Economic Conditions - The COVID-19 pandemic negatively impacted revenues from legacy products, particularly the DVM-250 Plus and DVM-800, while positively affecting sales of the Shield disinfectant and ThermoVU product lines[162] - Inflation has not materially affected the company during the past fiscal year[248] - The company typically generates higher revenues in the second half of the calendar year compared to the first half[248]