Digital Ally, Inc. (NASDAQ:DGLY) Q3 2022 Earnings Call Transcript

Digital Ally, Inc. (NASDAQ:DGLY) Q3 2022 Earnings Call Transcript November 17, 2022

Operator: Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc. 2022 Third Quarter Operating Results Conference Call. 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 indicatefuture events and trends and do not relate to historical matters rather, they represent forward-looking statements. These forward-looking statements are based largely on our expectations or forecast of future events can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control.

Therefore, actual results could differ materially from the forward-looking statements 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 Stan Ross. Please go ahead.

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Stanton Ross: Thank you very much. Thanks, everybody, for joining us today. I appreciate your time. With me today is Tom Heckman, the company’s CFO; and also Brody Green, our Chief Accounting Officer. What we’ll do today, just to give you a little insight, Tom will go over the operations and Brody as well will be contributing with his input. And then I’ll be sharing some new events that have occurred and some things that we’re looking forward to finishing up 2022 and also some insight on how 2023 looks. So with that being said, Tom, I’ll turn it over to you.

Tom Heckman: Thank you, Stan, and good morning to everybody. Welcome to our call. We did file our 10-Q on Monday. So hopefully, everyone’s had a chance to at least look at it and see the details behind the numbers for our third quarter ended September 30, 2022. First, I’d like to start out with talking about several corporate events or matters, which you may or may not have seen, Form 8-Ks and other filings on before we get into the actual operating segments or results of the operations. The first one I’d like to talk about is the Form 8-K that we filed back in July regarding the NASDAQ delisting notice that we received for the minimum bid price being under $1. That delisting notice gives us until January 30, 2023, to rectify that situation.

We are, however €“ we believe we’re eligible for an additional 180-day grace period in which to meet the minimum requirements, which would actually put us out to July of 2023. Now that’s not a given, but we believe we are eligible for that 180 days. Obviously, that’s €“ the whole delisting notice and matter is of great importance to management and obviously, the shareholders. So management, we have been dealing with this issue and are talking about several alternatives, which leads me to the following matter. We filed a Form 8-K in October 22, so it’s after the September 30 quarter ended, wherein we issued $15 million worth of Series A and B preferred stock, redeemable preferred stock. The Series A preferred stock votes on specific matters only on an as-converted basis, and the Series B votes on a mere basis and a mere basis, meaning the exact percentages of the other votes, including the preferred Series A as well as the common stock and the votes on a 2,500 share to 1 basis, and there’s 100,000 shares of Series B issues.

So obviously, a big matter and probably of importance to you all, and hopefully, you’ve had a chance to read that 8-K the proceeds €“ the $50 million proceeds of that issuance is an escrow pending redemption. There is a 5% premium on the redemption. There was a 5% discount on the issuance. The redemption period starts on the date of the shareholder meeting, the Annual Shareholder Meeting and ends 90 days thereafter. So that’s what you might ask why do we do this? And there’s simply one answer. We needed to get our voting quorum and a majority at our annual meeting. You probably and hopefully have received a proxy statement from us for our annual meeting dated December 7, 2022, which is coming up rather quickly. And the reason we did the preferred stock is that if we are providing voting matters that actually amend the company’s articles and incorporation per our bylaws and articles incorporation, it requires over 50% vote of all outstanding shares, not just those shares voted.

So in other words, if we got 53 million shares outstanding, we’ve got to get at least €“ 53 million, half of that, 26 million, 27 million shares voting yes on that matter even though usually not that many people vote on matters. So what we’ve done is, in the past, we’ve tried to raise our authorized shares and a couple of other matters for the last four or five years that required over 50% vote of outstanding shares. And we always received a majority of the shares voted, but we never did reach the point where we got more than 50% of all shares outstanding. Hence, that is the reason we did this preferred stock. So we can ensure ourselves that we’re: a, we’re going to get a quorum for the meeting; and b, that we’ve got enough votes to equal 51% or just over 50% of all shares outstanding, not just those that are voted.

There are several reasons that we are going to these lengths to get the quorum and the shares voted by issuing the preferred stock. First is there’s been a rise in the non-interested shareholders that don’t vote €“ it’s kind of what I call the Robin Hood-type shareholders that just don’t have the interest in voting. So they leave it unvoted, their shares unvoted. And also, there’s been several major brokers, including Charles Schwab and TD Ameritrade that no longer those non-voted shares. In the past, they usually voted those non-objecting beneficial owners, what we call novo votes on their behalf. And in that way, we got the quorum and to 50% vote majority. So without them doing it at this point, it makes it very, very difficult to reach quorum, much less 50% of all shares outstanding.

So the preferred stock is out there merely to help us get to the 50% quorum and voting majority in order to get some issues passed. Now let’s look at the matters that are going to be voted out at the Annual Meeting. Again, the meeting of December 7, 2022, it’s coming up shortly. I encourage everybody to vote their shares. Please vote your shares because it’s important to us, and we need to get this €“ a couple of these matters voted in. There’s a total of six items on the agenda, two of which require 50% voting majorities of outstanding votes. In other words, these are the two items that are going to be voted on by the preferred shareholders. The first is to approve an amendment to increase capital stock from $110 million to $210 million.

That €“ you might ask why we’ve only got 53 million or 54 million shares outstanding now. Why we need to go to $210 million. But we do have, from time-to-time, warrants outstanding, sometimes convertible debt so on and so forth. So those have to be reserved for in our capital stock. So very important for us to get up to $210 million in total approved capital stock. So that’s item number 1 is going to be voted on by the preferred shareholders as well as the common shareholders. The second one is to pre-approve the Board of Directors’ decision and discretion on whether a reverse split is needed to meet the NASDAQ delisting requirement. In other words, in order to get up to the $1 minimum bid, the Board may have to at last resort do some type of reverse split in order to get there, and we’re asking for pre-approval of their voting for this.

That doesn’t mean it’s going to happen. It will only happen if it’s needed and necessary. But we need that matter voted and approved upon at the Annual Meeting. So those are the two items that are very important to us, the Board and hopefully to all shareholders and you guys €“ everyone understands the reasons we’re doing this. It’s in order to get matters past at the annual meeting. Again, and I can’t stress this enough. I encourage all shareholders to vote their shares. I know it sometimes it’s a pain to do it. Sometimes you’ll lose the proxy control number or whatever. But please call us and get the voting instructions or getting €“ or even come to the Annual Meeting itself if you have to. But we want everyone to vote in order to get these matters passed.

The other item that happened during the quarter €“ a corporate item that happened during the quarter that I’ll mention is that we extinguished pretty much all our warrant derivative liabilities in Q3. It resulted in a $3.6 million gain on the books. And if you remember, the previous investor calls, I’ve always expressed that there’s a $3 million gain and there’s a $6 million loss, non-cash. It’s funny money. It’s accounting gymnastics because of the way you have to treat warrant derivative liabilities. So we got rid of all those warrant derivative liabilities in Q3, recorded a $3.6 million gain. And hopefully, we don’t have to run into that issue again because number one, it’s hard to explain. And number two, it’s hard to understand for a lot of people, a lot of investors.

So okay, let’s move on to the operating segments and how they did for the third quarter. First of all, the Video Solutions segment, revenues increased $65,000 in Q3 2022 over 2021 or about 3% increase, not a huge increase. But it’s important because it shows that our subscriptions revenues are increasing. And quite frankly, the traction that our new first few models are receiving in the marketplace. We’re getting a lot of new subscriptions versus hardware sales. And I call that mailbox money. It’s very steady. It comes in. It’s predictable and you don’t have the ups and down movements of hardware sales, whether it closes the day before quarter ends versus the day after, so on and so forth. So we’re happy with the improvement and the migration to the subscription agreement.

Also, I will say that deferred revenue, which is basically these subscription agreements, increased to $7.2 million at the end of September 30, 2022. Again, $7.2 million of deferred revenue, which means that we’ll recognize that as it rolls off in what I call mailbox money, the subscriptions. If you look at 12/31, December 31, 2021, we only had $4.3 million of deferred contract revenues. So we’ve increased that in a matter of nine months by $2.9 million or 67%. So we’re very pleased with the growth in the subscription model and how it’s affecting on video segment. The margins for the quarter were down slightly to 24.6% versus 29.1% the year prior. And it really €“ I think it really reflects the fact that we are moving to the subscription model versus a onetime hardware sale, normally a onetime hardware sale upfront yields very good margins but that’s it.

And there are no continuing impact. So I think this is indicative of us moving to a subscription model, and we’re very pleased with it. Okay. Let’s move on to the Revenue Cycle Management segment. That is our medical billing segment, which we have started a roll-up strategy. I think we started that last year, second or third quarter. Our revenues were down slightly in Q3, $2.015 million in 2022 versus $2.050 million in 2021, which is a very slight decrease. However, if you look at the margins generated by those sales, it increased dramatically in 2022 versus 2021. We reached $866,000 of positive gross margins or 43% gross margin percentage versus $197,000 or 9.6% gross margin percentage in 2021. And really, this reflects the synergy. We’re getting the synergies that are the part of the roll-up strategy and the consolidations of the acquisitions we made previously.

We did not make any acquisitions in Q3. So we had time to concentrate on assimilating and consolidating and achieving those synergies. And I think the gross margins are a testament to that effect. It is working €“ our roll-up strategy is working, and it’s growing into a very steady, profitable business for us, and we look forward to further growth down the road. Okay. Now let’s go to the ticketing segment, which is our TicketSmarter business. Our revenue increased to $4.4 million in 2022 versus $560,000 in 2021. Obviously, a huge increase. But remember, we bought TicketSmarter effective September 1, 2021. So there was only one month of revenue in the 2021 period. But even if you take that time straight, it’s a heck of an improvement year-over-year in revenues.

Now let’s look at the bad news. The gross margins were disappointing. We had negative gross margins in 2022 of $786,000 and over $612,000 in 2021. The reasons for this margin issue that we’re dealing with is we had unanticipated write-off of unsold tickets. And really, there’s a hundred reasons for that, but I’ll tell you one. We have generally received a lot of ticketing revenue for €“ on Broadway shows and ballets and such up in New York. And really, the whole COVID thing has changed the buying patterns of many people and predominantly the older generation €“ and I’m one of those obviously. But anyway, the older generation is €“ has really shown a popular interest in those shows and that. And with COVID, they just haven’t come back the way we thought they would.

So that’s just an example, and there’s probably four or five other ones similar to that, that we can go over. The second area is €“ our strategy that we implemented last year to doing a sponsorship relationship really is not working very well. And I’m talking about things like iHeartRadio contract, the Gannett/USA Today contract there’s several others. This sponsorship model did not pan out the way we thought €“ and obviously, the click-through revenues did not reach the levels that we expected. We’re hearing the same sort of problems being experienced by other tech companies such as Facebook and such that the click-through revenues are not there like they have been in the past. So what we’ve done is we have decided to end this strategy and this model and therefore, started in the third quarter to reduce, non-renew or terminate existing contracts that are out there.

So in other words, we’re going to let these things run out if they haven’t run out, terminate early if we can, and non-renew obviously, in order to get away from this model. We believe this will restore profitability in the Ticketing segment within the near future. So we’ve got a plan to fix the Ticketing segment. Its generating revenues, obviously, very good revenues, but we’ve got to fix the gross margin because we obviously do not want those margins to go negative on us like that. Okay. Let’s look a little bit at the balance sheet at September 30, we had roughly $6.3 million of cash on the balance sheet, $21 million of positive working capital. We have only $1.2 million in interest-bearing debt obligations. And remember, those are primarily earn-out notes and the roll-up strategy for the medical billing segment.

So it’s $1.2 million of interest-bearing debt obligations, and we have $48 million in equity. So balance sheet remains strong. We intend to continue the positive trends in our video and revenue segments and go ahead and make the necessary changes in the Ticketing segment to get to profitability that we all would like to see and expect. So with that, I will turn it over to Brody. He’s probably got some more insight into the operating segments and what happened to us in the third quarter and what to expect in the future quarters.

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Brody Green: Yes. Thanks, Tom, and we covered off on most everything I was going to mention as well. So just a few things. He didn’t mention we’re €“ we still have our Shield revenue segment still up and running, and they’ve got some exciting traction coming up here late this year into early 2023 that we’re really looking forward to in a couple of announcements we’ll be able to make here soon regarding their new ventures they’ve got going and some new contracts that are coming due here soon. Tom obviously mentioned the excitement we have surrounding the deferred revenue and how that’s growing rather quickly, and we’re seeing the success of the subscription plans, $7.2 million in deferred revenue is exciting, and we only expect that to grow at the same pace it’s been growing, if not faster.

So, we’re looking forward to seeing that and we’ll recognize that revenue quarter-over-quarter. Similarly, with TicketSmarter, Tom mentioned we’re just kind of rightsizing it right now, trimming out some of those contracts that going quite come to provision like we were hoping for. But we’ve been focusing quite a bit on primary ticketing and becoming a primary ticketing group for a lot of these events and festivals and what not, and we have some exciting announcements we’re going to be able to make here yet before the end of this year that I think will be beneficial for all of us here. And then obviously touched on the consistency in Nobility showing and how it’s really starting to increase its gross margins and the plan is coming together as we expected it to.

So that’s exciting to see as well. So all-in-all, we’re making some corrections here, but we’re also seeing some things trending in the right direction and we’re very excited about here going forward and heading into 2023 as well. With that, Stan.

Stanton Ross: Yes. Thanks, Brody and Tom. Yes, a couple of things that I’ll circle back to, and we’ll start with the ticketing side of things. One of the things, once we acquired that platform, realizing that they normally were just a secondary market and trying to do some unique packages that put them in a primary position. And we’ve been able to establish quite a few of those. As a matter of fact, I think we’re up to over 40 different relationships that we have that were actually the primary ticketing platform for these venues. And so with that and all the relationships we have with the secondary markets and the universities, one of the things that we established is a new entity that you will be seeing quite a bit in 2023, and that is Kustom440 Entertainment.

This is a platform that will allow us to, not only through our relationships that we have with the different theaters and amphitheaters and different stadiums and ballparks, be able to present and have our own concerts or festivals and be able to generate quite a bit of revenue and also believe that it will be very healthy bottom line. That being said, if you look at the growth that we’ve had with TicketSmarter and what we’re anticipating with the Kustom440 marriage. Right now, I think we’ve identified a minimum of six concerts and we hope to have that raised up to well over 15, possibly in 2023. So being a little bit conservative. If you look at the revenue side of just those events, very, very possible another $9 million to $15 million in additional revenue from that aspect and that particular opportunity.

And that is not a very, very high risk area as there is a tremendous amount of data on the individuals that you would be bringing in to perform what they typically draw, what their typical ticket sales are. So providing you’ve got the right structure, venue, primary ticketing, utilize the Digital Ally security side of things with our connections for video solutions. It puts us really in a nice position to be all encompassed in regards to being able to throw these events and also maximize the return from doing those events. So real excited about TicketSmarter and Kustom440, the marriage that they would have and being able to work together. And Shield, as Brody did mention, we really do anticipate some nice announcements in the very near future on that.

It’s taken a while to educate the public on the safetiness of our product, being the non-alcohol or chemical-based disinfectant sanitizer that has all the what you say, cleaning capabilities and to handle viruses and other issues that are out there, but also very safe around children, pets and food. So we do think that, that’s getting a lot of momentum, and you should see some good news coming out of that as well. So anyway, I’m sure there’s some questions that are out there. So we’ll go ahead and open up the floor for Q&A.

Q&A Session

Operator: Thank you. Ladies gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Rommel Dionisio from Aegis Capital. Please go ahead.

Rommel Dionisio: Good morning. Thanks for taking my question. Just wanted to touch based on the Video Solutions segment. Nice revenue increase after here in the third quarter. I know you guys have launched the FirstVU Pro, FirstVU II in kind of late last year, earlier this year. And I wonder are those kind of the key drivers between seeing the €“ this nice revenue bump up? And then obviously, with the subscription model, I would guess that this not only it could lead to sort of steadier and more predictable revenue streams for the segment going forward? Am I understanding that correctly? Thanks very much.

Tom Heckman: You’re absolutely right, Rommel. This new product has been very helpful and gained quite a bit of traction throughout the marketplace as we’re noticing here. And as you mentioned, it’s really making our quarter-over-quarter revenues rather predictable, which is pretty €“ a nice comfortable level for us. And we had a few big contracts come to fruition this year, Kansas State Wildlife, I’m sure you guys saw that press release, it was a nice sizeable order. And I think they might have a second one here coming in Q4 as well. So yes, these new products in the subscription model are really coming together well as we’re starting to see on our income statement, which is nice.

Rommel Dionisio: And maybe just one quick follow-up, if I may. The new products, obviously, you were seeing good results from that in the numbers. Did that help sort of gain incremental customers? Or was it getting kind of existing customers to trade up? Maybe you could just give us a little color on that? Thanks.

Tom Heckman: Yes, it was actually quite a bit of both. We’ve seen quite a few customers that were existing make the upgrade, along with several new customers that we may have not have had the product they were looking for at the time. Now that we do, and we’ve noticed that nice one to coming into our group as well. So that’s in a good touch. And we’re excited to see the new commercial product we announced a few weeks ago. We’re excited to get that out in the market as well to kind of broaden our horizons outside of law enforcement and really get into the commercial business as well.

Rommel Dionisio: Great. Okay. Thanks very much.

Tom Heckman: Thank you.

Stanton Ross: Thank you.

Operator: Thank you. Your next question comes from the line of Mike Albanese from EF Hutton. Please go ahead.

Michael Albanese: Hey. Hi, guys. Thanks for taking my question. My question is in regards to the Ticketing segment and kind of marketing and advertising. Obviously, the sponsor share programs didn’t work out the way you had anticipated. I think ultimately, you’re trying to rightsize that cost structure given the decreased demand. So kind of moving forward, how do you think about optimizing your marketing spend and driving future traffic? Now I know kind of this probably refers more to your secondary segments, it’s the primary and with the rollout of Kustom44, you kind of get that by default. But just how do you think about driving future traffic in the secondary Ticketing segment?

Stanton Ross: Yes. Thanks for the question. What we’re really dealing with is getting back to the basics. I mean, when we looked at the company, we acquired them based upon the values that we’ve already seen they were establishing and the profits that they were generating. And what was anticipated is the media spend with those entities that we talked about if we would have got the click-throughs like, let’s say, so represented by all parties, then it made a lot of sense. But we were talking about €“ I mean it was a hefty. I mean, $5.5 million in commitments and therefore, it should have driven a tremendous amount of traffic. And it just did not. They did not pan out that way. And so what we’ve been able to do is, okay, we let some of them run on out, some of them we’ve been ahead to go €“ we were able to cancel some of them.

We renegotiated because they too realize that what they were hoping and anticipating was a reality either. So we’re getting away from a lot of the media spend and staying focused on the just enormous amount of synergy and relationships that we have, whether it be through the fact that we have like some of these €“ we’re in every state there is in the United States in regards to our Video Solutions company, we’ve sold to probably half the in the country and a good €“ probably third of them still utilizing some of our products. So we have an enormous amount of contacts and relationships with entities that we can go just directly to them and make a presentation to be their primary. Even with our NASCAR and the Indy and stuff, that’s opened up a lot of doors that I think, is going to help drive a tremendous amount of traffic as we continue to bring on more primary.

So we haven’t been up at this very long in regards to having them make this transition. But like I said, I think we’re over 40 different entities that we now have the primary rights. And when we do that, we’re not doing it on a short-term. I mean, we’re trying to do five and 10-year contracts so that we really get established there. And then like I said, the additional stuff that really assist and by default, call it whatever you want. But being able to actually bring in some acts and entertainment ourselves. But you got to realize, like a lot of these amphitheaters, I mean, they’ve already got a bunch of stuff booked. We just happen to be in there, and we just happen to also have the ability to fill in on certain dates that they don’t have something currently booked.

So I think that’s what we’re going to do is get back to a lot more €“ do a better job with the feet on the ground versus just doing the media spend.

Michael Albanese: Got it. No, that makes a lot of sense. And regarding the sponsorship and kind of click-through traffic, you guys obviously aren’t the only ones saying a kind of a negative dynamic at play. And then just regarding Kustom44 Entertainment, and I know you talked about it a little bit, but you had said $9 million to $15 million, that’s kind of your estimate based on what contracts that are essentially in your pipeline? Or can you just provide some more color around how you’re try coming up with this number?

Stanton Ross: Correct. And I think you’re going to see us start to €“ some of the announcements €“ anticipate some of them happening yet this year. But early in the first quarter, you’ll start seeing some of the announcements of the events that we look to be doing. They made you simultaneously with a particular NASCAR or Indy event, also possibly just some stand-alone festivals that we have or relationships with political parties that are saying a particular city that would love to generate and attract a lot of individuals from the larger communities to come out to their smaller one. One in particular, I’ll mention because we have talked about this now, but they have really an amazing facility that is being built out in Windsor, Colorado.

And for those that don’t know, Windsor is about between 45 minutes and an hour from Denver and Cheyenne and then right around from Fort Collins, so it’s a big college communities. And this facility that they’re building is just over the top. It’s called Future Legends, I don’t know how many soccer fields, baseball fields, indoor facilities they have. It’s just first class. And so it is the TicketSmarter stadium. And they too will be doing different festivals, but really for us to be bringing in the entertainment. With a little bit of preplanning and once they get fully up and functioning, a guy could do six to 10 concerts just at their single facility. Let alone the ticket sales you’re going to get from the baseball events and there actually is a minor league team that they own.

There’s also the soccer events tickets that are sold through there. So we still have all those ticketing outside of those concerts. So we’re going to just continue to use our relationships and keep bringing them on in.

Michael Albanese: Definitely that makes a lot of sense. I look forward to kind of seeing that unfold because I think it could be really a strong challenge of the business. Thanks for taking my question.

Stanton Ross: You bet. Thank you.

Operator: Thank you.

Stanton Ross: Listen, I’m going to go ahead and jump in here. I mean, I appreciate those are both our analysts that have covered this, and I’m grateful for their questions and their coverage. I know that we’ve got a lot going on. We’ve been talking a little over, I don’t know, close to 45 minutes here. And so I think we’ll go ahead and wrap this up. But like Tom said, and please get out there, do the best you can to get your votes in. Our 10-Q is out there. Brody, thanks for joining us today, and thanks, everybody else that joins us. I really appreciate it, and look forward to more follow-up. I imagine there will be maybe been a follow-up call that we decide to have right after the Annual Meeting that’s coming up here in December. So thank you very much, everybody.