Digital Ally, Inc. (DGLY) Q4 2022 Earnings Call Transcript

Digital Ally, Inc. (NASDAQ:DGLY) Q4 2022 Earnings Conference Call April 3, 2023 11:15 AM ET

Company Participants

Stanton Ross - CEO

Brody Green - Chief Accounting Officer

Conference Call Participants

Rommel Dionisio - Aegis Capital

Operator

Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc. 2022 Operating Results Conference Call. At this time all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session, [Operator Instructions]. This call is being recorded on Monday April 3, 2023.

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 indicate future 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.

Stanton Ross

Thank you, Julie. Thanks, everybody, for joining us today. I’ve got Brody Green, Company’s President with the CEO, and Brody will be covering the numbers.

Just sort of want to make sure and enlighten you a little bit on what we're going to try to accomplish here today, as many of you have heard and have seen us talk about the different segments that we have within the Digital Ally family and the attention to try to go ahead and looks like we may spin off the entertainment side of the business, allowing the Medical Billing and the Video Solutions to remain within Digital Ally.

So we'll try to elaborate on that but also want to make sure and cover each of these segments. They are the three pillars right now of Digital Ally, although there are a couple other smaller activities that are going on within the company.

So thank you all for joining us and I'll turn this over to Brody.

Brody Green

Yes, thanks, Stan and like it stands out. Thanks, everyone for jumping on this call. I hope everyone had the chance over the weekend to review our Form 10-K that went out Friday the 31st of March, nice to get that went out on time this year. And so I would advise you guys all to review that at your convenience, because it'll go into much greater detail than we'll be covering on this call.

So a few corporate matters before we jump into the financials, just to discuss some of the 8-Ks that have gone out since our past discussion back going over Q3. We did regain our NASDAQ compliance on February 6 of 2023. So we've got that behind us and really, that came through this other matter, which was the reverse stock split. We completed that at a similar time back in February, that went effect I believe, February 8, and that was a 2021 split, which we got shareholder approval to do so in our annual meeting back in December.

Since then, we've also extinguished all pretty much all of our warrants, through a warrant extinguished back in Q3 as well. I think we discussed that on our last call, which brought our outstanding warrants from $1.3 million down to about $67,000. So it was nice to get those off the books. And you'll see a $3.6 million gain on extinguishment reflected in these financials as well. That's due to derivative accounting that we have to account for, just for our books.

Jumping into the financials, video had a year -- did $8.3 million in revenue for the year, was down about 9% of recognized revenue. That has a little bit to do with our subscription model as well as some Shield sales that were larger and ‘21 in comparison to ‘22. However, in that same segment Video Solutions, our deferred revenue number jumped from $4.3 million at year end 2021, up to $8 million in year-end ‘22.

So it provides us comfort that our plan to do this subscription model has really started to build up quite a bit and really stack on to each other, or the three to five year plans that we have in place right now. And it shows our new products as far as the EVO and FirstVu Pro and docking stations are also gaining traction in the marketplace.

So we anticipate that number to continue to rise as it almost doubled in just one year. So hopefully we'll continue to double and double and just build it up and recognize that over the life of those contracts.

The revenue cycle management segment, had a great year, up 393%, almost $8 million for the year. That's largely due in part to having a full year of operations for most of our acquisitions, as we did one in January 1 of ‘22, as well as February 1 of ‘22. So really got a full year of the ‘21 acquisitions and essentially a full year as well for both of our ‘22 transactions.

So, we continue, we continue to see that FBA’s wide segment for us and really starting to stack onto one another and right sizing those operations in that role of strategy we previously discussed. And lastly, our entertainment segment. That's really the TicketSmarter industry for -- TicketSmarter subsidiary for now. ‘23 will start seeing that build up even further.

So for ’22, the entertainment segment did $20.9 million in revenue up 95% over ‘21. And again, similar to revenue cycle management that has to do with the full year of operations as TicketSmarter was acquired September 1 of ‘21. So we really only got to see four months of operations back in 2021. So this year, we got to see a full 12 months. So that reflects the large jump year-over-year for that segment.

And it's been nice to get those acquisitions behind us allow us to focus on the operation of all those entities, since we haven't done acquisitions since February ‘22. We've been able to get our hands a little dirtier and won one of these acquisitions to right size them and find the synergies between all of them to make this thing. Everybody roll in the right direction.

In the gross margins. The Video Solutions segment had a negative gross margin of $1.2 5 million this year. That's largely due in part to a large inventory reserve we placed on their inventory at year end, mostly due to PPE products that were bought back during the COVID times and obviously COVID Since subsided, which is luckily just not luckily for the inventory piece on hand right now.

Revenue Cycle Management, they have great gross margins. We're very excited about that for ’22. They had a gross margin of $3.3 million. So that was that was very nice to see. And then the entertainment division had a gross profit of about $300,000. And they run on a thinner margin, but we've obviously are taking some corrective actions to enhance that margin as the revenues are there we just need to make sure we're maximizing profitability of those revenues.

And onto the balance sheet side, at 12, 31, we have 3.5 million in cash and $11.4 million in positive working capital. Compared to only $900,000, interest bearing debt obligations, those are related to the acquisitions on the Medical Billing side, and just the earn out notes that are contingent on collections and whatnot over the matter of, I think, three years’ post-acquisition, and then one SBA loan digital got back during COVID. So minimal debt on our books, which is nice.

And then you have $36.3 million equity. And, we're just going to continue to try and right size everything and maximize profitability for the best interest of the company, as well as the shareholders. And with that, I'm going to turn it back over to Stan.

Stanton Ross

Thanks much, Brody. So you can actually see what we're a little bit excited about going into 2023. When I talk to different parties that show an interest in Digital Ally, sometimes it's hard for them to understand the overall picture that the company has, and it's understandable, I mean, it's no different than if you had multiple panes of glass and had a painting on each one of those, but they were stacked on top of each other, it's very difficult to see through them, to really see what a good clear picture is.

This way, when there's doing the spin out, I think that's going to help separate those panes of glass and show that you have a much better story a lot cleaner picture of what each of these entities are. And so when you really get to digging into them, if you look at some of the analyst reports that have been out there, and in some of the valuations of our peer groups, you can see that Digital Ally as a story that has value and potential growth ahead of it in 2023.

And I'll just give you a little bit of a recap. Again, I'm not trying to say this is where the stock ought to be at today, but just trying to give you some ideas where these entities fall in their peer group. There was a real nice story, both Aegis Capital, and EF Hutton both did real nice follow ups on this and sat there and looked at the core businesses, the three main ones that Brody really touched on there.

And I'll start with TicketSmarter, the ticketing platform, because there's quite a few entities out there and including one that's gotten a lot of press and in live nation's Ticketmaster division, but there's also SeatGeek and Vivid and others that are out there that are publicly held. And so if you can sit there and look at the multiples that they're getting, and realize that TicketSmarter did approximately $21 million in revenue, and you still you do something similar in a ratio or even discounted a little bit to about a 2.5 times revenue.

You're coming in right at a $50 million valuation for the ticketing platform. Now, that's sort of a value side of things. When I get into talking more about the custom entertainment, and Kustom440 that will be part of that entity that gets spun off, you'll see the growth side. And what I'm talking about there is recently Pollstar came out with a report and indicated that it appeared that, both ticket sales and concerts were up almost 20%, so far in the first quarter. Which is a very good sign on what this summer activity looks like, as far as the concerts are concerned.

And Kustom440 is a production company, we've already announced our first concert, that'll be May 13, we have identified at least we hope, at least four more possibly five before the years out. But ticket sales have been very sharp and very in line with what our expectations were on that as well. So that's the growth side that comes into the ticketing, not only we will be adding value through doing our own events, but we also be able to handle and control the ticketing through TicketSmarter, which, again, will add value there.

If you look at the Nobility, they've really done a really good job. I mean, the whole task in hand and the very beginning on the medical billing side. And again, you've got certain numbers out there, are one RCM is out there and again publicly held entities that are out there, and you can look at again, the revenue that they've done, look at the numbers are thrown to the bottom line. They'll continue to improve on that. These are acquisitions that they're now getting a little bit of time to make the changes and adjust to their model that ends up throwing more money to the bottom line, so excited about that.

Again through that peer group if you just use your numbers similar to what's out there, you don't even discount a little bit, a lot of them are given a number that's close to four times revenue, that 4.5 times revenue. So realized really about 51% of it. That puts that in somewhere around that $18 million in valuation based upon the reports that were out there. So, excited about that, and excited the fact that they've got additional targets out there that they want to continue to acquire and bring into the fold to continue to build on their model that they've got.

And then obviously, the core business, it's a little tougher to use this, because the real only entity that's out there that's similar is Axon, and they trade at a very, very high multiple, it's not quite fair to use us that by any means. So, it really, really beaten it up and just do a maybe something close to just a two times revenue, which I struggle with a two times revenue, because they're on track to happen well over $11 million in reoccurring revenue or deferred revenue, I should say, the inventory, a very good products that they can sell. I find this number, maybe on the smaller side, if I just use a two-time revenue, and only given about $16 million in valuation.

And when you talk about the growth that they're looking at, honestly, and Brody touched on this, the law enforcement continues to get a lot of traction with our new products that we've introduced there. But I think the big shot in the arm that they could see yet this year, is in the commercial division, where they will be announcing a new in car system for the commercial side of things. So, it really will allow them to focus on all the many, many fleets that are out there, some of the partnerships that they have, will enhance their capability of getting in front of a tremendous amount of potential customers.

So, it too has a very exciting future, not just the existing value. So, I select and if I look at what the number of shares we have outstanding, I look at the value that's out there and add up the three that are together right now, just those three, and you come in north of $80 million, that’s roughly $84 million in comparable values, not implied values, compared to our peers.

And the number of shares that we have outstanding, is only 2.75. And so now you're looking at a price per share number that's right around 30 bucks. So those are big numbers, those are all based upon, if we were to be valued close to some of our peer groups in regards to the revenue side of things, I know that, Brody and I both touched on and will continue to touch on the bottom line, making sure that we have strong EBITDAs and cash flow, that will also come into the I guess, the valuations and the outlook where the company is going.

So, anyway, I love our story. Right now, I love our position where we're at. The one thing I do want to touch on is a little bit of timing of the anticipated the spin off, provide, everything continues to come together, we should be completing the 2021 necessary audits that will be required for us to spin off the ticketing and entertainment division. That being said, and then proper timing, from feedback with the SEC and NASDAQ can all the parties possibly can be a June date. If we're that far, we get very far into June, just to make it a cleaner separation or spin out to our shareholders, we would most likely go ahead and make it like a July 1, so that’d be -- it would be at the end of the quarter.

So we're still on track there. We haven't deviated from the plan. It still looks like it'll be a one for one. For every share of Digital Ally, you have, you'll also end up with a share of custom entertainment that would include the ticketing company to get smarter and also the Kustom440 on the production side of things.

So I think we've got a very, very bright future even with -- it sounds like the economy, at least in the entertainment side is still performing pretty strong from the polls that we've seen. We've also know that Live Nation a competitor of ours is announced previously that they were anticipating a record years. So, we're looking forward to continuing to march through 2023 and beyond.

So, Julie, if you got time, I think we'll go ahead and open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Rommel Dionisio from Aegis Capital. Please go ahead.

Rommel Dionisio

Good morning. Thanks for taking my question. Stan, I wonder if you could delve into the entertainment ticketing side of the business, in terms of the potential going forward, you guys have had a lot of experience with live events, music, sports, NASCAR. I wonder if you could just maybe just give us a feel for what those relationships what that experience could can translate to on the live ticketing side, in terms of opportunities going forward for proprietary events, especially given the new worlds kind of getting back to normal now? Thank you.

Stanton Ross

Yes, thanks. Thanks for the question. And you really did hit on a very unique question, because a lot of the opportunities that are in front of the customer entertainment division and the ticketing, are an extension of what we've been doing over the past several years. And that is, in providing video solutions for everyone's from entities, obviously, like NASCAR. We do stuff at Arrowhead Stadium, MetLife Stadium, I think there's some 200 colleges that we have relationships with from the ticketing and security side of things.

So, if you look at, for instance, just the Country Roots concert that we're doing here in May, it essentially is a minor league ballpark. And because of our capabilities, we're able to literally go out there utilize the ballpark, obviously, there'd be some sweets, there's some seats, but there's also a lot of GA VIP areas. And also we have the capability to build out. So you don't need a massive arena or amphitheater, to sit there and be able to do a very, very nice concert that you can draw 10 12 15,000 people.

And, those are very nice, because you also have a good control over your food and beverage, your parking, and even the VIP capability of building unique experiences for them. So that was a great question. Because we really are utilizing the relationships that we have created over the years with NASCAR and Indy and different stadiums.

And municipalities the fact that we probably sold to over half the police agencies in the country at some point in time. But even if you take the right relationship that gives you Ally has with these city leaders and chiefs of police and you want to visit with them about being able to utilize their city park to throw an event that would draw business to their community and to their local shops that they have there. They're very receptive and very appreciative of -- and have a lot of belief in us, they've been utilized in our in car, video and body cameras for numerous years.

So we really are going to leverage those relationships that we have with everything from city leaders to county to state, the situations that we have with the MetLife stadiums or Arrowheads. Those will be available for us to and remember, you know me a little better than most on this call. But my upbringing was around music.

So the relationships that we have along those lines are very strong as well. So it just feels like the complete package is coming together. I couldn't be more excited about doing a half a dozen concerts this year. And continuing just magnify that going forward. Because if you do look at it, like I mentioned just a second ago, let's say we do six concerts that generate about an extra $10 million in revenue. So you got your ticketing platform out there and just like easy numbers are they're doing $20 million, we add another $10 million from the production side of things. You have probably a 10% in additional ticket sales. I mean, that industry went from just last year they did $21 million, let's say, so now where you're doing well over $30 million.

And what happens if I can sit there now doing 18 concerts the following year, I mean, I can continue to grow this entity very strongly. And also the relationships that we have with certain venues doesn't mean just one concert a year, you could two, three, four and have that good relationship with all the local vendors and community and can build on it. So very excited about that side of it in the ticketing side.

Rommel Dionisio

I appreciate the feedbacks. Stan, thank you.

Stanton Ross

Thank you.

Operator

[Operator Instructions] Presenters, there are no further questions at this time, please proceed with your closing remarks.

Stanton Ross

Well, I appreciate everyone on the Digital Ally. I know that with us and doing the reverse when we did it, everything else. Obviously, there's fewer shares out there and the few less shareholders as well. But we're excited about Digital Ally’s future, we're excited about the potential spin off with custom entertainment. We think that we've really positioned both companies in a really good position to maximize the relationships that are already out there and continue to look real strongly on the efforts that we need to do to continue to improve the bottom lines on there. So, thank you all so much for joining us. We look forward to visiting with you again probably in the next 40 days or so as we will be reporting our first quarter numbers.

Thank you all.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.