Digital Ally Inc (DGLY) 2022 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Digital Ally, Inc. 2022 Operating Results Conference Call. (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 of or indicate future events and trends and that do not relate to historical matters, whether 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.

Thank you, Julie. Thanks, everybody, for joining us today. I've got Brody Green, the company's President with us here, 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 3 pillars right now of Digital Ally, although there are a couple of 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.

Yes. Thanks, Stan. And like Stan said, 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. It was nice to get that one out on time this year. And so I would advise you guys all to review that at your convenience because it will go in 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, 2023. So we've got that behind us. And really, that came through this other matter, which was the reverse stock split we completed a similar time back in February that went effective, I believe, February 8 and that was a 20:1 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 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 and 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. We're down about 9% of recognized revenue. That had a little bit to do with our subscription model as well as some shield sales that were larger in '21 in comparison to '22. However, in that same segment, Video Solutions, our deferred revenue number jumped from $4.3 million at year-end of 2021 up to $8 million in year-end '22. So it provides us comfort that our plan to do the subscription model is really starting to build up quite a bit and really stack on to each other or the 3- to 5-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 1 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% to 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, '22, as well as February 1, '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 to see that as being a wide segment for us and really starting to stack on to one another and rightsizing those operations in that rollout strategy we previously discussed. And lastly, our Entertainment segment, that's really the TicketSmarter industry -- or TicketSmarter subsidiary for now. '23, we'll 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 the revenue cycle management that has to do with the full year of operations as TicketSmarter was acquired September 1, '21. So we really only got to see 4 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. It's been nice to get those acquisitions behind us and allow us to focus on the operation of all those entities since we haven't done acquisitions since February of '22. We've been able to get our hands a little dirtier in each one of these acquisitions to rightsize them and find the synergies between all of them to make this thing, everybody grow in the right direction.

In the gross margins, the Video Solutions segment had a negative gross margin of $1.25 million this year. That's largely due in part to a large inventory reserve we placed on their inventory at year-end, mostly to the 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. The gross margins of $3.3 million. So 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 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 on to the balance sheet side. At 12/31, we had $3.5 million in cash and $11.4 million of 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 were over a matter of, I think, 3 years post acquisition and then 1 SBA loan digital got back during COVID. So minimal debt on our books, which is nice.

And then you have $36.3 million in equity. And we're just going to continue to try and rightsize 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.

Thanks a lot, Brody. So you can obviously see why 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 have 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 it'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 and like 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 some of the valuations of our peer groups, you can see that Digital Ally is 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 got 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 and both did real nice follow-ups on us and sit there and looked at the core businesses. The 3 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 in, in LiveNation'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 2.5x revenue, you're coming in right at a $50 million valuation for the ticketing platform.

Now that's sort of the value side of things. When I get into talking more about the Kustom Entertainment and Kustom 440 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 Polestar 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 Kustom 440 is a production company. We've already announced our first concert. That will be May 13. We have identified at least -- we hope, at least 4 more, possibly 5 before the year's out. The 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 will we be adding value through doing our own events, but we also will 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 in the very beginning on the medical building side. And again, you've got CERN was out there R1 RCM is out there. There's -- again, [populate entities] that are out there. And you can look at, again, the revenue that they've done, look at the numbers they're throwing 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 number similar to what's out there and even discounted a little bit, a lot of them are given a number that's close to 4x revenue, about 4.5x revenue. So realize we will own roughly 51% of it, that puts that in somewhere around the $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 that by any mean. So really, really beating it up and just doing maybe something close to just 2x revenue, which I struggle with the 2x revenue because they're on track to having well over $11 million in recurring revenue or deferred revenue, I should say, the inventory of very good products that they can sell.

I find this number maybe on the small side, if I just use a 2x revenue and only given about $16 million in valuation, and when you talk about the growth that they're looking at, obviously, and Brody touched on this, the law enforcement continues to get a lot of traction with our new products that we've -- 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 sent and I look at the number of shares we have outstanding, I look at the value that's out there and add up the 3 that are together right now, just those 3, and you come in north of $80 million, it's roughly $84 million in comparable values or 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, a number that's right around $30.

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 have both touched on and we'll continue to touch on the bottom line, making sure that we have strong EBITDA and cash flow that will also come into the, I guess, the valuation and the outlook of 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 spin off. Providing 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 the proper timing from feedback with the SEC and NASDAQ and all the parties, possibly could be a June date. If we're that far or 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 in July 1. So that -- 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 will be a one-for-one for every share of Digital Ally you have, you'd also end up with a share of Kustom entertainment that would include the ticketing company TicketSmarter and also the Kustom 440 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 LiveNation, a competitor of ours, as announced previously that they were anticipating a record year. 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.

(Operator Instructions) Your first question comes from Rommel Dionisio from Aegis Capital.

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 kind of translate to on the live ticketing side in terms of opportunities going forward for proprietary events, especially given the growth kind of getting back to normal now.

Yes. 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 Kustom entertainment division and the ticketing are an extension of what we've been doing over the past several years, and that is 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 can be some suites. 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 a amphitheater to set there and be able to do a very, very nice concert that could draw 10,000, 12,000, 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.

Look at 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 relationship that Digital 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 utilizing 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, the state, the situations that we have and with the MetLife stadiums or Arrowheads, those will be available for us, too.

And Rommel, 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 and could be more excited about doing half a dozen concerts this year and continuing just to magnify that going forward? Because if you do look at -- like I mentioned just a second ago, let's say, we do, do 6 concerts, that will generate about an extra $10 million in revenue. So you got your ticketing platform out there and these are like easy numbers.

They're doing $20 million. We had another $10 million from the production side of things. You have probably a 10% in additional ticket sales. I mean that entity went from just last year, they did $21 million, let's say. So now you're doing well over $30 million. And what happens if I can sit there and now do 18 concerts the following year. I mean I can continue to grow this entity very strongly and also relationships that we have with certain venues, doesn't mean just 1 concert a year. You could do 2, 3, 4 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.

(Operator Instructions) Presenters, there are no further questions at this time. Please proceed with your closing remarks.

Well, I appreciate everyone that did get on. I know that with this doing the reverse when we did it and everything else. Obviously, there's fewer shares out there and quite a few less shareholders as well. But we're excited about the Digital Ally's future. We're excited about the potential spin-off with Kustom 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 line. 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.

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