Digital Ally, Inc.

Good morning, ladies and gentlemen, and welcome to the Digital Ally Inc. 2022 Operating Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Monday, April 3, 2023. This conference call may contain forelooking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We may use words and other expressions that are predictions of or indicate future events and trends, and that do not relate to historical matters, rather they represent forelooking statements. These forward-looking statements are based largely on our expectation or forecast of future events can be affected by inaccurate assumptions and are subject to various business risks 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 on their 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 the forward-looking statements contained in this document will in fact transfer 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, you know, the different segments that we have within the Digital Ally family and the intention 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.

Yeah, thanks, Dan. 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 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 AKs that have gone out since our past discussion back going over Q3. We did regain our NASDAQ compliance on February 6th 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 at a similar time back in February that went effectively February 8th. And that was a 20 to one split, which we, got shareholder approval to do so in our annual meeting back in December. Since then, we've also extinguished 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. We're 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 in 21 in comparison to 22. However, in that same segment, video solutions, our deferred revenue number jumped from 4.3 at year end of 2021 up to 8 million in year end 22. So it provides us comfort that our plan to do this subscription model is really starting to build up quite a bit and really stack onto each other for 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 FirstView 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 on January 1st of 22, as well as February 1st 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 to see that as being a wise 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 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 the revenue cycle management, that has to do with the full year of operations as TicketSmarter was acquired September 1st 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. 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 an acquisition since February of 22. We've been able to get our hands a little dirtier in each one of these acquisitions to right-size them and find the synergies between all of them to make this thing everybody row in the right direction. Into 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 due to PPE products that were bought back during the COVID times and obviously COVID since subsided, which is, you know, luckily, just not luckily for the inventory piece on hand right now. Revenue cycle management, they had great gross margins. We're very excited about that for 22. They had 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, you know, 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 1231, 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 know, $36.3 million in equity. And, you know, 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.

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 Allied, sometimes it's hard for them to understand the you know, the overall picture that, you know, 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, with us doing the spin-out, I think that's going to help separate those panes of glass and show that, you know, 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 some of the valuations of our peer groups, you can see that Digital Ally has 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 they're just trying to give you some ideals 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 us and sat there and looked at the core businesses, the three main ones that Brody really touched on there. 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 Live Nation's Ticketmaster division, but there's also SeekGeek 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 do something similar in a ratio or even discounted a little bit to about a two and a half times revenue, you know, 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 custom 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 Custom 440 is a production company. We've already announced our first concert. That'll be May 13th. We have identified at least, we hope at least four more, possibly five 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 TicketSmart, which, again, will add value there. If you look at the nobility, they've really done a real good job. I mean, the whole task at hand at the very beginning on the medical building side, and, again, you've got CERN Rivers out there, R1, RCM is out there. Again, publicly held 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. The 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. You know, through that peer group, if you just used a 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 four times revenue, four and a half times revenue. So realizing we only own roughly 51% of it, that puts that in somewhere around an $18 million in revenue. 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 means. So, you know, really, really beating it up and just doing maybe something close to just a two times revenue, which I struggle with a two times revenue because, you know, they're on track to having well over, you know, 11 million in, you know, reoccurring revenue or deferred revenue, I should say, you know, the inventory of very good products that they could sell. I find this number, you know, maybe on the small side, if I just use a two-time revenue and only give it about $16 million in valuation. And when you talk about the growth that they're looking at, obviously, and Brody touched on this, you know, 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, you know, not just the existing value. So I center and I look at, you know, the number of shares we have outstanding. I look at the value that's out there and, you know, add up the three that are together right now, just those three. And, you know, 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 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 have 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 valuation and the outlook of where the company's going. 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, you know, the anticipated spinoff, 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 a July 1st so that it would be at the end of the quarter. 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'd also end up with a share of custom entertainment that would include the ticketing company, TicketSmarter, and also the custom 440 production side of things. 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 also know that Live Nation, a competitor of ours, has announced previously that they were anticipating a record year. So we're looking forward to continuing to march through 2023 and beyond. Julie, if you've got time, I think we'll go ahead and open it up for Q&A.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your request, please press the star followed by the two. If you're using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Ramil Dionysi from AEG's Capital. Please go ahead.

Good morning. Thanks for taking my question. Stan, I wonder if you could delve into the entertainment ticketing side of the business, you know, in terms of the potential going forward. You know, you guys have had, you know, 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, you know, in terms of opportunities going forward for proprietary events, you know, especially given that the world's kind of getting back to normal now. Thank you.

Yeah, 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 custom 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 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, you know, 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 suites, there's some seats, but there's also a lot of GA and VIP areas, and also we have the capability to build out. So you don't need a massive arena or an amphitheater to sit there and be able to do a very, very nice concert that can draw 10, 12, 15,000 people. And, you know, those are very nice because you also have a good control over your food and beverage, your parking, and, you know, 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 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, you know, 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 to state, you know, the situations that we have in you know, with the MetLife stadiums or Arrowheads, those will be available for us too. And, Ramel, you know me a little better than most on this call, but, you know, my upbringing was around music. So, the relationships that we have along those lines are very strong as well. It just feels like the complete package is coming together. I could be more excited about, you know, doing a 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 six concerts. You know, that would generate about an extra $10 million in revenue. So you've got your ticketing platform out there, and let's say, you know, easy numbers. They're doing $20 million. We add another $10 million from the production side of things. You add probably a 10% in additional ticket sales. I mean, that entity went from, you know, just, you know, last year they did $21 million, let's say, to now where you're doing well over $30 million. And what happens if I can sit there and now do $18 million? 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 one concert a year. You could, you know, two, three, four. And, you know, have a good relationship with all the local vendors and community and can build on it. So very excited about that side of it and the ticketing side.

I appreciate the feedback, Stan. Thank you.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. 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, you know, with this pandemic, 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 Digital Ally's future. We're excited about the potential spinoff 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 everything. 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.