Q3 2022 Digital Ally Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the digital ally Inc. Thank you. Thank you the third quarter operating results conference call.
This conference call may contain forward looking statements within the meaning of section seven of the Securities Act of thank you.
And searching for anyone and you have to Securities Exchange Act ethanol and thank you for it.
You may use weights and other expressions that are predictions of or indicate future events unchanged and do not relate to historical matter 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 factors 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 those are cautioned not place undue reliance on such forward looking statements.
We can only 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 I prove to be accurate I would now like to turn the conference over to Stan Ross. Please go ahead.
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 Rudy as well will be.
Beginning with his input and then I'll be sharing some new events that have occurred and some things that were.
Looking forward to finishing up.
2022, and also some insight on how 2023 looks so with that being said Tom turn it over to you.
Thank you Stan and good morning to everybody welcome to our call.
We did file our 10-K or I'm, sorry, 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 32022.
First I'd like to start out with talking about several corporate advance or matters, which you may or may not have seen form eight ks and other filings on <unk>.
Before we get into the actual operating segments the results of the operations.
The first one I'd like to talk about is in the form 8-K that we filed back in July .
Got into the NASDAQ.
The listing notice that we received for the minimum bid price being under a dollar.
That delisting notice gives us until January 32023 to rectify that situation. We are however.
We believe were 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.
That's not a given but we believe we are eligible for that additional 180 days.
Obviously, that's the whole delisting notice matter is of great importance to management and obviously the shareholders.
So we have been dealing with this issue and are talking about several alternatives, which leaves me to the filing matter.
We filed a form 8-K and October 22.
So it is after the September 30.
<unk> 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 boats on a mirror basis, and a mere basis, meaning.
The exact percentages of the the other votes, including the preferred series, a as well as our common stock.
It's on a 2500 shared a one basis and Theres 100000 shares of series B issue. So obviously, a big big matter and probably of importance to you all and hopefully you've had a chance to read that 8-K.
The.
Proceeds of $50 million proceeds of that debt.
Issuance is in escrow pending redemption.
As a 5% premium on the redemption, there was a 5% discount on the issuance there.
Our redemption period starts on the date of the shareholder meeting the annual shareholder meeting and in 90 days thereafter.
So thats why you might ask why did we do this and there is simply one answer we needed to get our voting.
Orem and majority at our annual meeting.
You, probably and hopefully have received a proxy statement from us for our annual meeting dated December seven 2022, which is coming up rather quickly.
And the reason we did the preferred stock is that if we are providing.
Providing.
Voting matters that actually amend the company's articles of incorporation.
Per our bylaws 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 got to get at least 50 53 half of that $26 7 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.
<unk> raised our authorized shares 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've.
<unk> got more than 50% of all shares outstanding so.
Since 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 be that we've got.
We've got enough votes to.
Equal, 51% or just over 50% of all shares outstanding not just those that are voted.
Why there are several reasons that we're going to this links to get the quorum and the shares voted.
<unk> issued a preferred stock first is there's been a rise in the non interested.
Shareholders that don't though it is kind of what I call. The Robin Hood type shareholders that just don't have the interest in boating. So they leave it leave it on voted their shares on voted and also theres been several major brokers, including Charles Schwab and TD Ameritrade that no longer votes nonvoting shares into <unk>.
Past, they usually voted.
Those non objecting beneficial owners, what we called Novo boats.
On their behalf and in that way, we got to quorum and to 50% vote.
Majority so.
Without there they are 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% Forum and voting majority in order to get some issues passed now let's look at the matters that are going to be voted at the annual meeting.
And again the meeting is December seven 2020, twos coming up shortly I encourage everybody to both their shares. Please vote your shares because it is important to us.
And we need to get this.
Couple of these matters voted in.
There is 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 a is to approve an amendment to increase capital stock from $110 million or $210 million.
That you might you might ask why we've only got 53% 54 million shares outstanding now why do we need to go to $210 million, but we do have from time to time of warrants outstanding sometimes convertibles debt.
So on and so forth so those have to be <unk>.
<unk> four and our capital stock so very important for us to get get up to 210 billion in total approved common capital stock. So that's that's item number one it's 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 reverse split as needed.
To meet the NASDAQ listing requirement in other words in order to get up to the $1 minimum bid.
The board May have to add last resort do some type of a reverse split.
To get there and we're asking for preapproval.
They're they're 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 debt.
Matter voted and approved upon at the annual meeting. So those are the two items that are 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 it's in order to get get.
Matters pass at the annual meeting.
Again, I can't stress this enough I encourage all shareholders to vote their shares I know, it's sometimes it's a pain to do it sometimes you lose the proxy control number or whatever but please call us.
And get the voting instructions are getting are 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 we extinguished pretty much all our warrant derivative liabilities in Q3, and it resulted in $3 $6 million gain.
On the books and if you remember the previous.
Investor calls I've always expressed that.
There is a $3 million gain or theres, a $6 million loss noncash, it's funny money it's accounting.
Gymnastics.
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.
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 65000.
In Q3 two.
2020 to over 21 are about 3% increase not a huge increase but it's important because it shows our subscriptions.
Revenues are increasing.
And quite frankly.
<unk>.
Traction that our new first view models are receiving in the marketplace, where 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 weather.
Closes the day before quarter ends versus the day after so on and so forth. So we're happy with the improvement in the migration to the subscription agreement.
Also I will say that deferred revenue, which is basically these subscription agreements.
Kris to $7 2 million at the end of September September 32022.
Seven 2 million of deferred revenue, which means that we'll recognize that as it rolls off and what I called mailbox money the subscriptions.
If you look at 12 31.
December 31, 2021, we only had two I'm, sorry, $4 3 million.
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 that with the growth in the subscription model and how it's affecting our 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.
One time hardware sale upfront yields very good margins, but thats. It there are no continuing impacts so.
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.
We have started a roll up strategy I think we started that last year's second second or third quarter. Our revenues were down slightly in Q3, two point over one 2.015 million 22 versus 2.050 million 2021 which are very slight decrease.
However, if you look at the margins generated by those sales it increased dramatically in 2022 versus 2021.
We reached $866000 of positive gross margins are 43%.
Gross margin percentage versus 197000 or nine 6%.
Gross margin.
Percentage in 2021 and really this reflects the synergy we're getting the synergies that are the heart of our rollout strategy and the consolidations of the acquisitions. We've made previously we did not make any acquisitions in Q3. So we had time to concentrate on assimilating and.
Consolidating in achieving those synergies and I think the gross margins are are testament to that effect. It is working.
A roll up strategy is working and it's growing at a very steady profitable business for us and we look forward to further growth down the road okay.
Okay now, let's turn this ticketing segment, which is our ticket smarter business.
Revenue increased to $4 4 million in 2022 versus 560000 in 2021, obviously, a huge increase but remember we bought tickets smarter effective September one 2021. So there was only one month of revenue.
In the 'twenty one period.
Take that times three 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 $2022 786000 or 612000 in 2021.
The reasons for this margin issue that we're dealing with is we had we had.
Unanticipated right off of unsold tickets.
And really there is.
There is 100 reasons for that but I will.
Tell you one.
We have generally.
Received a lot of ticketing revenue 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 in predominantly the older generation.
And I'm, one of those obviously, but but anyway the.
Older generation is has really shown a popular interests in those shows on that and with Covid. They just haven't come back the way we thought they would so that's that's just an example, and theres probably four or five other ones similar to that that we can go over.
The second area.
As our strategy that we implemented last year doing a sponsorship relationship really is not working very well and I'm talking about things like I heart radio contract that gain net slash USA today contract side and there is there are 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 tech companies, such as Facebook in such that the click 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 in this model and.
Therefore, starting in the third quarter to reduce non renew or terminate the existing contracts that are out there. So.
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 to get away from this model. We believe this will restore profitability to ticking segment.
Within the near future. So we've got a plan to fix the ticketing segment.
To generate revenues, obviously very good revenues, but we got to fix the gross margins because we obviously do not want those.
Margins to go negative on us like that but okay, let's look a little bit at the balance sheet at September 30th.
We had roughly $6 $3 million of cash on the balance sheet $21 million of positive working capital we have.
Only $1 2 million and interest bearing debt obligations and remember those are primarily earn out notes in the rollout strategy for the <unk>.
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 cycle segments and go ahead and make the necessary changes in ticketing segment too to get to profitability that we all we all would like to see and expect so with that I will turn it over to Brody. He has probably got some more.
Inside into the operating segments and what happened to us in the third quarter and what to expect in future quarters.
Thanks, Tom and covered off on most everything I was going to mention as well. So just a few things he didn't mention where we still have our shield.
Revenue segments still up and running and they've got some exciting traction coming up here late this year into early 'twenty three that we're really looking forward to in a couple of announcements, we'll be able to make here soon regarding there.
New ventures, they've got going into 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.
And 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 recognize that revenue quarter over quarter.
Similarly, with ticket smarter, Tom mentioned, which is kind of right sizing and right now trimming out some of those contracts that didn't quite come to fruition like we were hoping for.
But we have been focusing quite a bit on primary ticketing and becoming a primary ticketing group for a lot of these events and festivals and whatnot 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 we will.
Be beneficial for all of US here and then obviously touched on the consistency nobility, showing and how it's really starting to increase its gross margins.
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 are trending in the right direction that we're very excited about here going forward and heading into 2023 as well.
With that Stan.
Thanks, Brad and Tom Yeah, a couple of things that all of them.
Circle back to and we will start with the the ticketing side of things one of the things once we we acquired that platform realizing that they normally we're just a secondary market in 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 a matter of fact, I think we're up to over 40 different relationships that we have that we're 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 establish as a new entity that.
You will be seen quite.
Quite a bit in 2023 and that is custom for 40 entertainment.
This is a platform that will allow us to not only through our relationships that we have with the different theaters in empty theaters.
Different stadiums 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 ticket smarter and what were anticipating with the customer for 40 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.
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 <unk>.
That aspect in that particular opportunity and that is not a very very high risk.
As there is a tremendous amount of data on the individuals that you would be bringing into perform.
What they typically draw what their typical ticket sales are so providing you've got the right structure.
Structure venue primary ticketing utilized.
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 particular smarter and customers were 40% of the marriage that they would have and being able to work together.
Shield is.
Brody did mention you know, 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 safety.
<unk>.
Our product being a non alcohol or chemical based disinfectant sanitizer.
That has all the.
What did you say cleaning.
Capabilities and.
Handled.
Irises another issues that are out there, but also very safe around children pad some 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.
Anyways I'm sure. There's some questions that are out there. So we will go ahead and open up the floor for a Q&A.
Thank you ladies and gentlemen, we will now begin the question and answer session.
So do you have a question. Please press the star followed by the number one on your Touchtone sign.
If you would like to withdraw your request. Please press star followed by the number Tim if you like using a speaker phone. Please lift the handset before pressing on it.
One moment. Please for your first question.
The first question.
<unk> comes from the line of <unk> from Aegis capital. Please go ahead.
Good morning, Thanks for taking my question.
Just wanted to touch base on the <unk>.
The video solutions segment.
This revenue increase sector.
Here in the third quarter.
I know you guys had lots of FERC pro for <unk> two in kind of late last year earlier, this year and I Wonder if there was kind of the key drivers between seeing the.
This nice revenue bump up and then obviously with the subscription model.
I guess at this not only.
Could lead to sort of steadier and more predictable revenue streams for the segment going forward.
Am I understanding that correctly, thanks very much.
Yes, Youre absolutely right. This.
New product that's been very helpful in gaining quite a bit of traction throughout the marketplace.
We're noticing here as you mentioned, it's really making our quarter over quarter revenues, rather predictable which is pretty.
Nice comfortable level for us and we had a few big contracts come to fruition. This this year, Kansas State Wildlife I can sure you guys saw that press release was a nice sized order in.
They might have a second one here you come in in Q4 as well so yes, these new products and the subscription model are really coming together well.
As we're starting to see on our income statement, which is nice.
And maybe just one quick follow up if I may.
The new products, obviously, we're seeing the good results from that.
<unk> 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.
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 not have had.
Product they were looking for at the time now now we do and we've noticed a nice blend of things coming into our.
Our group as well so that's been 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.
Great. Okay. Thanks very much.
Thank you. Thank you. Thank you.
Your next question comes from the line of.
Tony. Please your next question comes from the line of Mike <unk> from Jeff Hutton. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
My question is in regards to the <unk>.
Ticketing segment.
You know kind of your marketing and advertising, obviously, the sponsorship programs and work out the way you had anticipated.
All familiar trying to right size that cost structure given the decreased.
And so you.
Kind of moving forward, how do you think about.
Optimizing marketing spend and driving.
<unk> traffic now I know kind of there's probably refer more to your secondary segments at the primary rollout across some 44, you kind of get that by default but.
Just how do you think about driving future traffic in these secondary ticketing segment.
Yes, thanks for the question.
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 are already seeing they were establishing in the profits that they were generating.
And.
What was anticipated as the media spend with the.
Those entities that we talked about.
If we would've 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 happening I mean, $5 5 million in commitments and therefore, it should have driven a tremendous amount of traffic.
It just did not they did not pan out that way.
So what we've been able to do is okay, we'd let some of them run on out some of them. We've been ahead, we were able to cancel some of them, we renegotiated because they to realize that.
What they were hoping and anticipating wasn't reality either so we're getting away from a lot of the media spend.
And staying focused on.
The just enormous amount of of synergy and relationships that we have whether it be through the fact that we have.
Like I said, we're in every state there is in the United States in regards to our video solutions company, we've sold probably half the police agencies in the country and the good probably a third of them still utilizing some of our products. So we have enormous amount of contacts and relationships with entities that we can.
Just directly to them and.
A presentation to be their primary.
Even with our NASCAR and the Indian 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 were over 40 different entities that we now have the.
The primary Reits 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.
The additional stuff that really assist and by default call. It whatever you want but being able to actually bring in some some acts and entertainment's ourselves, but yet realized like a lot of these MP theaters I mean, they've already got a bunch of stuff book, we just happen to be in there and we just happen to also have the ability to fill in on certain dates.
They don't have.
Currently booked so I think that's what we're going to do is get back to.
A lot more.
Do a better job of the feet on the ground versus.
Just doing the media spin.
Got it no that makes a lot of sense.
Johan <unk>.
John for shipping kind of click their traffic you guys, obviously aren't the only ones.
Saying that kind of a negative dynamic at play.
And then just.
Custom 40 for entertainment and I know you just talked about a little bit, but you had said 9% to 15 million.
Kind of year estimate based on what.
Contracts that are essentially in your pipeline or could you just provide some more color around how you're coming up with those numbers.
Correct, and I think youre going to see us start to.
Some of the announcements.
<unk> anticipates some of them happening yet this year, but early in the first quarter Youll start seeing some of the announcements.
The events that we'd look to be.
Be doing maybe simultaneously with a.
Particular, NASCAR, India in the event.
Possibly.
Just some standalone festivals that we have relationships with.
Political parties, let's say.
A particular.
City that would love to generate and attract.
Sure.
A lot of.
Individuals from the larger communities to come out to they're a smaller one that one in particular I mentioned, because we have talked about this low but they have a <unk>.
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 in an hour from Denver, and Cheyenne in the Red room from Fort Collins, So that's big.
College communities and this facility that we'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.
Just first class.
It is the ticket smarter stadium.
And they too will be doing.
Festivals, but really going to have to be bring it in.
The entertainment.
With a little bit of pre planning and once they get fully up and functioning a guy can do six to 10.
<unk> suggests that they are single facility, let alone the ticket sales youre going to get from the the baseball bats, and there actually is a minor league team that they that they own. There is also the soccer events tickets that are sold through there. So we still have all those ticketing outside of those contracts. So we're going to.
Just you have to continue to use our relationships.
And keep bringing them on in.
Okay.
Yes definitely that.
Yes makes a lot of times I look forward to kind of thing that on forward because I think it could be really.
Strong talent for our business.
Thanks for taking my question.
You bet. Thank you.
Listen I think to sit there.
I'm going to go ahead and jump in here.
I appreciate that.
Those are both our analysts that have covered us and them.
Grateful for their questions and their coverage.
No.
We've got a lot going on we've been talking about a little over.
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 get your votes in our 10-Qs out there Brian Thanks for joining us today and thanks, everybody else that joined US really appreciate it.
Look forward to more follow up I imagine there will be maybe even a follow up call that we decided to have.
Right after the annual meeting that's coming up here in December so.
Thank you very much everybody.
Thank you so much presenters ladies and gentlemen. This concludes today's conference call. Thank you Paul and thank you for participating and ask you to please disconnect your lines have a lovely thing.