Digital Ally, Inc.
Q3 2022 Earnings Call Transcript

Published: 17 Nov 2022

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc. 2022 Third Quarter Operating Results Conference Call. This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. We may use words and other expressions that are predictions of or indicatefuture events and trends and do not relate to historical matters rather, they represent forward-looking statements. These forward-looking statements are based largely on our expectations or forecast of future events can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements expressed in this conference call and readers are cautioned not to place undue reliance on such forward-looking statements. We generally do not publicly update or revise any forward-looking statements expressed in this conference call, whether as a result of new information, future events or otherwise. There can be no assurance that forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I would now like to turn the conference over to Stan Ross. Please go ahead.

[Stanton Ross:]

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

[Tom Heckman:]

Thank you, Stan, and good morning to everybody. Welcome to our call. We did file our 10-Q on Monday. So hopefully, everyone's had a chance to at least look at it and see the details behind the numbers for our third quarter ended September 30, 2022. First, I'd like to start out with talking about several corporate events or matters, which you may or may not have seen, Form 8-Ks and other filings on before we get into the actual operating segments or results of the operations. The first one I'd like to talk about is the Form 8-K that we filed back in July regarding the NASDAQ delisting notice that we received for the minimum bid price being under $1. That delisting notice gives us until January 30, 2023, to rectify that situation. We are, however – we believe we're eligible for an additional 180-day grace period in which to meet the minimum requirements, which would actually put us out to July of 2023. Now that's not a given, but we believe we are eligible for that 180 days. Obviously, that's – the whole delisting notice and matter is of great importance to management and obviously, the shareholders. So management, we have been dealing with this issue and are talking about several alternatives, which leads me to the following matter. We filed a Form 8-K in October 22, so it's after the September 30 quarter ended, wherein we issued $15 million worth of Series A and B preferred stock, redeemable preferred stock. The Series A preferred stock votes on specific matters only on an as-converted basis, and the Series B votes on a mere basis and a mere basis, meaning the exact percentages of the other votes, including the preferred Series A as well as the common stock and the votes on a 2,500 share to 1 basis, and there's 100,000 shares of Series B issues. So obviously, a big matter and probably of importance to you all, and hopefully, you've had a chance to read that 8-K the proceeds – the $50 million proceeds of that issuance is an escrow pending redemption. There is a 5% premium on the redemption. There was a 5% discount on the issuance. The redemption period starts on the date of the shareholder meeting, the Annual Shareholder Meeting and ends 90 days thereafter. So that's what you might ask why do we do this? And there's simply one answer. We needed to get our voting quorum and a majority at our annual meeting. You probably and hopefully have received a proxy statement from us for our annual meeting dated December 7, 2022, which is coming up rather quickly. And the reason we did the preferred stock is that if we are providing voting matters that actually amend the company's articles and incorporation per our bylaws and articles incorporation, it requires over 50% vote of all outstanding shares, not just those shares voted. So in other words, if we got 53 million shares outstanding, we've got to get at least – 53 million, half of that, 26 million, 27 million shares voting yes on that matter even though usually not that many people vote on matters. So what we've done is, in the past, we've tried to raise our authorized shares and a couple of other matters for the last four or five years that required over 50% vote of outstanding shares. And we always received a majority of the shares voted, but we never did reach the point where we got more than 50% of all shares outstanding. Hence, that is the reason we did this preferred stock. So we can ensure ourselves that we're

[Brody Green:]

Yes. Thanks, Tom, and we covered off on most everything I was going to mention as well. So just a few things. He didn't mention we're – we still have our Shield revenue segment still up and running, and they've got some exciting traction coming up here late this year into early 2023 that we're really looking forward to in a couple of announcements we'll be able to make here soon regarding their new ventures they've got going and some new contracts that are coming due here soon. Tom obviously mentioned the excitement we have surrounding the deferred revenue and how that's growing rather quickly, and we're seeing the success of the subscription plans, $7.2 million in deferred revenue is exciting, and we only expect that to grow at the same pace it's been growing, if not faster. So, we're looking forward to seeing that and we'll recognize that revenue quarter-over-quarter. Similarly, with TicketSmarter, Tom mentioned we're just kind of rightsizing it right now, trimming out some of those contracts that going quite come to provision like we were hoping for. But we've been focusing quite a bit on primary ticketing and becoming a primary ticketing group for a lot of these events and festivals and what not, and we have some exciting announcements we're going to be able to make here yet before the end of this year that I think will be beneficial for all of us here. And then obviously touched on the consistency in Nobility showing and how it's really starting to increase its gross margins and the plan is coming together as we expected it to. So that's exciting to see as well. So all-in-all, we're making some corrections here, but we're also seeing some things trending in the right direction and we're very excited about here going forward and heading into 2023 as well. With that, Stan.

[Stanton Ross:]

Yes. Thanks, Brody and Tom. Yes, a couple of things that I'll circle back to, and we'll start with the ticketing side of things. One of the things, once we acquired that platform, realizing that they normally were just a secondary market and trying to do some unique packages that put them in a primary position. And we've been able to establish quite a few of those. As a matter of fact, I think we're up to over 40 different relationships that we have that were actually the primary ticketing platform for these venues. And so with that and all the relationships we have with the secondary markets and the universities, one of the things that we established is a new entity that you will be seeing quite a bit in 2023, and that is Kustom440 Entertainment. This is a platform that will allow us to, not only through our relationships that we have with the different theaters and amphitheaters and different stadiums and ballparks, be able to present and have our own concerts or festivals and be able to generate quite a bit of revenue and also believe that it will be very healthy bottom line. That being said, if you look at the growth that we've had with TicketSmarter and what we're anticipating with the Kustom440 marriage. Right now, I think we've identified a minimum of six concerts and we hope to have that raised up to well over 15, possibly in 2023. So being a little bit conservative. If you look at the revenue side of just those events, very, very possible another $9 million to $15 million in additional revenue from that aspect and that particular opportunity. And that is not a very, very high risk area as there is a tremendous amount of data on the individuals that you would be bringing in to perform what they typically draw, what their typical ticket sales are. So providing you've got the right structure, venue, primary ticketing, utilize the Digital Ally security side of things with our connections for video solutions. It puts us really in a nice position to be all encompassed in regards to being able to throw these events and also maximize the return from doing those events. So real excited about TicketSmarter and Kustom440, the marriage that they would have and being able to work together. And Shield, as Brody did mention, we really do anticipate some nice announcements in the very near future on that. It's taken a while to educate the public on the safetiness of our product, being the non-alcohol or chemical-based disinfectant sanitizer that has all the what you say, cleaning capabilities and to handle viruses and other issues that are out there, but also very safe around children, pets and food. So we do think that, that's getting a lot of momentum, and you should see some good news coming out of that as well. So anyway, I'm sure there's some questions that are out there. So we'll go ahead and open up the floor for Q&A.

[Operator:]

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

[Rommel Dionisio:]

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

[Tom Heckman:]

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

[Rommel Dionisio:]

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

[Tom Heckman:]

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

[Rommel Dionisio:]

Great. Okay. Thanks very much.

[Tom Heckman:]

Thank you.

[Stanton Ross:]

Thank you.

[Operator:]

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

[Michael Albanese:]

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

[Stanton Ross:]

Yes. Thanks for the question. What we're really dealing with is getting back to the basics. I mean, when we looked at the company, we acquired them based upon the values that we've already seen they were establishing and the profits that they were generating. And what was anticipated is the media spend with those entities that we talked about if we would have got the click-throughs like, let's say, so represented by all parties, then it made a lot of sense. But we were talking about – I mean it was a hefty. I mean, $5.5 million in commitments and therefore, it should have driven a tremendous amount of traffic. And it just did not. They did not pan out that way. And so what we've been able to do is, okay, we let some of them run on out, some of them we've been ahead to go – we were able to cancel some of them. We renegotiated because they too realize that what they were hoping and anticipating was a reality either. So we're getting away from a lot of the media spend and staying focused on the just enormous amount of synergy and relationships that we have, whether it be through the fact that we have like some of these – we’re in every state there is in the United States in regards to our Video Solutions company, we've sold to probably half the [indiscernible] in the country and a good – probably third of them still utilizing some of our products. So we have an enormous amount of contacts and relationships with entities that we can go just directly to them and make a presentation to be their primary. Even with our NASCAR and the Indy and stuff, that's opened up a lot of doors that I think, is going to help drive a tremendous amount of traffic as we continue to bring on more primary. So we haven't been up at this very long in regards to having them make this transition. But like I said, I think we're over 40 different entities that we now have the primary rights. And when we do that, we're not doing it on a short-term. I mean, we're trying to do five and 10-year contracts so that we really get established there. And then like I said, the additional stuff that really assist and by default, call it whatever you want. But being able to actually bring in some acts and entertainment ourselves. But you got to realize, like a lot of these amphitheaters, I mean, they've already got a bunch of stuff booked. We just happen to be in there, and we just happen to also have the ability to fill in on certain dates that they don't have something currently booked. So I think that's what we're going to do is get back to a lot more – do a better job with the feet on the ground versus just doing the media spend.

[Michael Albanese:]

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

[Stanton Ross:]

Correct. And I think you're going to see us start to – some of the announcements – anticipate some of them happening yet this year. But early in the first quarter, you'll start seeing some of the announcements of the events that we look to be doing. They made you simultaneously with a particular NASCAR or Indy event, also possibly just some stand-alone festivals that we have or relationships with political parties that are saying a particular city that would love to generate and attract a lot of individuals from the larger communities to come out to their smaller one. One in particular, I'll mention because we have talked about this now, but they have really an amazing facility that is being built out in Windsor, Colorado. And for those that don't know, Windsor is about between 45 minutes and an hour from Denver and Cheyenne and then right around from Fort Collins, so it's a big college communities. And this facility that they're building is just over the top. It's called Future Legends, I don't know how many soccer fields, baseball fields, indoor facilities they have. It's just first class. And so it is the TicketSmarter stadium. And they too will be doing different festivals, but really for us to be bringing in the entertainment. With a little bit of preplanning and once they get fully up and functioning, a guy could do six to 10 concerts just at their single facility. Let alone the ticket sales you're going to get from the baseball events and there actually is a minor league team that they own. There's also the soccer events tickets that are sold through there. So we still have all those ticketing outside of those concerts. So we're going to just continue to use our relationships and keep bringing them on in.

[Michael Albanese:]

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

[Stanton Ross:]

You bet. Thank you.

[Operator:]

Thank you.

[Stanton Ross:]

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