Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc. Q1 2023 Operating Results Conference Call. [Operator Instructions] 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 rather represent forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts 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 the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I would like to remind everyone that this call is being recorded on May 16, 2023. I'll now turn the conference over to Stan Ross. Please go ahead.

Thank you, everybody, for joining us today. I have with me, Brody Green, who is the company's President. He will be going over some of the numbers. He's also the acting CFO as of now as our dear friend, after almost 17 years, Tom Heckman, has decided to retire and take a slower pace nowadays. So anyways with me is Brody. Brody will be covering the numbers, going into quite a bit of detail there and then letting you obviously dig a little bit more into this in regards to the Q&A. I'm excited to talk to you a little bit about where we're at in regards to the relationship of our strategic opportunities that are out there, as we've talked and had mentioned and went public with in regards to a possible spinout or another avenue that would help define, I guess, some of the companies that are under the Digital Ally umbrella and hopefully give a lot more clarity to the excitement and valuations within those, including a recent event that we had that will show up in the second quarter's numbers, but we just finished with our very first Kustom 440 concert that was put together and also utilized our ticketing platform as well. So I'll cover that in a little more detail after Brody goes through the numbers and I'll go from there. Anyways, Brody?

Yes. Thanks, Stan. And like we're happy to talk to everybody again. I know it's only been about 45 days since our last call. So looking at the -- as I'm looking through the balance sheet, again, you can see there's not a -- there's not many dramatic changes as our total assets are at $55.5 million relative to $56.7 million at year-end. Similarly, with total liabilities they're pretty constant with year-end as well, there's $25 million. So our total stockholder equity remains relatively healthy at $30 million that are above. In the equity section, obviously, not much has transpired during Q1, a couple of issuances and we also did our reverse stock split, which I'll get into here shortly. On the income statement side, revenues were still higher than -- I mean, with all these acquisitions, you can see our revenues continue to stay fairly high compared to where we were a couple of years ago. I know we're down relative to Q1 of '22, but still $7.7 million in total revenue for Q1 2023. Gross profit, 20% gross profit, which is much better than we looked at in Q4. So the changes we talked about during our last call have obviously been effective, and we'll continue to make sure those are staying in effect and even more so enhancing our gross profit as we move along here throughout 2023. You can see an operating loss of $6.2 million -- I mean, an improvement over 2022, obviously not where we want to be. So we're going to continue to work on that and make changes as fast as we can. Stockholders. Yes, stockholders' equity side, we're sitting at 2.7 million shares outstanding. We have 200,000 authorized, so plenty of room there. And we -- as I mentioned, we did…

Yes. Thanks, Brody. And as I said, the 10-Q is filed with all the details out there. But I think really what everyone's been curious about and a lot of the e-mails, a lot of the calls I get is sort of the process that we've been going through since we made the announcement that we were looking at spinning off the Entertainment division. And of course, the Entertainment division will include the Ticketing company, the Production company and the Aviation company. And so that is still in the process. Obviously, we needed to have the year-end and the quarterly financials done. And with that being completed, we'll do a little bit of fine-tuning in regards to the 2021 [indiscernible] numbers needed for TicketSmarter since we acquired it in September of '21. We need to make sure they just button up the first 8 months of 2021. And they were at a point where we're in a position to go ahead and act upon whatever makes the most sense as far as a strategic move, whether it be a spinoff or some other avenues that may present themselves to us. So excited to be where we're at now, excited to hopefully be in a position in the coming days to define what direction we are going to go into. But even more important from that perspective is the launch that Kustom Entertainment has had. Most recently, we did a concert here in our backyard here in Kansas City, and weather could not have been more of an interest in regards to how this was going to play out because we seem to have continued forecast of rain in the future -- rain, rain. It's going to rain on our particular festival day. And as it got closer, literally within less…

[Operator Instructions] First question comes from Allen Klee at Maxim Group.

Yes. On the video solution offerings, can you discuss a little, how the business breaks out between product sales and recurring and how we could think about the potential growth in recurring revenues?

Yes. So as far as the products go, so most of our sales are now -- look for over the past 2 years, I think, at this point, maybe even 2.5 to 3. The -- most of our products are now sold on a subscription of 5 years. So there'll be -- that will include your hardware and your software. So the contract is for both. As far as collections go, usually, we'll front load it to get our hardware cost back in at the point of the initial sale. But on the revenue recognition side, that will be tapered off over the 5 years of the contract evenly, just due to rev rec guidelines with ASC 606. So there's -- as far as, I guess, the cash influence a little front heavy, but not overly heavy. I mean but it's really software over the 5 years is really what breaks down, if that answers your question.

Yes. Allen. This is Stan. I'll comment a little bit, too. One of the things the majority, I mean, I would say well over maybe even 95% of all the reoccurring revenue is on the law enforcement side. So the commercial side is just really starting to be able to get a split in the door and mainly with the new EVO system that we're going to start counting quite a bit. And with that, I don't know if you happen, Allen to be on the call for as the year-end. But we recently had some data that we received from one of our partners, which is a very large insurance company that is looking to assist us in the marketing of our products through all those that they insure. And they've seen a reduction in claims that almost paid for their whole -- all their devices in 1 year, and they still got 4 more years. I mean, I think, Brody, you know the exact numbers of that, what it came in at. But that's going to be very encouraging. And then that's something that we'll be looking at doing on reoccurring revenues with very solid creditworthy end users on the commercial side.

That's great. And then one other question on revenue cycle management. If I could just understand a little as you integrate acquisitions. How do you think about the synergies of owning multiple of these companies and the end markets that they sell to and different type of software. Does that matter? Or do you try to make it one type or maybe just explain that a little?

Yes. No, the one thing, Allen, we’re pretty blessed. I mean we’ve got a very, very strong engineering team. And so when we do look at some of the areas that we can get involved in, especially when it comes to video solutions, we’re very capable to adapt to the environment that meets their needs. I mean if you look at it, we’re doing everything from law enforcement to stadiums like MetLife Stadium to Royal Caribbean Cruise lines. We’re doing taxi cabs, ambulances, buses. We’re doing over-the-road vehicles. So the videos – it truly is a video solutions, the vision anymore to where it’s not just so much of law enforcement or just even call it in-car video because there’s so many other applications that we’re getting involved in. And then as far as the other avenues that we may look at as far as in acquisitions and companies that would want to partner up with. Some of them, we look for where they may have some uniqueness in some areas that we may not, and we know that may take us 1.5 years or 2 years to get to that area. While we may have uniqueness if they do not. And therefore, as long as all parties are willing to work with each other, things can happen really quickly. And we’ve got a few of those that have came together that we’re pretty excited about that we’ll continue to enhance the revenue and bottom line for the video solutions side as well. On the ticketing and production side, we’ve got -- again it’s -- we’re very, very blessed because on the ticketing side, we went from a ticketing platform that was pretty much secondary and still does a lot of secondary business, but we now have over 50 entities…

Your next question comes from Bryan Lubitz at Equitable.

All right. So the first question I have for you, and I think you had touched on it a little bit earlier in regards to getting your financials done for 2021 and obviously in this Q as well. Do we have any time line that we can point towards or that we're shooting for in terms of getting the actual split done with spinning off of TicketSmarter?

So Bryan, the timing of the actual split, let's call it, is going to be a little bit in the SEC's hands. We think that we're real close on getting the audits wrapped up. So let's say that maybe in just a couple of weeks, we have the remainder of 2021 for TicketSmarter completed. At that point in time, providing that we've got a real clear direction on the avenue that we want to go down with some of the options that have been presented to us. We will have all the information necessary that the SEC is going to require from us, and we can make that filing. So we're hopeful that -- that's a pivotal point, obviously, to get that done. And then once we have that all inserted into the proper documents, we'll file that with the SEC. Obviously, they'll probably come back with comments now with us being publicly held, depending on the path that we go down, hopefully, is looked at one time, not 2 and 3, and we could go ahead and get this wrapped up fairly quickly. I think they technically have to respond within 30 days of a filing. So provided that we take a look at it and everything looks in order, it could happen really quickly. But I would think that we're going to get at least 1 round of comments before they'll allow us to go ahead and exercise the transaction that we're eventually contemplating.

Okay. And this one is for you, Brody. You mentioned earlier when you were going over the numbers that current stockholder equity in the company is roughly $30 million right now. Can you comment at all to the fact that you guys are sub-$10 million in market cap? You have over $30 million in stockholder equity.

Yes. I mean I'm just -- I was trying to think what to say there. Because there is kind of disappointing to us that our market cap is where it is, considering the value we think we have with really in our 3 core businesses, but the business as a whole. I mean, our current assets alone are 2x our market cap. So -- and our stockholders' equity like you just said is 3x our market cap. So obviously, it's not a favorable market and we need to show some results here soon that can help this -- our market cap increase as well. Yes, it's tough to see them in with our market cap where its relative to our assets and stockholder equity as well.

Bryan, that's one of the things that we're trying to do. As you know, we've attended a couple of conferences, we're going to be looking at additional conferences to try to get more exposure out there on the values that Brody and I, for sure, and others, obviously believe that we have because you read it right. There it is. Stockholders' equities is almost 3x what our market cap is right now.

Yes. It's, as Brody said, a tough market, especially for small caps. I'm curious, and I know we've had conversations privately being that you guys are 1/3 of what your shareholder equity is, half of what your current assets are and you have a bunch of mailbox, money coming your way as you would love to term it, Stan. Have you guys ever considered some of the parts being so much greater than the whole doing a private takeover of the company or selling off parts of the company?

Well, I think that’s sort of -- the answer is yes. I mean we contemplated a lot of things along those lines. I think that’s why we are doing all the things that we’re doing right now as far as the audits and all those in place even going back the full 2 years on TicketSmarter because that opens up our opportunities. Whether or not it’s strategic to go ahead and spin it out and let it stand on its own as a publicly-held company or if the right price came along, take advantage of that as well. And that actually would go with any of the entities that are there. Obviously, we needed to go ahead and we do have [audited] financials on the medical billing side of things, clearly, on the video solutions side. We now have the ticketing, entertainment side completed. So it does open up a lot more opportunities to explore not only what you’ve said, but again stay in the course on some of the other things that we’ve been in contact with and the Board has this looking at.

Your next question comes from Mike Albanese at EF Hutton.

Hi Stan and Brody. I just wanted to talk about Kustom 440 quick, I guess. Congrats on getting your first event done and I think you alluded to this, but do you have any other planned for the back half of this year?

We do. So right now, we have obviously a lot of offers out there. And what I mean offers, not only you got to coordinate not only the facility and the availability of the facility but also the availability of the talent that you want to have come in. And so there's quite a few offers that are out there that we're trying to firm up and we'll get pretty aggressive here in the coming days in regards to going ahead and nail and some of them down. I mean that the things that you do have, Mike, is that if for some reason, a particular artist passes because just there's a conflict or whatever the reasoning may be, we are very, very well connected and positioned to go ask someone else to step in of the same caliber. If you want an A lister right off the bat, you go get them. I mean having Chris Young and Trace Adkins and Gabby Barrett and Jo Dee Masina. We had even some of the history in Lonestar and Clay Walker there. I mean we have a great lineup out there and everyone just had an amazing time. So what you do is, we really truly are looking for not just a concert to where you've got a headliner in one opening that. This is -- typically, these are gates open at 1:00, and the headliner may not go on until 9 or 10 later that day. So you've got like 6 different acts that will be performing maybe more. So you just got to fill them in, but we have a tremendous amount of offers out there. We have the venues identified and are working with us. So I think the back side, you'll see a lot of activity on the Kustom 440 side, for sure.

Got it. And were you able to leverage your shield line at all? I know there's the potential to be able to use that at these venues.

Yes. I mean so the intention is to not only use the shield line at these events, but also to do the best that we can to be utilizing the video solutions side as well as far as our body cameras and even if you have a patrol car driving around a little bit, make sure that those security people that we hire, will be utilizing our products as well and also giving us the exposure not only to the local departments that will be hired to come in and help monitor things. But definitely, our security team will be wearing body cameras and such out there as well.

Was that the case for this [past] festival?

We had this past festival, they had a situation where that particular company was not allowed to -- they didn't have the proper insurance to go that far. And so while this was our first one out of the box, we've got a little more clarity on what to make sure the checklist or before we go ahead and sign a contract with them.

Got it. Okay. And then in terms of, I guess, revenue or just breakout in general between -- with Kustom 440, between the Ticketing segment and then kind of all other revenue? I mean, do you plan on breaking that out? I mean the crux to what I'm getting to is, I think the expectation, right, you alluded to this earlier, TicketSmarter was profitable. There's obviously been some headwinds from revenue and kind of cost standpoint, negative gross margins in that business. But back to basics, you can ramp up volume kind of that coincides with the entertainment segment. I mean -- do you plan on kind of breaking it out so that we can get a look at what the underlying profitability is of the Ticket segment versus all else? And then I guess if you could provide any insight or color on top of that as to [indiscernible] for profitability there.

Sure. Mike, I think what you're asking is, we're definitely going to sit there and identify what Kustom Entertainment will look like. And I think what you're asking is, can we go a little further than that and break it out to give us an idea of what Kustom 440 versus TicketSmarter, that platform looks like as well. And if that's the case, I don't know why -- I mean we operate them essentially separately. So I don't know why we couldn't. I'm not on the accounting side of things, so I'll let Brody deal with that.

Yes, I think especially once the separation occurs, I think once Kustom Entertainment has their own filings in Q's and K's, they'll have it broken out absolutely between the TicketSmarter segment and the Kustom 440 segment. As we currently do it on a consolidated level, it would probably fall under the entertainment segment. But I think once the separation is done, you'll really see the difference between Kustom 440 and TicketSmarter within their filings.

Yes. Mike, I think we [really want] to do that because we actually have been asked by other parties, let's leave it at that, to step in and put together a -- whether it be a concert or an event or something along those lines, that may be just a corporate event, that doesn't have any ticket sales at all. So it definitely will need to have them separated for sure when we get to that point.

Yes. Okay. Great. Yes, that's helpful. I just -- I think the theory in a sense of the investment thesis for that strictly that segment, right, is that as you build out Kustom 440 in the Entertainment segment, that will help drive scale and volume for TicketSmarter, which in theory should improve its profitability, right? And then you kind of get the exponential growth of the operating leverage there. And I guess I'm just -- I'm hoping that, that becomes apparent as opposed to a situation where TicketSmarter maybe doesn't get those benefits and tailwinds, but it's kind of masked by Kustom 440 as a whole. So I think if you could kind of break that out in your filings and so accretive to that theory, so to speak, that would be beneficial work both the analysts and obviously investors as well.

No problem. We'll take that and definitely would like to do that. If not, we'll try to -- if it's an accounting issue, we'll try to footnote it to help you out. How about that?

Yes, that makes sense. That works. Okay. That’s really it for me.

The next question is the follow-up from Allen Klee at Maxim Group.

Your joint venture for medical billing. This business, it seems like it's mostly -- it gets paid by doctor visits. So it's kind of reoccurring and it seems to have attractive margins. Can you talk about your strategy of as you're acquiring new companies, what you're looking for and have the synergies you can get from combining them, the type of customers they have? And is there any issues that there's different software being used from the various companies that get acquired?

Yes. Thank you, Allen. So when we look at these acquisitions, it's really, we're looking at ones that have growth potential but also have positive earnings as they stand now and margins that can be improved as well. So you've mentioned software. Once we do all these acquisitions, we turn them in, they all move into our software side, and we have our back office, which is really where we can lessen the costs and improve margins as fast as possible by bringing them into our back office solutions and whatnot. So we do integrate them all into our systems and our processes, which is really the strategy we wanted to have anyway because that's the way we can grow the profitability of each one of those acquisitions. So if that answers your question, if you wanted -- I mean the customer is everything, obviously, we're -- they kind of mould together anyway. So I don't as far as the medical billing side themselves. So a lot of them -- I think, one, they've kind of been all over the United States. So I think a couple have been in the same regions, but others have been branched down in the Midwest and the Northeast or Northwest and the Southwest.

And Allen, again, I think the strategy -- the long-term strategy is to continue the roll ups because it's very fragmented, very fragmented market. And so as we go out there and continue to find the, call it, the mom-and-pops or the smaller entities, and we can roll them up and then implement our software and efficiencies that will just continue to help it grow. And right now, I think we're at a run rate somewhere around $8 million a year. Obviously, we'd like to get it, built up into the masses to where it's a very attractive candidate for a possible purchase or maybe possible stand-alone. So that's sort of the strategy that we've taken. But we're not trying to catch any falling knives out there by no means. There's plenty of them out there. And we don't also -- one last thing, and we'll wrap this up. But we also don't have to be just truly what's called medical. We also could do dental and some -- and other areas that we're capable of doing. So it's not just the MinuteClinic. It's also the dentist offices and stuff like that as well that we're capable of doing.

That’s great. Thank you so much.

Thank you. And thank you, everybody, for joining us today. We really appreciate it. I know we've got a lot of work ahead of us, and we'll continue to keep our head down and do what we can to not only continue to execute on the plan and the strategy that has been announced in regards to the separation of the Entertainment and the Video Solutions division or the legacy Digital Ally. We'll continue to move forward on that and we do believe that will sit there and help bring a lot more clarity, as we mentioned, we have a stockholder equity of $30 million and a market cap of $10 million is just somewhat unacceptable, and we've got to get that fixed for our shareholders, and we'll work hard on doing that. So thanks, everybody, for joining us. We appreciate it.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating, and we ask that you please disconnect your lines.