Digital Ally, Inc.

Good morning, ladies and gentlemen, and welcome to the Digital Alley Inc. Q1 2023 Operating Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. 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 16th, 2023. I will 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. Our dear friend, after almost 17 years, Tom Heckman, is the CEO. decided to retire and take a little 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 have mentioned and went public with in regards to a possible spin-out 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 have that will show up in the second quarter's numbers. But we just finished with our very first – custom 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 we'll go from there. Anyways, Brody.

Yeah, thanks, Dan. And like, happy to talk to everybody again. I know it's only been about 45 days since our last call. So 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 55 and a half million relative to 56.7 at year end. Similarly with total liabilities, they're pretty constant with year end as well, they're 25 million. So our total stockholder equity remains relatively healthy at 30 million that are above. In the equity section, obviously not much, That's 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 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 profits, the 20% gross profit, which is much better than we looked at in Q4. So, you know, 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, 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. Stockholder's equity side, we're sitting at 2.7 million shares outstanding. We have 200,000 authorized, so plenty of room there. And as I mentioned, we did the reverse stock split back on February 6th. So we did a 20 to 1 split, as we talked about at the year-end call. Very few options and warrants left out there right now. At quarter end, there was only 53,000 options outstanding and 39,000 warrants. So cleaning all those up, and they'll run their course here shortly. I think there's only – they'll all go away at the end of June or July on the warrant side. We're excited to see our deferred revenue number as we continue to talk about. It just continues to grow. At Q1 2022, that number was sitting at $5 million, and now we're looking at $9 million at Q1 2023. So nearly doubled. We're excited to have that number out there. It raises our floor every quarter for what our sales number will be. So it's nice to have that number continue to grow with these subscriptions we've put in place. And a majority of those are five-year subscriptions. So I think our total subscriptions are well above 200,000 subscriptions now, and that's departments – or sorry, 200 subscriptions. So that's probably over 250 at this point. And those are departments. Those aren't units. So those subscriptions can range from one to several hundred in-car body-worn cameras. So A lot of deferred revenues sitting out there, which is nice, and we love seeing that. On the segment side, you know, Video Solutions did about 1.9 in revenue. Medical Billing Revenue Cycle Management did 1.8. And the entertainment side did four. And we're excited to see what happens in Q2 with all of those, especially on the entertainment side, as Stan mentioned, the concert concluding this past weekend. which was a success, and I'll let him go into more detail on that. Depreciation and amortization for the quarter was about $543,000, so those are non-cash items that flow through the P&L, so those, you know, we can calculate either at another time. One last comment I have, and then I'll turn it back over to Stan. I just wanted a subsequent event was a convertible note we issued and filed an AK on, so. It was for $3 million, a convertible note at 550. So more details, it's in the 10Q as well as an AK file at that issuance. So feel free to look into that. Just want to make you guys all aware of it as we have already. I'll tell you that, Stan.

Turn it back over to you. Thanks, Brody. And as I said, you know, the 10Q's filed and all the details out there. But I think really what everyone's been curious about in a lot of the emails, a lot of the calls I get is, you know, 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 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 audited numbers needed for TicketSmarter since we acquired it in September of 21. We need to make sure to just button up the first eight months of 2021. And then we're 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, you know, in the coming days to define what direction we are going to go into. But even more important, you know, from that perspective, is the launch that Custom 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 forecasts of rain in the future. Rain, rain. It's going to rain on our particular festival day. As we got closer, literally within less than 48 hours, it had cleared up and the weather forecast was very favorable for this festival. Matter of fact, on the last day, there was almost 500 tickets. Almost 10% of those that attended showed up and bought at the door. So we did hit a number close to 7,500 tickets sold, which was I think our bogey was somewhere between 6,000 and 8,000. So we were on the high side of that, very pleased with that. The food and beverage, as we try to be able to be in a position to control a lot of that, we believe the numbers are going to come in. above what expectations were on that as well. So all in all, just a very, very successful event. You can get on the website. It's countryrootsfest.com and just maybe see a little bit of how things did play out, whether it be on a Facebook or Instagram. Just a tremendous amount of people showed up. The acts that we had from start to finish were phenomenal. fantastic, a very good atmosphere as far as the crowd. And we look forward to doing a lot more of these. And that's the whole thing I was trying to tell you and explain a little bit about our ticketing platform and the production platform is that we actually can sit there and throw gas on our own fire by doing these type of festivals and concerts that helps the ticketing company and obviously with us having the production side of it, we reap the benefits from that as well. So, again, as we mentioned last year, you know, TicketSmarter, you know, did, you know, 21 million roughly, and if we're sitting there and we're continuing to do let's say, you know, a half a dozen more concerts this year, with those kind of revenues, with those additional ticketing revenue that it'll generate, you're going to see, you know, that particular entity, and when I say that, meaning custom entertainment, go from, you know, $21 million to possibly close to $30 million. So by just, you know, doing this ourselves. So very excited, very pleased and excited impressed with our partners on this deal, the sponsors that we had were very recognizable names. And we look forward to being able to announce quite a few up and coming events, and hopefully maybe one of them is in your office backyard and you can actually come out and see it firsthand. So it's been exciting on that side of things. see very, very nice opportunities in regards to the video solutions division. Probably the biggest of all would be on the commercial side of our products. As all of us know, you know, being around over 17 years, we have a very good foothold when it comes to the law enforcement side of things. And now we seem to be getting very well established and very well received feedback in regards to the new Evo commercial system that we have out there as far as the in-car system, and also the uniqueness of being able to use even some of the body cameras in the commercial division as well. So we've got a lot of T&Es out there right now that we look to hopefully come to fruition fairly soon, be able to announce those orders. They are sizable. And so we'll continue to stay on top of them, and obviously when they come through, we'll be making an announcement of those. So I'd love to go ahead and open up the floor for any questions that there may be out there. So let's do Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Alan Klee at Maxim Group. Please go ahead.

Yes, hello. 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?

Yeah, so as far as the products go, so most of our sales are now over the past two years, I think, at this point, maybe even two and a half to three. Most of our products are now sold off in subscription of five years. So that will include your hardware and your software. So the contract is for both. As far as collections go, we usually will front load it to get our hardware costs back at the point of the initial sale. But on the revenue recognition side, that will be tapered off over the five years of the contract evenly just due to RevRec guidelines with ASC 606. So there's – as far as, I guess, the cash inflow, it's a little front-heavy but not overly heavy. I mean, it's really software over the five years is really – what breaks down, if that answers your question.

Now, this is Dan. I'll comment on it 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 It's foot in the door and mainly with the new EVO system that we're going to start touting quite a bit. And with that, I don't know if you happen, Alan, to be on the call as far as the year end, but we recently had a 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 one year, and they still got four more years. I mean, I think, Rhoda, 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 a reoccurring revenues with very solid, creditworthy end users on the commercial side.

That's great. Thank you.

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 types of software? Does that matter? Or do you try to make it one type? Or maybe just explain that a little. Thank you.

Yeah, no. The one thing, Alan, 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, you know, 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 that, you know, meets their needs. I mean, if you look at it, we're doing everything from law enforcement to stadiums like, you know, 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 division. to where it's not just so much of a 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 acquisitions and companies that we would want to partner up with, Some of them we look for where they may have some uniqueness, you know, in some areas that we may not, and we know that may take us a year and a half or two years to get to that area, while we may have uniqueness that they do not. And therefore, as long as all parties are willing to work with each other, things can happen rather quickly. And we've got a few of those that have came together that we're pretty excited about that will continue to enhance the the revenue and bottom line for the video solution side as well. On the ticketing and production side, we've got, again, we're very, very blessed because on the ticketing side, we've 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 that were the primary, meaning it doesn't matter if it's soccer, baseball, or a concert, you know, all the ticket sales will be going, you know, through Ticket Smarter, which makes it, you know, very nice. And because of that relationship that we have with over, you know, 200 universities, We also have unique opportunities on being able to introduce the production company, Custom 440, much like we just did this weekend, and put together events. One of the things I might... To clarify on this event, while our number was 7,500, that may not seem like a big number when you're talking, people are used to hearing stuff like Arrowhead Stadium or T-Mobile Arena, stuff like that. That production that we did was in a minor league ballpark, a baseball field, actually inside of it. We're capable of going to a university, a city. We can do the whole build out and everything. And because of the relationship that we've had and the credibility we have with our law enforcement background and security background, you have the city fathers and others that are willing to work with us and allow us to bring talent to their city, draw business to their cities. And so we believe that we'll be able to have numerous opportunities in regards to the custom 440 production side, which also enhances the ticketing side going forward.

I hope that helped a little.

Thank you so much.

Thank you. Next question comes from Brian Lubitz at Equitable. Please go ahead.

Morning, guys. Morning, Brian. Morning, Brian.

All right, so the first question I have for you, and I think you had touched on a little bit earlier in regards to getting your financials done for 2021 and obviously in this queue as well. Do we have any timeline 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, Brian, the timing of the actual split, let's call it, is going to be a little bit in the SEC's hands. You know, we think that we're real close on getting the audits wrapped up. So, let's say that, you know, maybe in just a couple of weeks, we have the remainder of 2021 for TicketSmarter completed. At that point in time, provided that we've, you know, 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, you know, 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 this being publicly held, depending on the – the path that we go down, hopefully, you know, it's looked at, you know, one time, not two and three, and we can go ahead and get this, you know, wrapped up fairly quickly. They are, I think they technically have to respond within 30 days of a filing. So, provided they take a look at it and everything looks in order, it could happen rather quickly. But I would think that we're going to get at least one round of comments before I'm they'll allow us to go ahead and exercise the transaction that we're eventually contemplating.

Okay. And this one's 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 yet have over $30 million in stockholder equity?

Yeah, I mean, I'm just trying to think what to say there. It's kind of disappointing to us that our market cap is where it is, considering the value we think we have with really our three core businesses. But the business as a whole, I mean, our current assets alone are two times our market cap. So and our stockholders, actually, like you just said, is three times our market cap. So obviously, it's not a favorable market. And we need to show some results here soon that can help our market cap increase as well. Yeah, it's tough to see with our market cap where it's at relative to our assets and stock close equity as well.

Brian, 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 you know, more exposure out there on, you know, the values that, you know, Brody and I for sure and others obviously believe that we have because you read it right. You know, there it is. You know, stockholders' equities is almost three times what our market cap is right now.

Yeah. 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 a third 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 the sum of the parts being so much greater than the whole doing a private takeover of the company or selling off parts of the company?

So I think that's sort of, you know, the answer is yes. I mean, we contemplated, you know, a lot of things along those lines. You know, I think that's why we're doing all the things that we're doing right now as far as the audits and getting all those in place, even, you know, going back the full two years on TicketSmarter because that opens up our opportunities. You know, whether or not, you know, 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 up to financials on the medical billing side of things, clearly on the video solution 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 contacts with, you know, and the board has us looking at.

Thank you, guys. Thank you, Brian.

Thank you. Next question comes from Mike Albanese at EF Hutton. Please go ahead.

Yeah, I can stand that, Brody. Thanks for taking my question. I just wanted to talk about custom 440 quick. I guess congrats on, you know, getting your first event done, and I think you alluded to this, but do you have any others planned for the back half of this year? We do.

So right now we have obviously a lot of offers out there. And when I mean offers, you know, 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 pretty aggressive here in the coming days in regards to going ahead and nailing some of them down. I mean, the things that you do have, Mike, is that if for some reason a particular artist passes because 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 can go get them. I mean, having Chris Young and Trace Atkins and Gavin Barrett and Jody Messina, we had even some of the history and Lone Star and Clay Walker there. I mean, we had a great lineup out there and everyone just had an amazing time. What you do is we really truly are looking for not just a concert to where you've got a headliner and one opening act. You know, this is typically these are gates open at 1 o'clock, and the headliner may not go on until 9 or 10 later that day. So you've got like six different acts that would be performing, maybe four. So you've 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 backside, you'll see a lot of activity on the custom 440 side for sure.

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

Yeah, 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 solution side as well as far as our body cameras. And even if you have, you know, a patrol car driving around a little bit, make sure that, you know, those security people that we hire will be utilizing our product as well and also giving us the exposure not only to the local security, 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?

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 checklists are before we go ahead and sign a contract with them.

Got it. Okay, thanks. And then in terms of I guess revenue or just breakout in general with custom 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 of what I'm getting to is, you know, I think the expectation, right, and you alluded to this earlier, TicketSmarter was profitable. There's obviously been some headwinds from a revenue and kind of cost standpoint, you know, negative gross margins in business. You know, back to basics, you know, 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 your expectations for profitability there.

Sure. Mike, I think what you're asking, you know, is we're definitely going to sit there and identify what the custom entertainment will look like, you know. 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 custom 440 versus TicketSmart, 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 the accounting side of things, so I'll let Brody deal with that.

I think especially once the separation occurs, I think once Custom Entertainment has their own filings and Qs and Ks, they'll have it broken out absolutely between the TicketSmarter segment and the Custom 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 custom 440 and TicketSmarter within their filings.

Mike, I think we're going to 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 – you know, 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.

Yeah, okay, great. Thank you. Yeah, that's helpful. I just, you know, I think that, you know, the theory in a sense of the investment thesis for that, strictly that segment, right, is that as you build out custom 440 and the entertainment segment, 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 or the operating leverage there. And, you know, I guess I'm hoping that that becomes apparent as opposed to, you know, a situation where, you know, TicketSmarter, you know, maybe doesn't get those benefits and tailwinds, but it's kind of masked by Custom 440 as a whole. So I think if you could kind of break that out in your filings and show credence to that theory, so to speak, that would be a beneficial work for, you know, both us 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?

Yeah, that makes sense.

That works. Okay, that's really it for me. Thanks, guys. Thanks, Mike.

Thank you. The next question is a follow-up from Alan Klee at Maxim Group. Please go ahead.

Yes, hi. 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 how 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? Thank you so much.

Yeah, thank you, Alan. So when we're looking 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 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 our back office solutions and whatnot. So we do integrate them all into, into our systems and our processes, which is really the strategy we wanted to have anyway, because that's the way we can, you know, grow the profitability of each one of those acquisitions. So if that answers your question, if you want to, I mean, the customers and everything, obviously we're, they kind of all mold 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 the Midwest and the Northeast or Northwest and the Southwest.

And Alan, you know, 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, you know, the, call it the mom and pop. So we're, you know, the smaller entities and we can roll them up and then implement our, um, our software and efficiencies that will just continue to help it grow. And right now, I think, you know, we're at a run rate, you know, somewhere around 8 million a year. Obviously, we'd like to get it up, build up into the masses to where it's a very attractive candidate for, you know, a possible purchase or maybe, you know, a possible 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 other areas that we're capable of doing. you know, the minute clinics. 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 you know, 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. You know, to have a stockholder equity of $30 million and a market cap of $10 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.