Digital Ally - Q1 2024

Executive Summary

• Q1 2024 revenue fell 28% year over year to $5.53M, while gross profit held essentially flat at $1.52M; operating loss improved to $(3.64)M as SG&A was reduced by 33%.
• Deferred revenue reached $10.6M at March 31, 2024 (current $3.30M; long-term $7.29M), supported by growing subscription plans and multi-year contracts.
• Segment dynamics: Entertainment revenues decreased 41% YoY as management “right-sized” the business; Revenue Cycle Management (RCM) revenues decreased 19% YoY; video solutions segment improved segment gross profit YoY.
• Management highlighted progress on the Kustom Entertainment SPAC transaction (Clover Leaf S-4/A filed May 13) and reiterated expected stock dividends to DGLY shareholders upon closing, a potential near-term stock catalyst.

What Went Well and What Went Wrong

What Went Well

• Gross profit resilience: $1.52M vs $1.54M YoY despite a $2.17M revenue decline, reflecting disciplined cost control and mix improvements.
• SG&A down materially: $5.16M vs $7.72M YoY (−33%), driven by reduced sponsorships/marketing and ongoing “rightsizing” initiatives.
• Management tone on subscription traction and pipeline: “It is exciting to see our deferred revenue balance reach $10.6 million…continuing to build upon our existing subscription plans”.

What Went Wrong

• Top-line pressure: revenue decreased 28% YoY to $5.53M, primarily from Entertainment service revenue reductions during the profitability focus.
• Entertainment segment: revenues fell 41% YoY to $2.38M as marketing spend was curtailed; segment gross profit was $494k (up YoY but still modest).
• Profitability still negative: operating loss $(3.64)M and net loss $(3.94)M; interest expense rose to $(649)k and warrant derivative marked to market at $(349)k, weighing on results.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Digital Ally first quarter earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, May 21st, 2024. This conference 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, they 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 our new information, future events, or otherwise. There can be no assurance that the forward-looking statements contained in this document will in fact transfer or prove to be accurate. I would now like to turn the conference over to Stan Ross, CEO. Please go ahead.

Stan Ross (CEO)

Thank you. Thanks, everybody, for joining us today. I know we had a call not too far back in regards to our year-end numbers and gave everyone a revenue update. Obviously, this is our first quarter call, and while it's been such a short period of time in between our two calls, really excited what all has happened since we've last had a chance to talk to you. Obviously, you've seen some press releases on Digital Ally and some of the Video Solutions contracts that they've received, including the ones with the Kansas City Chiefs. And also you've probably seen that, we've had another very quick turn on an S-4 filing that was done by Clover in regards to the purchase of Kustom Entertainment from Digital Ally, concerning the SPAC acquisition.

So we're really pleased that that is progressing along very nicely. Hopeful to hear something in the coming days that we're getting close to having this completion, and then we'll move on, obviously, to all the votes and stuff necessary to get it finalized and then move forward. For those of you that may be new to the call, you do realize that there will be stock dividends that would be shared with the Digital Ally shareholders upon completion of that. So really excited about it. Clover's stock is still holding very strong, up around the $12 point. We're still real close to about a 4-to-1 ratio in regards to what the Digital Ally shareholders will get.

So just been moving forward on it, and like I said, hopefully hear something back rather quickly from the SEC and get this thing buttoned up in the coming days. With that being said, we'll go ahead and do a recap of the first quarter numbers. Brody Green is here with me and is President of Digital Ally. So Brody, I'll let you take it.

Brody Green (President)

Thank you, Stan, and as Stan mentioned, it's only been probably 45 days since we last spoke, so not a whole lot of substantial changes, at least as far as the balance sheet goes, and we'll run through the Q1 P&L as well, and compare it to 2023's first quarter numbers. You guys probably noticed we filed our 10-Q a couple days late, and that was just due to some... You know, right after the 10-Q or sorry, right after the 10-K and the annual audit, it gets a little fast-paced to get this 10-Q wrapped up in time, along with all the S-4 filings we've been working through for the business combination. So, just a 48-hour delay on that. We do apologize, and we don't anticipate that being a trend here moving forward.

Going through the balance sheet at Q1 of 2024, you know, our total current assets were $15.1 million, compared to $15.6 million at year-end, so really a $500,000 change in total current assets. Mostly due to, just that's mostly attributable to, inventory decreases as far as, you know, what, what we have in stock here, along with probably a couple more write-offs included within that as well, as far as our reserve goes. Total assets at quarter end were $45.2 million, compared to $47 million at year-end. A lot of that's related to, an, an asset sale we had during the quarter.

Total current liabilities was slightly up to $24.7 million, compared to $22.5 million at year-end, largely related to accounts payable and some debt obligations taken on during the first quarter as well. Total liabilities, a similar increase, up to $37.6 million, compared to $35.6 million at year-end, so up about $2 million, again, related to accounts payable and some debt taken on during that first quarter. You'll see our stockholders' equity is $7.5 million in the first quarter, compared to $11.5 million at year-end. That's, you know, that's just in line with, you know, small decrease in assets and a small increase in liabilities.

As far as the P&L goes, revenues were down in Q1 of 2024 to about $5.5 million, compared to $7.7 million last year in the first quarter. However, the real sticking point is our gross profit remained flat at $1.5 million, compared to the first quarter of 2023, which is really a testament to us really focused on right sizing and working towards profitability and, you know, focusing on profitable revenues, rather than just revenues for the sake of revenue. So seeing that gross profit number remain at $1.5 million with a $2.2 million dollar decrease in total revenue is exactly what we are hoping for as far as the gross profit comes.

And then another big change is our total SG&A for the quarter was $5.2 million, compared to $7.7 million in the prior year. So a $2.6 million-- $2.5 million, $2.6 million dollar decrease in SG&A, which is very substantial, which brings our operating loss to $3.6, compared to $6.2 last year. So a large improvement in our operating loss compared to our first quarter of 2023. Obviously, still a lot of work to be done, but that's definitely a big step in the right direction to keep our gross profit flat and our operating loss substantially lower. You'll see in our stockholders' equity section, really no change in that section. Some minor stock grants during the quarter, about it.

We're really trying to keep that ratio for the business combination, as Stan mentioned, as close to 4-to-1 as we can. We're close to the finish line there. A few other things just to touch on. Our deferred revenue is up to $10.6 million at March 31, 2024, compared to $8.9 million at this time last year. So up about $1.6 million, which is attributable to our subscription model that we talk about every quarter, and just those contracts continuing to pile up as deferred revenue gets larger and larger each quarter, as we anticipate continuing on here every quarter after this. Like I mentioned earlier, the decrease in inventory down from $3.8 at year-end to $3.1.

You know, our gross inventory was about $7.6 compared to $8.4 at year-end, so that's really attributable to the decrease in net inventory. One large item during the quarter, and I don't think Stan touched on this yet, was the acquisition of Country Stampede that we completed on March 1st, 2024. So Country Stampede, and I'm sure Stan will touch on further once I wrap up, but that's a very, very large country festival that's very prominent in the Midwest. It's a three-day festival that brings in, I mean, I think it's between 15,000-25,000 people a day, you know, throughout. So it's a very well-established festival here in the Midwest that is considered. What are the dates? June 25th through 27th this year?

Stan Ross (CEO)

Through 29th, I believe, this year.

Brody Green (President)

June 27th to 29th. So again, that's coming up here in about a month, and that acquisition is very exciting for the company and for the Kustom Entertainment sector as well. As you'll see in the 10-Q, we have our segment footnote, I think it's footnote 18. You'll see the revenues for each segment. So video did about $1.7 million this quarter. Revenue cycle management did $1.4 million, and the entertainment section did about $2.4 million. So that brings the total revenues to $5.5 million. You'll see our gross profit in the video side was almost $600,000. Revenue cycle management was about $500,000, and the entertainment section was also about $500,000.

You'll see there's a large depreciation amortization on both the video solution side and entertainment side. That's due to amortization with the acquisitions the entertainment section have done. So with TicketSmarter, they have a large amortization that hits every quarter, which flows to the P&L, unfortunately. Now, on the video side, it's depreciation of some assets on the books here on the video side. So overall, it was, you know, a lot of positive signs in this quarter. Getting our gross profit to remain flat compared to this, this time last year, even on lower revenues, is very exciting because that means our, you know, our goal to right size everything and focus on profitability is, is coming together. Obviously, still some work to do, but at least we're turning in the right direction.

I'm very excited about, you know, the future as we continue on here. One last item, as Stan mentioned, the S-4, we continue to file those, and we're on amendment 4 now with the SEC. We got that on file on May 13th, so just 8 days ago. We expect to hear comments back yet this week from the SEC. They only had 6 comments on this last version, so hopefully those are wrapped up, and then we can, once we hear back from them, we'll promptly file another version with our Q1 numbers included, as our numbers are now stale. So we'll get their responses on those six comments, drop in Q1 numbers for both Kustom and the SPAC, and hopefully that version can go effective shortly thereafter.

And we'll obviously keep you guys posted on that, and I encourage you to just look at Clover's filings, they're CLOE on Nasdaq. You'll. That's where the S-4s will be filed within the SPAC. Then for any further details on our financials for the first quarter 2024, please jump into EDGAR and read our Form 10-Q for more details about our activity throughout the quarter. I'll turn it back over to Stan.

Stan Ross (CEO)

Thanks, Brody. Yeah, a couple of things. You know, obviously, Digital Ally, its video solutions and its position in law enforcement is still strong and still thriving in those areas, and they continue to, you know, pursue new customers with the commercial division, and so very excited about that. The acquisition that Brody was talking about, Country Stampede, that particular festival has been around for 28 years, and everyone from, you know, the Taylor Swifts of the world, you know, Blake Shelton, and many others have performed at this festival over the years. And it has drawn big numbers in the past, and depending on, I think a lot of it is the venue that it's at. In the past, it used to be at a state park.

It's got moved a couple of times, and we'll look at what we need to do to get back to a larger venue than what we have the capabilities of right now. But very excited the numbers we hit in this quarter, the second quarter, with it being the last weekend of June. We also will be announcing the 2025 lineup. We also have additional festivals that Kustom Entertainment will be doing yet this year, and so excited for, you know, its growth as well. Let alone the ticketing platform that we're able to utilize such as Country Stampede. We're using our own ticketing platform through TicketSmarter. And so it's nice because...

And I've said this time and time again, you know, as we do these events, providing the venue, you know, doesn't have something already in place, we will also be doing the ticket sales as well, which is just an added benefit and also helps to the profits associated with the events. So very excited that we're close to the finish line on, you know, the business combination agreement, and as soon as we do hear back and we plug in these numbers, we could turn that right back around to them and hopefully then go effective. So, Julie, we're going to open this up for any type of questions that we may have with our listeners.

Operator (participant)

Thank you. Ladies and gentlemen, should you have a question, please press star one. To withdraw your question, press star two. Again, to ask a question, press star one. One moment, please, for your first question. Again, if you'd like to ask a question, press star one. There are no questions at this time. I will turn the call back over to Stan Ross for closing remarks.

Stan Ross (CEO)

Well, again, thanks, everybody, for joining us. And, like we said, you know, we know that it was only about 45 days ago that we were having this call, and a lot of things have happened very positively. We know that there's gonna be potentially another exciting call here in the coming weeks so that we can share with everybody. So anyways, thank you. Have a wonderful day, and we'll wrap this up. Thank you, Julie.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. Thank you. You may now disconnect.