Digital Ally - Q2 2024

Executive Summary

• Total revenue declined 32% year over year to $5.62M, with product revenue $2.21M and service/other $3.41M; gross profit collapsed 91% YoY to $0.24M as cost of sales rose to 96% of revenue. Operating loss improved 21% YoY to $(3.91)M, but net loss was $(5.01)M and diluted EPS was $(1.74).
• Entertainment segment revenue fell 47% YoY to $2.47M as management “right-sized” the business to work toward profitability; RCM revenues declined 9% YoY to $1.56M. Video solutions saw traction in EVO-HD and FirstVu Pro but experienced a slight revenue decrease.
• Corporate separation progressed: Clover Leaf’s S-4 became effective and Digital Ally set an Aug 12 record date to distribute 30% of Kustom Entertainment shares immediately after closing, with the balance intended after a six‑month lockup. Management framed this as a catalyst to clarify DGLY’s profile and potentially deliver share dividends to holders.
• Liquidity and capital structure headwinds persist: cash was $0.52M at Q2-end; warrant derivative liabilities rose to $3.80M; monthly $100k payments and office building sale commitments were tied to a senior secured note increased to $1.725M in July.
• Wall Street consensus EPS and revenue estimates from S&P Global were unavailable at the time of request; estimate comparison is not provided (S&P Global data unavailable).

What Went Well and What Went Wrong

What Went Well

• Operating loss improved 21% YoY (to $(3.91)M vs $(4.94)M), reflecting SG&A reductions; selling, advertising and G&A were down materially YoY as sponsorship spending was cut.
• Subscription model traction and deferred revenue growth were emphasized; management highlighted “continued success and traction…particularly the EVO-HD, FirstVu Pro, and QuickVu docking stations,” with deferred revenue cited at $10.1M at June 30 and “a little over $10.5M” at the time of the call.
• Corporate separation momentum: “We are very excited about… the proposed business combination… to create Kustom Entertainment, Inc… We expect that this business combination will provide clarity… showing two distinct, stand‑alone entities” (CEO Stanton Ross).

What Went Wrong

• Revenue fell 32% YoY to $5.62M, driven by a 47% decline in entertainment revenues due to deliberate “right-sizing”; gross profit fell 91% YoY to $0.24M as cost of sales scaled to 96% of revenue (vs 67% a year ago).
• Net loss remained elevated at $(5.01)M; net margin was approximately −89% despite SG&A relief, reflecting weak gross margins and other expenses including interest and warrant fair value changes.
• Balance sheet pressure: cash of $0.52M, equity decreased to $3.05M from $11.45M at year‑end; warrant derivative liabilities rose to $3.80M (from $1.37M), and additional obligations around the senior secured note and asset sale commitments tighten near-term flexibility.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Digital Ally Q2 Earnings Conference Call. At this time, all lines on a listen-only mode. Following presentation, we will 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 August 19, 2024. 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 they represent forward-looking statements.

Brody Green (President)

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 forward-looking statements contained in this document will in fact transfer or prove to be accurate. I will 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. With me is Brody Green, the company's President. He'll do a high-level overview of our numbers, and then we'll start getting into answering a lot of the emails and text messages we've had over the last several weeks concerning the status of the merger of Kustom Entertainment with Clover Leaf Group. And so a lot's happened on that we'd like to share with you, and some timing issues concerning the first round of dividends and then the second round of stock dividends as well. And maybe give you just some insight on associated value that this entails in regards to Digital Ally and its shareholders.

Brody Green (President)

So with that being said, I will pass the call over to Brody.

Yeah, thanks, Stan. Like you said, I'll just do a brief overview of the financials. More greater detail will be in the Form 10-Q up on the SEC's website. Feel free to take a deep dive in there just for further details. I think the more pressing conversation is gonna be regarding the business combination, so we'll get to that as soon as we can. So the current assets of the company at June 30, 2024, were $14.2 million, down about $1.3 from year-end. Similarly, with total assets, that was at $43.3 million, compared to $47 million on December thirty-first. Total current liabilities bumped up to $27.6 million.

A chunk of that is about a little less than $4 million attributable to the warrant derivative liabilities, which is just the Black-Scholes value of the warrants, some from earlier transactions and some from the June 25th transaction as well. That's a non-cash liability, but nonetheless, liability on the books. Total liabilities is $40.3 million. Now you can see our contract liability sitting on the balance sheet, where $3.1 million is current portion and about $7 million for long term. That's our deferred revenue for, you know, our 3- and 5-year contracts. So that's... Those are really gonna find their way over to the P&L, as those mature and come due.

Total stockholders' equity, at the end of Q2, was a little over $3 million. So that wraps up the balance sheet. Again, further details you'll find on the Q. And then for the P&L side, our total revenue for the quarter was $5.6 million, with a total gross profit of $242,000. We had an operating loss of $3.9 million, with a net loss of $5 million, and then of a, net loss per share of, $1.74. And then our current, at, at the end of Q2, our current shares outstanding were 3.5 million. And I think that's a really a summary. One good thing to call out is our deferred revenue continues to grow.

I think it's up to, it's a little over $10.5 million at this point, I believe. So again, continuing to grow quarter over quarter, and it'll continue to be recognized in the quarter in which it's renewed. So this will continue to grow and hit the P&L just every year moving forward, and that, as that balance increases, that's pretty much the goal of what we're trying to do with the subscription model. So it continues to work, and I know we had a few big events this quarter on the entertainment side as well, with them having their festival at the end of June. And I'll let Stan touch on that, along with a few other items. So I'll turn it back over to Stan.

Stan Ross (CEO)

Good. Thanks, Brody. Yeah, a lot of the calls and, as I said, emails, even text messages, have been around the big business combination agreement, where Digital Ally is selling one of its subsidiaries, which is Kustom Entertainment, to Clover Leaf Capital. They are currently a Nasdaq company. I just looked up their stock. It's still trading nicely $12.40. We've already done the record date for the first round of dividends. So there will be approximately almost 2.3 million shares of Clover that will be sent out to the Digital Ally shareholders.

Brody Green (President)

That's the equivalent of, you know, just using today's price, let's just say, after the merger is completed and the price, let's say, it stays where it's at, that'd be almost a $7.70 stock dividend that those shareholders of record will be getting. And the shareholders of record were those that were shareholders at the end of business on August the 12th, so last week. So that should be happening. What'll also transpire is Digital Ally itself will then be receiving and holding on to almost 7.6 million shares. And so you can do the back of the envelope math on that. It's an astronomical number and a lot of value that comes into Digital Ally, especially if the stock holds strong where it's at.

Eventually, the goal is to go ahead and dividend that, dividend out those shares as well. There'll be a new record date established, and those will be sent out in about a six-month period of time as well. Now the timing. Those who've been following closely know that Clover got their SEC approval of their registration, so it's active. They are now having their shareholder vote to complete this transaction. I want to say it's at 10:00 A.M. Eastern Time, this coming Friday. Once that is completed, and we continue to move forward on cross the T's and dotting I's and making sure all the things that have been agreed upon in the business combination agreement are there, then we'll move forward the following week into completing that transaction.

So while this has been a very, very, very long haul, as you recall, we sort of announced this project back in December of 2022, and then started going down this path and negotiating in about March of 2023. Actually entered into an agreement. I want to say it was in June of 2023. So it's just been a long, long road, but I'm excited about the prospects and the value that it brings into Digital Ally, you know, for its shareholders and the opportunity for clarity on the companies as well. So, you know, it puts a situation where one of the ticketing platform and the festival platform is now out there on its own. So you essentially have now video solutions and the medical billing company that are a part of Digital Ally.

It makes it a little clearer to define you know Digital Ally and who they are by you know getting Kustom Entertainment moved out. Excited about that, excited for the value. I'm sure that both companies will be reporting the outcome of the votes. We probably you know it's not always good to be doing news releases on a Friday but the importance of this clearly will have us running something as soon as we know what the outcome of that vote was. At that point in time I'm sure we'll be trying to establish a closing date that we will try to include in that release as well. Been a long time coming.

Excited it's here for again like I said all the Digital Ally shareholders Digital Ally and also the new Kustom Entertainment. With that being said we'll touch real quickly on our festival. It was our first year that we acquired Country Stampede. We were in a new location. We had a you know lineup that was very good. We're excited about the future that Country Stampede holds. It's a 28 year-old country festival one of the largest in the... If not the largest in the state of Kansas and probably throughout the Midwest. We'd look to up our game a little bit next year.

We've already got offers in to a new lineup for 2025, and looking at multiple festivals that we'll be doing under the Kustom 440 as part of the Kustom Entertainment spinoff. So with that being said, why don't we go ahead and open up the lines for Q&A, please?

Operator (participant)

Thank you, ladies and gentlemen. If you'd like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star two. One moment, please, for your first question. Your first question comes from Rommel Dionisio from Aegis Capital Corp. Please go ahead.

Rommel Dionisio (Analyst)

... Good morning. Just, thanks for taking my question. The first is just a housekeeping question. Could you guys just clarify, please, shares outstanding? I, it's showing 3.5, but I thought you had 2.8, and there's 1.2 from the offering. Where's my math off on that? I thought it was be more like 4.0, and I've seen 3. Thanks.

Brody Green (President)

Yeah, so it was 3.5 at quarter end because the pre-funded warrants had yet to be exercised from the deal. So now it is up to, I believe you're, it's I think it's... Yeah, it's a little less than 3.7 now, but at quarter end it was three, it was, what was the number? It was 3.5 at quarter end, and then now let me just double-check the face of-

Rommel Dionisio (Analyst)

Thank you.

Brody Green (President)

But it shouldn't be... Yeah, it's a little less than 3.9 at this point, after all the warrants were exercised.

Rommel Dionisio (Analyst)

Great. Perfect. Thanks. Okay, and just more of a fundamental question. Yeah, I wonder if you could just give us an update on the FirstVu Pro and some of these models that you've launched over the years. It sounds like the deferred revenue number's really growing, so please comment on the execution of that strategy that you've been laying out the last few quarters and how that's all going. Thank you.

Brody Green (President)

Yeah, we continue to, you know, push that FirstVu Pro out and all the docking stations, the other AV in 2024. It's kind of a, I mean, we did a subscription model more for financing purposes, you know, instead of a massive CapEx for these municipalities, cities, and especially the commercial side too. It kind of gives them time to, you know, it's more of an annual fee rather than, you know, a massive undertaking in year one than they use for five years. So it's worked well on our, you know, the sports teams.

They've enjoyed the subscription model as well as, you know, the Royal Caribbean International and several other, you know, colleges and whatnot, outside of just law enforcement as well, that they sign up to these three or five-year contracts in which, you know, they can pay off cash flow rather than off of, you know, big CapEx spends throughout the, you know, they don't have to make a massive investment. So yeah, we're happy with that balance continuing to grow. And, you know, we hope for it to just continue to compile and then obviously be recurring revenue for us year over year, not just from a financial reporting standpoint, but also from a cash flow standpoint.

Rommel Dionisio (Analyst)

Great. Thanks very much.

Brody Green (President)

Thank you, Rommel.

Operator (participant)

Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one, and there are no further questions at this time. I will turn the call back over to Stan Ross for closing remarks.

Stan Ross (CEO)

Again, thanks, everybody, for jumping on real quick and also want to again point out that both Digital Ally currently has a shareholder vote coming up here this Friday, and Clover Leaf Capital also has one on Friday concerning the business combination agreement, and so we will keep you posted through both the press release and 8-K as soon as we have the outcome of those numbers. Thanks, everybody. Have a great week, and we'll talk soon.

Operator (participant)

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