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DA

DIGITAL ALLY, INC. (DGLY)·Q2 2024 Earnings Summary

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 .

Financial Results

MetricQ2 2023Q1 2024Q2 2024Wall St. Consensus (S&P Global)
Total Revenue ($USD)$8,279,632 $5,529,351 $5,616,235 N/A (unavailable)
Product Revenue ($USD)$3,077,661 $1,565,846 $2,207,601 N/A (unavailable)
Service & Other Revenue ($USD)$5,201,971 $3,963,505 $3,408,634 N/A (unavailable)
Gross Profit ($USD)$2,737,040 $1,523,699 $242,392 N/A (unavailable)
Gross Margin (%)33.1% 27.6% 4.3% N/A (unavailable)
Operating Income (Loss) ($USD)$(4,940,704) $(3,639,034) $(3,914,221) N/A (unavailable)
Operating Margin (%)−59.7% −65.8% −69.7% N/A (unavailable)
Net Income (Loss) ($USD)$(8,953,819) $(3,943,268) $(5,010,551) N/A (unavailable)
Net Margin (%)−108.2% −71.3% −89.2% N/A (unavailable)
Diluted EPS ($)$(3.12) $(1.37) $(1.74) N/A (unavailable)
Weighted Avg Diluted Shares (#)2,891,205 2,861,229 2,921,307 N/A (unavailable)

Note: Margins are computed from reported revenue, gross profit, operating loss, and net loss in cited filings.

Segment breakdown (reported):

Segment MetricQ2 2023Q1 2024Q2 2024
Entertainment Revenues ($USD)$4,655,270 $4,016,236 $2,466,211
RCM (Nobility Healthcare) Service Revenues ($USD)$1,724,772 $1,434,598 $1,564,354
Video Solutions Segment Gross Profit ($USD)$779,407 $565,694 $287,840
Entertainment Segment Gross Profit (Loss) ($USD)$1,155,459 $494,274 $(646,854)
RCM Segment Gross Profit ($USD)$802,174 $463,731 $601,406

KPIs and balance sheet items:

KPIQ1 2024Q2 2024
Deferred Revenue Balance (Mgmt commentary)$10.6M at 3/31/24 $10.1M at 6/30/24; call stated “a little over $10.5M” at 8/19/24
Contract Liabilities – Current ($USD)$3,299,714 $3,093,492
Contract Liabilities – Long-term ($USD)$7,285,206 $6,999,141
Cash and Cash Equivalents ($USD)$927,861 $517,113
Warrant Derivative Liabilities ($USD)$1,718,629 $3,796,746
Total Stockholders’ Equity ($USD)$7,545,822 $3,050,191

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Kustom Entertainment share distribution to DGLY holdersPost‑closingNot previously datedDistribute 30% of KE shares to DGLY stockholders of record as of Aug 12, 2024 immediately after closing; intent to distribute balance after six‑month lockup Announced framework and record date
Operating guidance (revenue, margins, OpEx, OI&E, tax)Q3/Q4 2024None disclosedNone disclosedMaintained “no formal guidance”
Corporate financing obligations2024Note $1.425MNote increased to $1.725M; $100k monthly payments starting Aug 12; sale of office building completed Aug 12; various flow‑of‑funds covenants Increased obligations and asset sale completed

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q2 2024)Trend
Subscription model & deferred revenueQ1: Deferred revenue reached $10.6M; focus on recurring revenues . FY23: Subscription plan “continues to gain traction,” deferred revenue grew to ~$10.3M .Mgmt emphasized growing deferred revenue “a little over $10.5M” and subscription contracts (3- and 5-year) across law enforcement and commercial customers .Positive traction; continued emphasis
Corporate separation (Kustom Entertainment + CLOE)Q1: S-4/A progress; expectation of clarity post business combination .S‑4 declared effective; special meeting scheduled; DGLY set record date and detailed stock dividend mechanics .Accelerating toward closing
Entertainment events executionQ1: Acquisition of Country Stampede; right-sizing the segment .Country Stampede hosted major headliners; multiple festivals planned under Kustom 440 .Building pipeline; near-term revenue pressured
Cost discipline & SG&AFY23: SG&A down YoY; focus on margins .SG&A down; operating loss improved YoY despite gross margin pressure .Ongoing cost control
Financing & liquidityFY23/Q1: Increased obligations; Nasdaq compliance efforts .Note upsized; covenants; office building sale completed; equity and cash lower QoQ .Liquidity tight; elevated liabilities

Management Commentary

  • “We are very pleased to keep our momentum… with greatly reduced net losses compared to the second quarter of 2023, showing the continued success of our focus on margins and working towards profitability… It is exciting to see our deferred revenue balance reach $10.1 million at June 30, 2024…” — Stanton E. Ross, CEO .
  • “The combined company will… create Kustom Entertainment, Inc… We expect that this business combination will provide clarity… showing two distinct, stand‑alone entities, Digital Ally and Kustom Entertainment…” — Stanton E. Ross, CEO .
  • “Our total revenue for the quarter was $5.6 million… gross profit of $242,000… operating loss of $3.9 million… net loss of $5 million… net loss per share of $1.74… deferred revenue continues to grow… a little over $10.5 million at this point…” — Brody Green, President .

Q&A Highlights

  • Share count mechanics: At Q2 quarter end shares outstanding were ~3.5M; after pre-funded warrant exercises, management indicated “a little less than 3.9 million” currently, clarifying dilution dynamics post June private placement .
  • Subscription execution: Management reiterated the subscription model’s appeal for law enforcement and commercial clients (3–5 year contracts), supporting recurring cash flows and deferred revenue growth .

Estimates Context

  • Wall Street consensus EPS and revenue estimates from S&P Global were unavailable at the time of request due to data access limits; therefore, no estimate comparison is presented. Values that would normally be shown here are sourced from S&P Global when available.

Key Takeaways for Investors

  • The quarter’s core issue was margin compression: gross margin fell to ~4% as cost of sales surged to 96% of revenue; despite SG&A cuts, profitability remains challenged near term .
  • Entertainment “right‑sizing” materially reduced revenue (−47% YoY), producing a segment loss; expect near-term volatility until the CLOE/Kustom merger closes and segment separation clarifies the story .
  • Corporate action is the primary catalyst: the Kustom Entertainment distribution mechanics and planned second dividend after a six‑month lockup could create event-driven trading and value recognition for DGLY holders upon closing .
  • Liquidity constraints and derivative liabilities warrant caution: low cash, rising warrant liabilities, and monthly note payments increase execution risk; monitor additional financings or asset sales .
  • Subscription traction in video solutions underpins the medium-term thesis: building deferred revenue and product adoption (EVO-HD, FirstVu Pro) can support margin recovery if cost of sales normalizes .
  • Watch for estimate updates and guidance: with S&P Global consensus unavailable and no formal guidance given, revisions post-merger closing and Q3 performance will drive expectations; prioritize visibility into segment margins and recurring revenue mix.

Bolded surprises/misses:

  • Gross profit down 91% YoY; gross margin ~4% as cost of sales reached 96% of revenue .
  • Entertainment revenue down 47% YoY due to deliberate right‑sizing; segment turned to loss .
  • Operating loss improved 21% YoY despite revenue decline, reflecting SG&A discipline .