Digital Ally - Q4 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc 2023 year-end earnings results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we'll 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 the 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, 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 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 conference call is being recorded on April 2nd, 2024.

I would now like to turn the conference over to Stanton Ross. Please go ahead.

Stanton Ross (Chairman and CEO)

Thanks, Julie. Thanks, everybody, for joining us today. I have Brody Green with us, the company's president. And Brody will end up going over the numbers in a little more detail, and I'll touch on a little bit of some of the highlights for the year and then also open up the floor after a while for a Q&A. But first of all, again, I'd like to thank everybody, the Digital Ally employees, for their hard effort this year. It's a tough year as far as the economy and different hurdles that we had to overcome, but we were able to do so. We continue to move forward and develop the Kustom Entertainment arm of Digital Ally and continue to move forward with the anticipated merger with Clover, hopefully here in the near future, with this 10-K being filed, numbers being fresh.

We'll be able to submit that to the group, and hopefully they'll be able to then move quickly and do a follow-up filing on the S-4, looking for the SEC's final approval so that the merger can happen and we can move forward on that. So I am very pleased that we continue to try to do our best and have been able to secure and continue to maintain the ratio that the Digital Ally shareholders will be getting in Kustom Entertainment on the spinoff. Hopefully that holds true as we move forward and get close to the actual execution date of the merger. So right now it's a 4-to-1 in Clover, so CLOE is their ticker symbol. So anyways, a lot has been accomplished.

A lot has been accomplished in subsequent events that we could touch on, including a couple of acquisitions that have been done on the Kustom Entertainment and a development of a new ticketing platform that will enhance the additional efforts that TicketSmarter has already succeeded to have. So anyways, I'll quit talking here for a little bit, let Brody jump in on the numbers, and then we'll get back to opening this up for a Q&A. Brody?

Brody Green (President)

Yep. Thanks, Stan. Like Stanton said, I'm just going to run through a brief overview of the numbers for the year. Obviously, I'm sure a lot of you have been on the quarterly calls as well, so this will be fairly similar to those as far as what we're going to touch on. I would encourage all of you to take a dive into the full 10-K to get a full scope and full detail of our annual numbers if you would like to see greater detail. Just to start off on the balance sheet, I'll run through it really quick.

We had cash and cash equivalents at year-end of about $680,000, with AR sitting at about $1.6 million, other receivables at $3.1 million, with our inventories down to $3.8 million for the year, which is part of our goal during the year was to kind of right-size our inventory across all segments, which includes the Shield division and kind of our divestment from PPE in that sense as COVID has resided quite a bit, along with right-sizing the video solution side and some of this old stale inventory we had there and kind of cleaning that up, along with TicketSmarter's reduction in their ticket purchases as those weren't yielding the greatest profits and more so focusing on the service side as far as that segment goes. We also have prepaid expenses sitting at about $6.4 million bringing our total current assets, so $15.6 million at year-end.

With other total assets, including PPE, it's $7.3 million, some goodwill and other intangibles at $16.5 million. So of that $16.5 million, about $12 million of that's goodwill and unamortized intangibles, with $4.5 million of that being other intangibles mostly related to the TicketSmarter acquisition from September of 2021. Other assets are at $6.6 million, bringing our total assets at year-end to $47 million. We're down in liabilities. We have AP of $10.7 million, other accrued expenses of $3.3 million, other lease obligations of $300,000 with contract liabilities at $2.9 million. All of this brings our current liabilities to $22.5 million. And then we have other long-term liabilities, including the mortgage on our building, which was a piece of debt we pulled out during 2023, brings our total liabilities to $35.6 million, which has our total equity at $11.4 million at year-end.

Stock-wise, we still are just sitting at, like Stanton said, 2.8 million shares outstanding, keeping that distribution ratio the same since we had first announced this acquisition, which is very important to us as far as what we want to do for our shareholders. Just to touch on a few highlights on that balance sheet, our deferred revenue is now sitting at $10.3 million at year-end. That's up from just under $8 million at year-end 2022, but it's up from $4.3 million at year-end 2021. So really, that's grown by over 200% since 2022. So over two years, it's grown from about $4.3 million to $10.3 million. So we're excited to see that continue to grow. So our subscription model is paying off, and we're almost to I think we're in year three of that, so one or two more years until we have a full runway versus one-time sales.

We'll have a full recognition of five years at a time, quarter-over-quarter, as we approach more mature subscriptions. I already touched on inventories and how we're right-sizing those. So that's the reason for that decrease. That was all our intent for the year. Income statement-wise, our total revenue for the year was $28.2 million, with our cost of revenue being $22.5 million. So we had gross profits of $5.8 million, which was a dramatic improvement from 2022 where our gross profits were only $2.3 million on even higher revenues. So our goal to right-size our profit margins and focus on profitability, and our margins paid off this year in 2023. You'll see in our SG&A, we continue to do an R&D. That's mostly on the video solution side.

So that was $2.6 million as we innovate several new products that we're excited to get to market, hopefully the latter half of this year of 2024. And that was some other products we were able to launch throughout 2023. And then SG&A or sorry, just selling and advertising, that was down by about $2.2 million to $7.1 million for 2023 as another part of us trying to rein some things in and focus on working towards profitability, particularly in the TicketSmarter segment, I believe, for this expense. General administrative, that's also down about $2.2 million year-over-year, bringing our total SG&A to $28 million, down by just about $4 million since 2022. There's some other income items you'll see on our P&L. A few of them are pretty substantial. So you have a $3.1 million interest expense related to a convertible note we did throughout the year.

We wrote off a legal part of the legal settlement we're dealing with. One of the lawsuits we're in for the gloves with Kolt McCauley, that was about a $1.1 million write-off, along with loss on conversion of convertible debt of $1.1 million related to the convert. So that's just a few of the high-level items throughout that other income section, just to give you some context of what those pertain to. Similarly, the shareholders' equity, like we touched on, relatively unchanged from year-over-year. We had 2.72 million shares outstanding at December 2022, and we're at 2.8 million at December 2023. So really minimal change in stock. That's shares outstanding at year-end. Again, we wanted to highlight the gross profit improvements. That was a big piece for the year. That was really part of our main goal, along with right-sizing inventory and just working on bringing down the SG&A.

So obviously, there's still more work to do on all of those line items, but it was nice to see progress. I mean, there were significant improvements in gross profit. The video side went from a $1.2 million net loss or gross loss last year to a $1.3 million gross profit this year. Similar on the entertainment side, only a $300,000 gross profit in 2022 and a $1.7 million gross profit here in 2023. So both of those were greatly improving their margins year-over-year. And again, throughout the 10-K, you'll see the segment data. It's in there probably two or three times, particularly in the footnote. So if you guys want a further breakout of the revenues, gross profit, operating income, and whatnot of these particular segments, I would encourage you to take a dive into those footnotes throughout the 10-K.

And as Stanton mentioned, quite a busy beginning of 2024 as we had a lot of subsequent events here in the first three months of 2024. I won't bore you with the details of going into every single one of them, but a few of the notable ones were the acquisition of Country Stampede. We completed March 1st of 2024. So I'll let Stanton give you more context on that here in a couple of minutes. That's his baby, so I'll let him touch on it. One thing I do want to touch on just to because I'm sure it'll come up in Q&A. So we did get a notice of failure to satisfy continuing listing rule from Nasdaq on March 14th, 2024. That was due to a board member having to step down during Q1.

So we have until January 30th or sorry, we have until the end of the year or our next annual meeting to get that resolved. Our plan is to get that resolved here shortly at our annual meeting this summer. It'll pretty much be resolved with a split and a successful transaction with Clover as the boards will be shifting at that point anyway. So we'll look to get that resolved here shortly in the next few months. And then as Stanton touched on as well, the business combination with Clover, as far as the S-4 goes, is still moving forward. We filed another S-4/A, I believe, back in February, and we plan to file our next one here shortly. And our comments were very minimal on the last round.

Hopefully, this is the final version we have to submit to the SEC, and we'll get the thumbs up and be able to go effective here in the next four or five weeks. Stanton, I'll turn it back over to you.

Stanton Ross (Chairman and CEO)

Thanks, Brody. Yeah, this has been a long, long journey in regards to this acquisition with Clover in regards to Kustom Entertainment and spinning that out. But as you could tell and again, like Brody said, please take an in-depth look at the 10-K because there's a tremendous amount of improvements that have been made in so many different areas on behalf of Digital Ally. And so there's a lot of good things that's going to be here with the legacy business even after the merger is completed. And Brody and his team on the video solution side and Nobility Healthcare, I think, have a lot of things right-sized, and they're going to continue to make those improvements. On the Kustom Entertainment, I was excited about having the opportunity and couldn't have done it without the assistance of the principals at Country Stampede.

But that acquisition, just so that you may not be aware, Country Stampede's been around for roughly 28 years. It's the largest country festival, maybe festival, definitely in the state of Kansas, if not throughout the Midwest. In its heyday, it would have over 150,000 people visiting the event on a given weekend. And so usually, it was maybe a four-day or even a three-day event. So for us to be able to acquire that, have such a legacy festival that's now part of the family of Digital Ally and Kustom Entertainment, is really a blessing for us. We also have Country Roots, which we look to be announcing its 2024 and possibly later in the year, the 2025 campaign on its festival.

We do have our sights on a couple of other opportunities that we look to expand on so that Kustom Entertainment has multiple festivals that it has underneath its belt, two different ticketing platforms underneath its belt, and really have the capability of doing a lot of this in-house, meaning everything from the production side to the ticketing side to the marketing side, and even having a big say in everything from the merchandising to food and beverage, parking, to try to really maximize the value that we and the Kustom Entertainment team can bring to the table. So very pleased with that acquisition, very excited about just the newly launched Kustom Tickets.

I think you'll start to see some noise out of it and the continued growth that we've got laid out, not only just through here in the Midwest, but we look to expand into different markets in the coming years, for sure, if not later in 2024. So, real excited. I do think that we're close on getting the revised S-4 submitted. Now, the numbers are fresh. And like Brody said, hopefully, this is the last go-around because there were just a minimal amount of questions that the SEC had concerning the transactions. So, Julie, let's go ahead and open up the lines for Q&A, please.

Operator (participant)

Thank you, ladies and gentlemen. Should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave the headset before pressing any keys. Again, to ask a question, press star one. Your first question comes from Rommel Dionisio from Aegis Capital. Please go ahead.

Rommel Dionisio (Head of Research)

Good morning. Thanks for taking my question. I wonder, Stanton, could you walk us through kind of the calendar here over the next few months as we start to get into the spring season relatively soon with regards to the TicketSmarter business? Do you kind of have a full lineup of proprietary events? And maybe you could just give us a little color on sort of what's coming over the next few months and quarters that could be a real catalyst for that business. Thank you.

Stanton Ross (Chairman and CEO)

Yeah. TicketSmarter absolutely has a pretty solid lineup in regards to not only the secondary market but also the primary market, where they have the key ticketing platform for a lot of different universities, colleges, different minor league ballparks throughout the country. And so their focus has been sort of partnering up and aligning themselves with those types of opportunities in regards to being the primary, like I said, and let alone all the business that they have on their secondary. As many of you may be aware, they have almost 2 million visitors a month that come to their site. So well-established, been around, well-known, well-trusted, deliver a really good product at a good price.

So they're teed up for, again, a nice 2024 and 2025, especially since they were able to lighten themselves from some of the burden that they had on the big media spends that they entered into in late 2021. The majority of those will all be gone. I believe the second quarter here is the last of some of the trailing media relationships they got into that did not deliver and hurt these numbers dramatically. But that seems to be getting them by the wayside, and he's definitely not making that mistake again. On Kustom Entertainment side with the Kustom Tickets, that platform, you'll see quite a bit of growth coming in, but it's going to take a little different approach. And I think the best way to explain this is, as many of you know, that we've done video work for NASCAR and Indy and others.

If you sit there and you look at the Roger Penske's and Andretti's of the world and Rahal's, they have more than one car in a race. I mean, they don't want to have a scenario where, by chance, their strategy on changing tires or fuel and driving styles and everything else, just one car's in there. If there's a mistake or an accident wreck, then they're out of the race and not have a chance to win. By us having two different platforms, we will definitely take a little different approach on how we go about securing and drawing traffic to our site.

I don't want to go into a lot of that openly, but we definitely have numerous relationships that we're being able to cultivate and not only get involved with primary ticketing but also being able the fact that we're going to be hopefully right at eight different concerts yet this year that we would obviously have the capability of being the primary. So we'd get the associated fees with that. Just to give you rough numbers, let's just say for easy math, let's just say $10 million is generated from concert sales. Well, typically, the fees associated with that will be anywhere from 10%-20%. So that's just essentially just on the low side, $1 million that could go to the bottom line because you have the capability of doing the ticketing in-house.

Now, the 2025 side of things will be quite a bit more dramatic as both Brody and I are able to really focus on our core businesses. And what I mean by that is Brody will really have to be able to concentrate. We won't be so much working and sharing the capital needs that we both are strapped with right now because it's a lot of expansion, if you can only imagine, the cost associated with doing the events, the concerts, the cost associated with the video solutions as far as the prepay of the equipment as they enter into a subscription model. So it is capital intense, but the returns get there. You just got to keep your head down, and you'll get there. So 2025, clearly, we'll be on our own. We'll have completed the merger, hopefully, with Clover.

It is well capitalized, so Kustom walks into a pretty nice situation there with the capital that it has in-house. Brody will be obviously well rewarded, Digital Ally and the Digital Ally shareholders, on the completion of this transaction because of the valuations that we're getting. And so very optimistic about finishing the year off strong and really looking forward to what kind of really both of us can the kind of growth that we're going to be able to have in 2025 because, again, Brody's team has done an amazing job. Please take a look at the numbers and see how they've improved the gross profits and gotten inventory down, and overall margins have just really improved. So teed up for some really good stuff. I hope I addressed it.

I will tell you, I can't be more excited to be able to focus a little bit on something that I've been around the majority of my life as far as the music and entertainment business because of my father's legacy in the business. But also, I'm excited about Digital Ally's video solutions, the legacy business, because Brody is in a unique spot as well with his background in law enforcement and the people he's surrounded himself with. So feeling really good about our position right now. Thanks for the question, Romel.

Rommel Dionisio (Head of Research)

Yeah. Thanks for the colors, though.

Operator (participant)

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by 1. Your next question comes from Brian Lubitz from Equitable Advisors. Please go ahead.

Bryan Lubitz (Financial Professional)

Morning, gentlemen.

Stanton Ross (Chairman and CEO)

Morning, Brian.

Bryan Lubitz (Financial Professional)

Brody, you had alluded earlier to the S-4 filing that we made and had said we expect to have, I guess, a resolution or an answer back from the SEC within the next three to four weeks. Can you just run us down in terms of what that process is and what we're waiting to actually, I guess, give them to get that final approval?

Stanton Ross (Chairman and CEO)

Yeah. So our numbers from Q3 went stale back on February 15th, and that was on our latest S-4/A filing that we put out there in the beginning of February. So the SEC still responded to the S-4/A with their comments, noting the numbers were stale, so we had to wait until we got the 10-K out the door to then update the S-4 with our full 2023 numbers along with responses to their I think it was only seven or eight comments remaining at that point in time. So now it's just dropping in the new numbers, flowing it through, cleaning up the S-4 because now we can pull out 2021. So it's more so just the cleanup and updating numbers for both Clover's 10-K and our 10-K and the standalone Kustom numbers to then throw in the S-4 and the responses to their seven questions the SEC had.

So that's when, hopefully, in the next week or two, we can get the S-4 out the door, submit it back to the SEC, and then we'll have until May 15th, which is the next staleness date. So hopefully, prior to that, we get the thumbs up and the ability to go effective from the SEC.

Bryan Lubitz (Financial Professional)

Okay. So May 15th is when these numbers will go stale is what you just said?

Stanton Ross (Chairman and CEO)

Correct. Because then we'll have filed our Q1 numbers.

Bryan Lubitz (Financial Professional)

Okay. So now when you guys do, I guess, a plug-and-play and give them the updated numbers, how long should the investors do we have a timeline how long we should expect before the SEC comes back to you guys? And will that be something that you guys make public to us?

Stanton Ross (Chairman and CEO)

Well, if I could speak on the timing from the SEC, I would love to, but your guess is as good as ours. We hope it's quick considering it's only seven more questions, but you are talking about the SEC as well. So I don't know if we have a good answer for that. We are optimistic but cautiously optimistic as well. As far as what we'll make public at that time, that's also a good question that will probably be more so at Clover's discretion rather than our own. Brian, this is Stanton. We'll get this thing filed and submitted just as quick as possible. Obviously, all of us on both sides, I mean, not only Clover but the Digital Ally and all parties want this thing to move forward as quick as possible. So it will get submitted quickly.

The questions that they were asking for a little bit of clarification are not extremely difficult at all, what they were requesting. And so that information is fairly available at our fingertips as well. So all that gets submitted, hopefully, because our examiner and who we're working with has now been involved with this process for some time, has a very clear understanding of what's going on. So hopefully, it'll move quickly. And just for a little clarification on the numbers going stale, I mean, that's just a standard your numbers are only good for so long in the eyes of the SEC.

We are already we'll be putting our heads down and making sure that we are working on Q1's 10-Q so that as soon as, God forbid, they come back with more questions or whatever, or this thing isn't done by that May date, we will quickly be able to have the Q1 completed and filed so we can, again, plug-and-play and get this thing behind us. But we're optimistic on this time around. Like I said, it was very few numbers, and answers are at our fingertips. So all that stuff's getting ready to be submitted right away. Yeah. Brian, keep an eye on CLOE so C-L-O-E, keep an eye on their SEC filings because it's all there. So you'll see our S-4 and whatnot because we file them publicly. We don't file them confidentially. So keep an eye on that as well.

Bryan Lubitz (Financial Professional)

Super. One last question I have for you guys. Are we, as shareholders, still expecting four shares of CLOE for every one?

Stanton Ross (Chairman and CEO)

Yeah. I mean, that's essentially the ratio as of this moment. Yeah. So we've worked really, really hard to try to secure that and maintain that for the Digital Ally shareholders, but currently, that's the ratio.

Bryan Lubitz (Financial Professional)

Okay. And if I remember correctly, we're going to have 20% released right away. Can you just speak to the language of what will happen with the last 80%? Will there be an additional record date, and how is the mechanism going to work for the shareholders for that?

Stanton Ross (Chairman and CEO)

Yep. So you're right. 20% will be immediately distributed. So that'll be a record date here pretty much at the conclusion of the transaction. And then it'll be a six-month holding period for the remaining 80%. And since it's over four months because six months was pretty much required in what Clover wanted to have been, I think it might have been a let's just see if I'm not sure. So there'll have to be a second record date since it's at that six-month mark. So there will be a second record date for the remaining 80% of the shares that are being held within Digital Ally.

Yeah. Brian, this is Stanton. Keep in mind the value that Clover has right now as far as for its shareholders. And when this transaction's completed, by only 20% essentially going to the Digital Ally shareholders right away, there's probably not going to be a strong run on the bank because it's a small number in comparison to everything being out there. That also gives Kustom Entertainment now, post-split, real six-month runway to really establish itself, build a name for itself, and continue to have value in that stock that eventually is going to all the Digital Ally shareholders. So I like the mechanism because for the Kustom Entertainment side of things, I'm going to have and you're already starting to see noise.

I'm starting to make this noise on purpose on what all Kustom Entertainment has because when this is completed, the Kustom Entertainment current shareholders and obviously, the Digital Ally shareholders that are now getting to understand a little bit more about what Kustom Entertainment is all about and we're creating, I think it will hold a lot of value, which translates to value for the Digital Ally shareholders.

Bryan Lubitz (Financial Professional)

Super. Thank you very much, guys.

Stanton Ross (Chairman and CEO)

Thanks, Brian. All right. Well, listen, thank you, everybody, for their time today. We really appreciate it. And like Brody said, and I think I repeated it, please take a look. There's been some amazing improvements on a tremendous amount of fronts on behalf of Digital Ally, and we couldn't be more excited about the future that we have in front of us. So thank you all. Have a wonderful rest of your day, and we'll be talking to you on the Q1 call, if not sooner. Bye now.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.