Q2 2023 Digital Ally Inc Earnings Call
Participants
Brody J. Green; President; Digital Ally, Inc.
Stanton E. Ross; Chairman & CEO; Digital Ally, Inc.
Thomas J. Heckman; CFO, VP, Treasurer & Secretary; Digital Ally, Inc.
Bryan Lubitz
Derek Greenberg
Rommel Tolentino Dionisio; Head of Consumer Products and Special Situations; Aegis Capital Corporation, Research Division
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Digital Ally Inc. Second Quarter 2023 Operating Results Conference. (Operator Instructions) 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 the 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, further events or otherwise. There can be no assurance that 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 is being recorded on August 15, 2023.
I will now turn the call over to Stan Ross, CEO. Please go ahead, Mr. Ross.
Stanton E. Ross
Thanks, Michelle. Thanks, everybody, for joining us today. Also in the room with me is Brody Green, the President and also -- we have Tom Heckman that has called in as the CFO, but Brody and I will be conducting the call today. I just like to, first of all, thank all the Digital Ally employees and especially the hard efforts that went into getting the 10-Q filed on time, which was really a task when you look at the significant amount of work that is also going on concerning the announced business collaboration agreement that we have concerning Kustom Entertainment with Clover Leaf.
So it wasn't an easy task, a lot of folks had to wear a lot of different hats, but it's real nice to see that everyone pulled together and got it done on time. Also very proud of seeing the reduction starting to really start to come into play that I think we talked about on the last call concerning the moves that we started making and some transitions that we're making to get away from some of the contracts that we were in, in regards to TicketSmarter that has really helped to dramatically bring down a lot of the expenses.
So while the revenue side was off a little that is very explainable, recognizing that we have such a massive amount of capital allocated towards some programs that just were not successful for us. And so getting through those and getting those was quite a project. The other thing is this was a very important 10-Q to get completed as it is also now gives us the very current numbers that will be a big part of the next filing that will be done very shortly in regards to -- essentially, it's an S-4, those that you're familiar with, SPAC purchases. Anyways, so now that we have that, I think we're going to see a lot of movement towards the Kustom Entertainment Clover Leaf agreements.
So with that being said, I'll let Brody go over into a lot more details on the numbers, and then we'll come back with some comments and then open it up for Q&A.
Brody J. Green
Thanks, Stan. And I'm just going to -- like Stan said, I'm going to roll through the numbers. I'll start with the balance sheet and then go through the P&L and touch on a few other points and then probably turn it back over to Stan to go further into detail on the transaction itself. I wasn't sure that's going to be a hot topic for this call. So I'll just briefly go through the balance sheet. As you guys -- everybody saw in the 10-Q, our cash and cash equivalents was about $2.9 million at the end of the quarter. Total receivables. We had about $4.6 million in receivables, along with a net inventory of $5.8 million and prepaid expenses of $7 million bringing current assets to a little over $20 million, along with some other noncurrent assets, our total asset value at June 30 was $53.5 million.
Our current liabilities that at $23.4 million with long-term liabilities, bringing our total liabilities to $31 million. So you can see as total stockholders' equity at June 30 of about $22.5 million with 2.8 million shares outstanding at June 30, and I think that number stands true today as well.
On the P&L side, our total revenue was just under $8.3 million. As Stan mentioned, it's slightly down from Q2 of last year. But as we walk -- go down this P&L, you'll notice, it really directly correlates with our cost of revenue as we rein back quite a few things on the TicketSmarter side, especially the paper click and some other sponsorship agreements that didn't really reap the benefits that we are hoping for with a high price tag.
Our cost of revenue for the quarter was $5.5 million, bringing a gross profit to $2.7 million for the second quarter of '23. That's up almost -- it's up over $1 million from the same quarter in 2022. So kind of like as Stan mentioned, we really focused on working on our cost of revenue increasing those margins, which you can see in $1 million boost in gross profit for the quarter, even with lower revenues.
You can see our total SG&A expense was just under $7.7 million, bringing our operating loss to $4.9 million. However, that's a dramatic improvement from an operating loss of $6.7 million in the quarter prior -- or year prior. Also, there's some other income or expenses flowing through related to the interest expense for the convertible note we did in April, along with an accrual we put together for a lawsuit, we're dealing with as well, bringing a total net loss to $8.3 million for the quarter, $8.4 million once you pull out the income attributable to the medical billing side.
One point I would like to touch on is our deferred revenue balance. So that's up $1.5 million from the beginning of the year. So we have a current balance of $9.5 million in deferred revenue for -- at June 30, 2023. So that's related to the subscription model and that -- it's continuing to grow and evolve. I think this quarter, we had over 36 new subscriptions with over 300 Pros and almost 50 EVOs included.
So you can see those subscription models are just starting to stack up as we've discussed historically, and just I think that deferred revenue number is going to continue to grow quarter-over-quarter as we move forward. Net inventory was $5.8 million at June 30. That's down about $1 million from year-end as we continue to try and rightsize our inventory levels to keep less unnecessary inventory on hand and wrap up capital in that sense. Related to the $3 million convertible note, we did in April, we issued a little over 1 million warrants along with that, those would be at $5.50 exercise price, $6.50 and $7.50 each tiered up as we disclosed in 8-K previously. So that's all high-level stuff. We also, during the quarter, completed our first event under the Kustom440 division that featured Chris Young and Gabby Barrett was a very successful show.
I think everybody that attended had a great time. We were pleased with out win. And obviously, that's just a stepping stone for us moving forward as we look forward to announcing more events yet this year and especially into 2024. But it's good to get the first one under our belt and grow from there.
Outside of that, we have some new products coming out on the Digital Ally side that were in the market for Q3 and Q4. Those being the EVO fleet, the commercial in-car systems along with the interview room solution. Those have all been disclosed through press releases. So we're encouraged about how the marketplace are taking those, and we'll see some good results here in Q3 and Q4 with those newer product lines. So for any further details, in more detail, you can heard you guys all read the Form 10-Q we filed yesterday afternoon.
And with that, I'll just turn it back over to Stan, and I'm sure we'll go into more detail from there.
Stanton E. Ross
Yes. Thanks, Brody. And again, a couple of things that I guess I understand the environment that the stock markets in and how hard it is, sometimes to really get a lot of exposure out there, especially going through the summer, too, when there's so many people doing their vacations and they're off on their trips.
But schools kick it back up, and I think people will start focusing again on their investments. But to sit there and, again, Digital Ally having a market cap of only $2.5 million and shareholder equities at $22.5 million. Deferred revenue that Brody was talking about is really just the video solutions side of things at $9.5 million.
And then you look at the value that the medical billing company continues to generate and build right now, again, with the ticketing platform and the Kustom440, having the ability and has had some very first production or concert or festival whatever you want to call it, which really did well. We were very pleased. It probably exceeded by as much as 20% of what our target was.
So the turnout was great. The lineup was great. The -- without any hiccups in regards to the event. So looking forward to being able to repeat that, not only repeat that model back here in Kansas City, again, but we have identified numerous locations that will be announced in the coming months in regards to conduct them to similar festivals in other parts of the country in which we will also be utilizing our ticketing platform to maximize the profitability on those.
So anyways, I was very, very pleased and continue to be very excited about the direction that Digital Ally has going and the opportunities that it has in front of us. And including some new and innovative products that I do believe that will be talked about before the years out as well.
So Michelle, I think I'd like to go ahead and open up the floor for questions and answers.
Question and Answer Session
Operator
(Operator Instructions) The first question in the queue comes from Allen Klee with Maxim Group.
Derek Greenberg
This is Derek Greenberg on for Allen. My first question is just if you could maybe provide an update on how sales are going to fleets currently?
Brody J. Green
Going to what, I'm sorry?
Derek Greenberg
Sales to fleet.
Brody J. Green
Fleets Yes. So that really other products I think we rolled out in early Q3. So we had quite a big pipeline prior to that we have several T&Es out there right now as well as some existing customers that are starting to utilize that new commercial product as well as we finally finalized some of this pricing and whatnot with our large insurance partner we have so they can push it out to their current customers as well. So it's really starting to pick up.
It just rolled out recently. So I don't really want to speak to sales that happened in Q3 either, but it's really gaining some traction early this quarter and into this latter half of the quarter as well that I think we're going to see the fruits of that labor here pretty soon.
Stanton E. Ross
Yes, Allen. One other thing, too, as you may recall, and I think we talked about it maybe a little bit on a previous call, but the neat thing about the insurance company that we're working with. They actually did a white paper on our fleet in-car video system. And Brody, you may have to help me with the numbers again. But essentially, they've seen such a dramatic reduction in the incidences that particular company was having that they paid for almost 90% of the cost of the equipment in the very first year of a 5-year contract but just the reductions that they had in costs associated with those incidences they had prior -- the year prior.
So they clearly, clearly are a big fan and advocate of Digital Ally's commercial in-car system. And they've got -- what was it, 200 reps or so that they'll be pushing it out to some, I think, 35,000 customers that they have. So we've really got to be on top of our game in regards to making sure that we can keep up with what we hope to be a very strong demand and be able to have the product in-house to get it out to them.
Derek Greenberg
Great. I also wanted to touch on the medical billing segment of the business. I was wondering if you maybe saw any opportunities to expand that I guess your overall outlook.
Stanton E. Ross
Right now, we've really been focusing on -- so part of that, we're buying decent mom-and-pop sized companies and really pushing for increased gross profit within those companies like just some of the procedures and practices that we have in place with our managing members. So I think we've been in the process of maximizing the profitability of those for the time being with those 4 recent acquisitions.
But our eyes are always open and looking at other opportunities as well in that same segment. So right now, we're just working on rightsizing and maximizing the bottom line of the recent acquisitions, but we're also keeping our ear to the ground for potential opportunities that pop up in the near future as well.
Derek Greenberg
Okay. Great. I just have one last question. And that's just relating to revenue. I was wondering what percentage of that is recurring?
Thomas J. Heckman
I want to say the recurring per quarter is about [$750,000] million of every quarter. So -- and that's all pertaining to the video solutions side. So I would say on the video solution revenue, it's probably 35% to 40% of the quarterly recognized revenue is the recurring portion.
Operator
The next question in the queue comes from Rommel with Aegis Capital.
Rommel Tolentino Dionisio
Just a couple of questions on the Entertainment segment. I appreciate your comments earlier on the country roots. So I wonder if you could just give us a little more color in terms of kind of attendance relative to expectations, the reception you had in the marketplace, sounds like you generated some nice product revenues. And as we look forward, do you expect that entertainment sentiment to really kind of start to generate -- looking at the 2024, 2025, the lion's share of its revenues from proprietary events such as this one?
Stanton E. Ross
Yes. So what -- give you a little idea of how we have a sort of a structured. We have an entity called Kustom440, and it is the production company that actually puts on the festivals. And so to give you a little insight on what we do before we go and take on even attempt to look at a market and then a line up, then obviously, the facility, the food and beverage and the deal terms that we -- we do a full-blown analysis in regards to the economics of it.
And so in this particular one, being here in Kansas City. They've had quite a few events going on in town. I mean I think Brooks & Dunn was just a week or 2 earlier at the T-Mobile Center. And so we're essentially doing this in a Minor League ballpark in the actual baseball park. And so our goal was trying to exceed over 6,000 tickets sold. And I think we came in right around 7,200. The other thing that was a little bit -- a very nice surprise is the food and beverage side of things, we were looking at about $29 as far as per head, and we came in closer to 49%. That's sometimes a real combination to weather because weather was beautiful.
I mean we got lucky, and it just -- it was just beautiful. So there was a lot of people having a lot of fun, they were out there. We're actually putting a presentation together that we will do an 8-K filings so that you can take a look at just the attendance, the people having a great time and get a feel for what kind of an event that we put on.
So we clearly -- we had representatives from other venues that came to town to see what we were talking about as far as the country routes festival. And so everything I've heard from those that went back is how soon can you come in new country roots at our festival?
And is there a chance that you could do one yet this year, things along those lines. So it went really well. And our expectations are to try to do somewhere -- I'm afraid you threw out a number, but I will, I think the country roots itself that brand will try to do approximately 10 of those throughout the country in 2024. Now we will mix that up with other different genres as far as we may have Kustom440 rock classic or something, we'll just have a different mix. And then what you do there, Rommel, what I could do is one day I'm doing the country genre and the next day, I may be doing the rock.
In that way, then your numbers really get to look nice because you essentially already have the stage, the lights, the power, your arena, everything is already there, all you're really doing is switching out signage and changing up the theme a little bit, right? So that's when I think we're really going to start to maximize some numbers associated with the festivals that we'll be able to put on.
And then possibly even in 3 days in the bigger cities. So we've got a lot of them identified, like I said, there will be a presentation and fairly soon that we'll file an 8-K, and you'll be able to go on there. And it'll have some not only alert you to what happened, but also we're going ahead and identify some of the cities that we anticipate in doing this at.
Rommel Tolentino Dionisio
Great. Well, please do one on the East Coast, Stan so I can attend. Thanks very much.
Stanton E. Ross
Okay. You got it.
Operator
(Operator Instructions) The next question in the queue comes from Bryan Lubitz with Equitable Advisors.
Bryan Lubitz
Glad to see the SG&A is going down, the expenses are coming down. And obviously, we're working through the cycle with the sponsorship deals. Are we fully through that sponsorship deal?
Stanton E. Ross
I think they're real close, Bryan. It probably -- they may have a little bit that wraps over into the remainder of the year. But I think there's stuff there that we were able to negotiate some value out of. And what I mean by there is it doesn't have to be just 100% driven by TicketSmarter.
So what we may be able to do is utilize the spots, the money that we're committed to spend for advertisement for country roots or our next festival and or some things along those lines. So I think we're at a point where what little bits remaining, we're going to be able to get some value out and whether it be, like I said, the advertising of concerts or maybe even the announcement of new products that video solutions coming out with.
Brody J. Green
And Bryan, real quick, I also think a lot of the school deals and whatnot we had their year-end is 630 because they do the summer year-ends. So I do think in Q3, you'll see that number continue to go down. And I think after Q3, it probably should be where the number lands going forward without some other adjustments we make along the way. But I do think you saw still a bit of the implications from those deals hit Q2. I think Q3 will continue to see improvements there due to what the schools year-ends are.
Bryan Lubitz
Good. Good. Okay. So as far as with the Kustom Entertainment, when you guys moved with the merger, does that deal, I assume just goes with you guys over to Kustom Entertainment. It's not canceled out because you're no longer TicketSmarter, right?
Stanton E. Ross
Correct.
Bryan Lubitz
Okay. All right. So I actually have 2 questions more. I'd like if you guys can indulge me. The first one is about the actual merger. And I know, Stan, you talked earlier about filing the S-4 and hopefully, thereafter, we can see you on that roadshow, so we can start to see exactly what's going to be handed out to the shareholders. As far as the $125 million takeover, just looking at the shares that you guys have outstanding and the shares that Chloe have outstanding, if I'm reading this right, $18 million is coming in cash and the rest of it is going to be coming in the form of stock.
Stanton E. Ross
Well, the way it's structured is based upon a value. And of course, with SPACs, they have the ability to do what do you want to say some redemptions and stuff like that. And they had a meeting the other day and had minimal redemption. So that was very, very encouraging. And so once the -- let's say, the SPAC really understands the Kustom Entertainment story, then everyone will be able to really wrap their arms around it. And so then you really get a sense of the amount of cash versus stock. But right now, I think their stock is still trading north of $11 a share is where it's at.
Bryan Lubitz
Okay. All right. So the formula could change. But essentially, shareholders of digital are going to get roughly $125 million takeover for the Kustom Entertainment. That's the value.
Stanton E. Ross
Correct.
Bryan Lubitz
Okay. All right. So now -- as far as -- and this might be a Brody question because, obviously, Stan, we know you're going to be moving with Kustom Entertainment. As far as just looking at you guys' balance sheet and having assets over $50 million and having $9 million in deferred income coming your way and $20 million worth of revenue roughly that you're going to be looking at?
And then looking at a market cap of 14%, again, we find ourselves in a spot where I don't know if we have a poison pill or protection for us, but what you guys are generating, the market's just not simply giving you value on it. At some point, Brody, are you looking to shop the company because, again, you have $15 million in assets out there and have a market cap of 15%, but then to sell a portion of the company at $125 million, just the numbers are just not working out where you guys are getting value to be public.
Brody J. Green
Yes. And I think that's part of the driver for us doing this spinoff/agreement -- merger agreement is to kind of provide clarity between the 2 companies and 2 stocks to show what Digital Ally is and what Kustom is because we think there's been a lot of confusion in the marketplace about what the company is because we're kind of a conglomerate of quite a few things. So I think we're going to see how it plays out post separation and see if we can start getting increased value in the marketplace for what Digital Ally is as well as what Kustom is going to be. And I think we'll go from there. There's no imminent plans to shop it around by any stretch. But yes, we're just -- I think we're going to see where the market takes it after this separation as it's kind of one of the driving forces is the lack of value we're getting as we currently said.
Bryan Lubitz
Yes, because I mean, to have a market cap of 15% and a portion of the company sold for $125 million, it's just -- it's manning for the shareholders. You guys know I've been with you guys for a long time. It's just -- for whatever reason, we're not getting the respect that we deserve.
And I know I said guys, I had 2, actually well I have one more. This might be a pawn question, but I'm going to ask in regards to this year being really, really positive on the AI movement. And I know you guys have had a lot of AI incorporated into your body cameras as well as the thermal views and things of that nature. Do you see Digital Ally going more down that road in the future in regards to AI with your products?
Brody J. Green
Yes, absolutely. I think the whole market is going to trend towards AI in some way, shape or form, and I don't see us not being included in that. I think you're going to have to utilize AI in some fashion down the road now to what extent that's yet to be determined. I know AI is also a bit of a scare for quite a few people. So it's a fine line to walk. Obviously, we know AI is coming, but you have to be careful with how much you dabble with it, and it will be interesting to see how we develop that into our current products and systems and to what extent it will be. But yes, we're looking at where the market is going. We all know that.
Bryan Lubitz
So the thermal view has like facial recognition and stuff like that included in it, right? Where else do you guys have AI attached to your products right now, if any?
Stanton E. Ross
Bryan, I mean, obviously, the in-car systems and even a lot of the body cameras have some of it. And I'll tell you this as well. I mean, there's ways to continue to bring AI even into the Kustom Entertainment side of things. Obviously, we've got a lot of people coming into arenas. We're going to be wanting to make sure and monitor that.
Everything on -- from that on the ticketing side and then keep a track of that to where you're not only a production company that's doing great events, but you're a ticketing company that is working right along with the security of those events, therefore, we can identify if there happens to be someone, let's say, like on the no-fly list, right? In other words, they're not supposed to be attending Taylor Swift concerts. So AI is going to be big in our world throughout.
Bryan Lubitz
Well, listen, guys, I'm glad to see that expenses are coming down and revenues, hopefully, will start going in the right direction for us, and we're all very excited to see that S-4 that you're talking about, Stan, and obviously, in the next leg of the Kustom/Digital chapter. So kudos to the quarter and looking forward to seeing more news from you guys soon.
Brody J. Green
Thank, Bryan.
Stanton E. Ross
Thanks, Bryan. Okay. I think we're going to go ahead and wrap things up now and really do appreciate the -- everyone that attended. I appreciate the questions. If there -- like Brody said, please take a look at the 10-Q. Please keep your alerts on for when the S-4 is filed and also the presentation that I referred to earlier. And if there is some additional questions, feel free to give us or shoot us an e-mail or a call and we'll try to get back to you and answer those, that we can answer.
Meanwhile, I could tell you on a personal front, how excited I am to see the direction and the improvement and just the excitement for all the Digital Ally opportunities that are ahead of us. And so hopefully, that turns in and monetizes for you all. So thank you, everyone, have a wonderful day, and we'll talk to you all soon.
Operator
Thank you, ladies and gentlemen. This concludes your conference. Please disconnect your lines.
