Digital Ally Q2 2023 Earnings Call Transcript

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August 15, 2023

There are 5 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Digital Ally Incorporated Second Quarter 2023 Operating Results Conference. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a Question and Answer Session. Instructions will be provided at that time for you to queue up for questions. 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.

Operator

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 that 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 forward looking statements contained in this document will in fact transpire or prove to be accurate.

Operator

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.

Speaker 1

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. Just like to, 1st 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 custom entertainment with Cloverleaf. So it wasn't an easy task.

Speaker 1

A lot of Folks had

Speaker 2

to wear a lot of

Speaker 1

different hats, but it was real nice to see that everyone pulled together and got it done on time. I'm 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 We're making to get away from some of the contracts that we were in, in regards to TicketSmarter That has really helped dramatically bring down a lot of the expenses. So while the revenue side was off a little, That is very explainable recognizing that we had 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 unwound It 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 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-four, those of the 2 who are familiar with SPAC purchases.

Speaker 1

Anyways, so now that we have that, I think we're going to see a lot of movement towards the Custom Entertainment Cloverleaf agreement. 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 to some comments and then open it up for Q and A.

Speaker 2

Thanks, Dan. And I'm just going to like Stan said, I'm going to roll through the numbers. I'll start with the balance sheet then go through the P and L and touch on a few other points and then probably turn it back over to Stan further into detail on the transaction itself as I'm sure that's going to be a hot topic for this call. So I'll just Briefly go through the balance sheet. As you can guide everybody saw in the 10 Q, our cash and cash equivalents was about $2,900,000 at the End of the quarter, total receivables, we had about $4,600,000 in receivables, along with a net inventory of $5,800,000 and prepaid expenses of 7,000,000 Bringing current assets to a little over $20,000,000 along with some other non current assets, our total asset value At June 30th was $53,500,000 Our current liabilities set at 20 $3,400,000 with long term liabilities bringing our total liabilities to $31,000,000 So you can see us Total stockholders' equity at June 30 of about $22,500,000 with 2,800,000 shares outstanding At June 30, and I think that number stands true today as well.

Speaker 2

On the P and L side, our total revenue was just under 8,300,000 As Dan mentioned, it's slightly down from Q2 of last year. But as we go down this P and L, you'll notice It really directly correlates with our cost of revenue as we reined back quite a few things on the TicketSmarter side, especially the pay per click and some other Sponsorship agreements that didn't really reap the benefits that we were hoping for with a high price tag. Our cost of revenue for the quarter was $5,500,000 bringing the gross profit to $2,700,000 for the Q2 of 2023. That's up almost that's up over $1,000,000 from the same quarter in 2022. So kind of like as Stan mentioned, we really focus on Working on our cost of revenue, increasing those margins, which you can see in a $1,000,000 Boost in gross profit for the quarter even with lower revenues.

Speaker 2

You can see our total SG and A expense was just under 7 $700,000 bringing our operating loss to $4,900,000 However, that's a dramatic improvement from operating loss of $6,700,000 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 the total net loss to 8,300,000 The quarter, 8.4 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 $1,500,000 from the beginning of the year. So we have a current balance of $9,500,000 in deferred revenue for at June 30, 23.

Speaker 2

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 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 It's going to continue to grow quarter over quarter as we move forward. Net inventory was $5,800,000 at June 30, that's down about $1,000,000 from year end As we continue to try and right size our inventory levels to keep less unnecessary inventory on hand and wrap up capital in that sense. Related to the $3,000,000 convertible note we did in April, we issued a little over 1,000,000 warrants Along with that, those will be at $5.50 exercise price, dollars 6.50 $7.50 Each cheered up as we've disclosed in previously.

Speaker 2

So that's all high level stuff. We also during the quarter completed our first event on the Custom 4 40 division that featured Chris Young and Gabby Barrett. It was a very successful show. I think everybody that attended a great time. We were pleased with the out win.

Speaker 2

Obviously, that's just a stepping stone for us moving forward as we'll 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 has 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, I encourage you guys to 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.

Speaker 1

Yes. Thanks, Brody. And again, a couple of things that I guess So I understand the environment that the stock market is in and You know the how hard it is sometimes to really get a lot of exposure out there, especially going through the summer too when there There's so many people doing their vacations and they're off on their trips, but schools kicking back up and I think people will start focusing again On their investments. But to sit there and again, digital, I have a market cap of only 10,500,000 And shareholder equity is at $22,500,000 Deferred revenue that Brody was talking about It's really just the video solutions side of things at $9,500,000 And

Speaker 2

then you

Speaker 1

look at The value that the medical billing company continues to generate and build right now, again, with the The ticketing platform and the Custom 4:40 having the ability and has had its very first Production or concert or festival, whatever you want to call it, which really did well. We're very pleased. It probably exceeded by as much as 20% of what our target was. So The turnout was great. The lineup was great.

Speaker 1

The it went 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 Conducting the 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 I'll be very excited about the direction that Digital Ally is going and the opportunities that it has in front of us, Including some new and innovative products that I do believe that will be talked about before the year is out as well. So Michelle, I think I'd like to go ahead and open up the floor for questions and answers.

Operator

Thank you, sir. Ladies and gentlemen, we'll conduct a question and answer session. The first question in the queue comes from Allen Klee with Maxim Group. Your line is open. Please proceed.

Speaker 2

Hi. This is Derek Greenberg on for Alan. My first question is just if you could maybe provide an update on how sales are going to fleets It's currently. Sales are going to what, I'm sorry. Sales to fleets.

Speaker 2

Fleets. Lisa? Yes. So that really was a project I think we rolled out in early Q3. So we had quite a big pipeline prior to them where We have several T and 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.

Speaker 2

So it's really starting to pick up. It's 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.

Speaker 1

Yes, Alan, one other thing too is, 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, that particular company was having that they paid for almost 90% The cost of the equipment in the very first year of a 5 year contract with just the reductions That they had and 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's 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 and give it out to them.

Speaker 2

Okay, great. Thanks for the color there. I still want to touch on the medical billing segment of the business. I was wondering if you maybe saw any opportunities to expand that Right now, we've really been focusing on so part of that, we're buying Decent mom and pop sized companies and really pushing forward increased gross profits within those companies. Just Some of the procedures and practices that we have in place with our managing members.

Speaker 2

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. Okay, great. Thanks.

Speaker 2

I just had one last question. That's just relating to revenue. I was wondering What percentage of that is recurring? I want to say Recurring per quarter is about $0.75 of $1,000,000 every quarter. So and that's all pertaining to the video solution side.

Speaker 2

So I would say on the video solution revenue is probably 35% to 40% of the quarterly recognized revenue It's the recurring portion. Got it. All right. Well, thank you for taking my question. Absolutely.

Speaker 2

Thank you, Alan.

Operator

The next question in the queue comes from Rommel with Algiers Capital. Your line is open. Please proceed.

Speaker 3

Good morning. Thank you. Just a couple of questions on the Entertainment segment. 1, I appreciate your comments Earlier on the country's website, 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, it 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

Speaker 1

Yes. So let's give you a little idea of how we have a sort of a structure. We have an entity called Custom 440, 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 lineup then obviously the facility, the food and beverage and the deal terms that 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.

Speaker 1

I mean, I think Brooks and 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 very nice surprise is the food and beverage side of things, we were looking at it About $29 per

Speaker 4

head and

Speaker 1

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 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 ks filing so that You could 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.

Speaker 1

So we clearly we had representatives from other venues They came to town to see what we were talking about as far as the Country Roots Festival. And so Everything that I've heard from those that have went back is how soon can you come in, do 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. Our expectations are to try to do somewhere I'm afraid to throw out a number, but I will.

Speaker 1

I think the country roots itself, that brand, 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 Custom 440 Rock Classic or something. We'll just have a different mix. And then what you could do there, Rommel, is 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.

Speaker 1

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 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 in fairly soon that we'll file an 8 ks and you'll be able to go on there and it'll have some Not only alert you to what happened, but also we'll go ahead and identify some of the cities That we anticipate in doing this at.

Speaker 3

Great. Well, please do one on the East Coast, Dan, so I can attend. Thanks very much.

Speaker 1

Okay. You got

Operator

The next question in the queue comes from Brian Lubitz with Incredible Advisors. Your line is open. Please proceed.

Speaker 4

Good morning, boys. How are we?

Speaker 1

Doing good, Brian.

Speaker 4

Good, good. Glad to see the SG and 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?

Speaker 1

I think they're real close, Brian. And they 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're 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 Advertisements for Country Roots for our next festival and or some things along those lines.

Speaker 1

So I think we're at a point where what little bit's 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 is coming out with.

Speaker 2

And Brian, real quick, I also think a lot of the school deals and whatnot we had, Their year end is 6.30 because they do the summer year end. So I do think in Q3, you'll see that Number continue to go down. I think after Q3, 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 We'll continue to see improvements there just due to what the school's year ends are.

Speaker 4

Good, good. Okay. So as far as with the Custom Entertainment, when you guys move with the merger, does that deal I assume just goes with you guys Over to custom entertainment. It's not canceled out because you're no longer ticket smarter, right?

Speaker 1

Correct.

Speaker 2

Okay.

Speaker 4

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-four and hopefully thereafter we can see you on that road show so we can start to See exactly what's going to be handed out to the shareholders. As far as the $125,000,000 takeover, Just looking at the shares that you guys have outstanding and the shares that Chloe have outstanding, if I'm reading this right, dollars 18,000,000 is coming in cash and the rest It's going to be coming in the form of stock?

Speaker 1

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 custom entertainment story, Then everyone will be able to really wrap their arms around it.

Speaker 1

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.

Speaker 4

Okay. All right. So the formula could change, but essentially shareholders of digital are going to get roughly $125,000,000 takeover For the custom entertainment, that's the value?

Speaker 1

Correct.

Speaker 4

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 Custom Entertainment. As far as just looking at you guys balance sheet and having assets over $50,000,000 and having $9,000,000 in deferred income Coming your way and $20,000,000 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 this 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?

Speaker 4

Because Again, to have $50,000,000 in assets out there and to have a net a market cap of $15,000,000 but then to sell a portion of The company at 125, just numbers are just not working out where you guys getting value to be public.

Speaker 2

Yes. And I think that's part of the driver for us doing this Spin offagreement merger agreement is to kind of provide clarity between the two Companies and 2 stocks to show what Digital Ally is and what custom is. So that 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 custom is going to be. And I think we'll go from there.

Speaker 2

There's no imminent plans to shop it around by any stretch. But yes, we're just going to 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 sit.

Speaker 4

Yes, because I mean to have a market cap of 15 and a portion of the company sold for 125, it's just It's managing 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. I actually will.

Speaker 4

I have one more. This might be a PON question, but Yes. I'm going to ask in regards to this year being really, really positive one 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?

Speaker 2

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.

Speaker 2

Obviously, we know AI is coming, but you have to be careful with how much you dabble with it. And It'll be interesting to see how we develop that into our current products and systems and to what extent it'll be. But yes, we are looking at it and we're it's where the market is going. We all know that.

Speaker 4

So the ThermoView 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?

Speaker 1

Brian, I mean, obviously, the in car video 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 custom entertainment side of things, obviously, we 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 keeping 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.

Speaker 1

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.

Speaker 4

Awesome. 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-four that you're talking about, Stan, and Obviously, in the next leg of the customdigital chapter. So, kudos to the quarter and looking forward to seeing more news

Speaker 1

Okay. I think we're going to go ahead and wrap things up now and really do appreciate the everyone that attended, appreciate the questions. If they're Like Brody said, please take a look at the 10 Q. Please keep your alerts on for when the S-four is filed. And also the presentation that I referred to earlier.

Speaker 1

And if there is some additional questions, feel free to give us Shoot us an e mail or a call and we'll try to get back to you and answer those that we can answer. And meanwhile, I couldn't tell you on a personal front how excited I am to see the direction and the improvement

Speaker 2

and just the excitement

Speaker 1

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 line.

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Key Takeaways

  • Digital Ally reported Q2 revenue of $8.3 million, a slight year-over-year decline offset by a $1 million increase in gross profit to $2.7 million, while operating loss improved to $4.9 million and net loss totaled $8.3 million as cost-cutting measures unwound unprofitable marketing contracts.
  • The company’s balance sheet shows $53.5 million in total assets and $22.5 million in shareholders’ equity, with cash of $2.9 million and deferred subscription revenue growing to $9.5 million after adding 36 new subscriptions in the quarter.
  • Digital Ally is finalizing an S-4 filing for a SPAC merger with Cloverleaf’s Custom 4:40 entertainment arm, which values that segment at approximately $125 million; the inaugural Country Roots festival sold about 7,200 tickets—20% above target—and generated stronger-than-expected food and beverage revenues.
  • New product rollouts in H2 include the EVO Fleet, commercial in-car systems and an interview room solution, while a partnership with a national insurer is set to deploy fleet video systems to 35,000 customers, having already demonstrated a 90% first-year cost reduction for one client.
  • The medical billing division is focused on integrating recent acquisitions to boost margins and remains on the lookout for further M&A opportunities, as the company explores adding AI capabilities across its video solutions and event security offerings.
AI Generated. May Contain Errors.
Earnings Conference Call
Digital Ally Q2 2023
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