Digital Ally Q4 2023 Earnings Call Transcript

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April 2, 2024

There are 5 speakers on the call.

Operator

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 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 they represent forward looking statements. These forward looking statements are based largely on our expectations or forecast of future events, can be affected by inaccurate assumptions and are subject to various business risks and non 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 transfer or prove to be accurate.

Operator

I would like to remind everyone that this conference call is recorded on April 2, 2024. I would now like to turn the conference over to Stan Russ. Please go ahead.

Speaker 1

Thanks, Julie. Thanks everybody for joining us today. And 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 the some of the highlights for the year and then also open up the floor after a while for Q and A. But first of all, again, I would like to thank everybody, the Digital Ally employees for their hard effort this year.

Speaker 1

It's tough year for us 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 custom 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 ks 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-four looking for the SEC's final approval so that the merger can happen and we can move forward on that. So I'm 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 custom entertainment on the spin off. Hopefully that holds true as this we move forward and get close to the actual execution date of the merger.

Speaker 1

So right now, it's a 4:one 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 the couple acquisitions that have been done on the customer entertainment and a development of a new ticketing platform that will enhance the additional efforts that TicketSmarter has already succeeded to have. So it was all quick talking here for a little bit, let Brody jump in on the numbers and then we'll get back to opening this up for Q and A.

Speaker 1

Brody?

Speaker 2

Yes. Thanks, Dan. And like Stan 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.

Speaker 2

And I would encourage all of you to take a dive into the full 10 ks to get a full scope and full detail of our annual numbers if you would like to see greater detail. So just to start off on the balance sheet, I'll run through really quick. We had cash and cash equivalents at year end of about $680,000 with AR sitting at about $1,600,000 other receivables at $3,100,000 with our inventories down to $3,800,000 for the year, which is part of our goal during the year was to get our 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 rightsizing the video solution side and the kind of old stale inventory we have there and kind of cleaning that up along with TicketSmarter's reduction and their ticket purchases as those weren't yielding the greatest profits and more so focusing on the service side and as far as that segment goes. We also have prepaid expenses sitting at about $6,400,000 our total current assets. So $15,600,000 at year end, with other total assets, including PPE at 7 point $3,000,000 some goodwill and other intangibles at $16,500,000 So that $16,500,000 about $12,000,000 of that's goodwill and unamortized intangibles with $4,500,000 of that being other intangibles mostly related to the TicketSmarter acquisition from September of 'twenty one.

Speaker 2

Other assets are at 6,600,000 bringing our total assets at year end to 47,000,000 dollars We're down in liabilities, we have AP of 10.7, other accrued expenses of 3,300,000 other lease obligations of $300,000 with contract liabilities of $2,900,000 All of this brings our current liabilities to $22,500,000 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 $35,600,000 dollars which has our total equity at $11,400,000 at year end. Stock wise, we still are just sitting at, like Stan said, 2,800,000 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 $10,300,000 at year end. That's up from just under $8,000,000 at year end 'twenty two, but it's up from $4,300,000 at year end 'twenty one. So really that's grown by over 200% since 'twenty two.

Speaker 2

So over 2 years, it's grown from about $4,300,000 to $10,300,000 So we're excited to see that continue to grow. So is our subscription model is paying off, and we're almost to I think we're in year 3 of that. So 1 or 2 more years until we have a full runway versus onetime sales. We'll have full recognition of 5 years at a time, quarter over quarter as we approach more mature subscriptions. I already touched on inventories and how we're rightsizing those.

Speaker 2

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 $28,200,000 with our cost of revenue being $22,500,000 So we had gross profits of $5,800,000 which was a dramatic improvement from 2022 where our gross profits were only $2,300,000 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 'twenty three. You'll see in our SG and A, we continue to do in R and D.

Speaker 2

That's mostly on the video solution side. So it was $2,600,000 as we innovate several new products that we're excited to get to market, hopefully, the latter half of this year of 'twenty four. And that was some other products we did we were able to launch throughout 'twenty three. And then SG and A sorry, just selling and advertising, that was down by about $2,200,000 to $7,100,000 for 'twenty three as another part of us trying to bring some things in and focus on working towards profitability, particularly in the TicketSmarter segment, I believe, for this expense. General and administrative, that's also down about 2,200,000 dollars year over year, bringing our total SG and A to $28,000,000 down by just about $4,000,000 since 'twenty 2.

Speaker 2

There's some other income items you'll see on our P and L, a few of them are pretty substantial. So you have $3,100,000 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 the one of the lawsuits we're in for the gloves with Colt Macaulay. That was about a $1,100,000 write off along with loss on conversion of convertible debt of $1,100,000 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.

Speaker 2

Similarly, the shareholders' equity, like we touched on, relatively unchanged from year over year. We had 2,720,000 shares outstanding at 12.20 or 12.22, and we're at 2.8 at 12.23. So really a minimal change in stock and shares outstanding at year end. Again, we want to highlight the gross profit improvements. That was a big piece for the year.

Speaker 2

That was really part of our main goal along with rightsizing inventory and just working on bringing down the SG and A. So obviously, there's still more work to do in all of those on all of those line items, but it was good nice to see progress. I mean there's significant improvements in gross profit. The video side went from a $1,200,000 net loss or gross loss last year to a $1,300,000 gross profit this year. Similar on the entertainment side, only a $300,000 gross profit in 'twenty two $1,700,000 gross profit here in 'twenty three.

Speaker 2

So both of those were greatly improving the margins year over year. And again, throughout the 10 ks, you'll see the segment data. It's in there probably 2 or 3 times particularly in the footnote. So that will if you guys want to further break out 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 ks. And as Dan mentioned, it's quite a busy beginning of 2024 as we had a lot of subsequent events here in the 1st 3 months of 'twenty 4.

Speaker 2

I won't bore you the details to go into every single one of them, but a few of the notable ones were the acquisition of Country Stampede, we completed March 1, 'twenty 4. So that's I'll let Stan 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 will come up in Q and A. So we did get a notice of failure of satisfied continuing listing rule from NASDAQ on March 14.

Speaker 2

That was due to a Board member having to step down during Q1. So we have until January 30 sorry, we have until the end of the year or our next annual meeting to get that resolved. And our plan is to get that resolved here shortly at our annual meeting this summer. And it will pretty much be resolved with a split and a successful transaction with Clover as the boards will be shipping at that point anyway. So we'll look to get that resolved here shortly in the next few months.

Speaker 2

And then as Dan touched on as well, the business combination with Clover as far as the S-four goes is still moving forward. We filed another S-4A, I believe, back in February, and we plan to file our next one here shortly in our comments. We're very minimal on the last round. So 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 4 or 5 weeks. And then, Stan, I'll turn it back over to you.

Speaker 1

Thanks, Brody. Yes, this has been a long, long journey in regards to this acquisition with Clover in regards to Custom Entertainment and sending that out. But as you could tell, and again, like Brody said, please take an in-depth look at the 10 ks because there's tremendous amount of improvements have been made in so many different areas on behalf of Digital Ally. And so it's 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 Solutions side and Knowbility Healthcare, I think, have a lot of things right sized and then they're going to continue to make those improvements.

Speaker 1

On the custom 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 that may not be aware, Country Stampede has 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 would have over 150,000 people visiting the event on a given weekend. And so usually it was maybe a 4 day or even a 3 day event.

Speaker 1

So for us to be able to acquire that and such a legacy festival that's now part of the family of Digital Ally and custom 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 sites on a couple of other opportunities that we look to expand on. So that customer entertainment has multiple festivals that it has underneath its belt, 2 different ticketing platform 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, the food and beverage, parking to try to really maximize the value that we and the customer entertainment team can bring to the table. So very pleased with that acquisition, very excited about just the newly launched custom tickets.

Speaker 1

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-four submitted down to the numbers refresh. And like Brody said, hopefully this is the last go around because there were just minimum amount of questions that the SEC had concerning the transaction.

Speaker 1

So Julie, let's go ahead and open up the lines for Q and A, please.

Operator

Your first question comes from Rommel Dionisio from Aegis Capital. Please go ahead.

Speaker 3

Good morning. Thanks for taking my question. I wonder, Stan, 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 for the with regards to the TICKETS Smart Business. You kind of have a full lineup of proprietary events and maybe you can just give us a little color on sort of what's coming over the next few months quarters that could be a real catalyst for that business?

Speaker 1

Yes. 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 type of opportunities in regards to be in 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 2,000,000 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.

Speaker 1

So they're teed up for, again,

Speaker 2

a nice

Speaker 1

2024 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 Q2 here is the last of some of the trailing media relationships we got into that did not deliver and hurt these numbers dramatically. But that seems to be getting they're by the wayside and definitely not making that mistake again. On custom entertainment side with the custom tickets, that platform, you'll see quite a bit of growth coming in, but it's going to take a little different approach.

Speaker 1

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. And if you sit there and you look at the Roger Penske's and Andretti's of the world and Ray Hall'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, one just one car is in there. And if there's a mistake or an accident, a wreck, then they're out of the race, not have a chance to win. So us having 2 different platforms, we will definitely take a little different approach on how we go about securing and drawing traffic to our site.

Speaker 1

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 to the fact that we're going to be hopefully right at 8 different concerts yet this year that we would be obviously have the capability of being the primary. So we get the associated fees with that. Just to give you rough numbers, let's just say for easy math, let's just say $10,000,000 is generated from conscious sales. Well, typically, the fees associated with that will be anywhere from 10% to 20%. So that's just essentially just on the low side, dollars 1,000,000 that could go to the bottom line because you have the capability of doing the ticketing in house.

Speaker 1

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 be able to concentrate, we won't be so much working and sharing the capital needs that we both are strapped with right now. I mean, 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. They you just got to keep your head down and you'll get there.

Speaker 1

So 2025, clearly, we'll be on our own. We'll have made completed the merger, hopefully with Clover. It is well capitalized. So custom

Speaker 4

walks into

Speaker 1

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 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.

Speaker 1

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 surrounded himself with. So I'm feeling really good about our position right now. Thanks for the question, Amel.

Speaker 1

Okay.

Speaker 3

Yes. Thanks for the color,

Operator

Sam. Your next question comes from Brian Lubitz from Equitable Advisors. Please go ahead.

Speaker 4

Good morning, gentlemen.

Speaker 1

Good morning,

Speaker 2

Brian. Brody,

Speaker 4

you had alluded earlier to the S-four filing that we made and had said you expect to have, I guess, a resolution or an answer back from the SEC within the next 3

Speaker 1

to 4 weeks. Can you

Speaker 4

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?

Speaker 2

Yes. So our numbers from Q3 went stale back in on February 15. So and that was on our latest S-4A filing that we put out there in the beginning of February. So the SEC still responded to the S-4A with their comments noting the numbers were sales, so we had to wait until we got the 10 ks out the door to then update the S-four with our full 23 numbers along with responses to their I think it was only 7 or 8 comments remaining at that point in time. So now it's just dropping in the new numbers flowing in through cleaning up the S-four because now we can pull out 21.

Speaker 2

So it's more so just the cleanup and updating numbers for both Clover's 10 ks and our 10 ks and the standalone custom numbers to then throw in the S-four and the responses to their seven questions the SEC have. So that's when I hopefully in the next week or 2 weeks, next S-4A out the door, submit it back to the SEC and then we'll have until May 15 is the next stalemate date. So hopefully, prior to that, we get the thumbs up and the effective ability to go effective from the SEC.

Speaker 4

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

Speaker 2

Correct, because then we'll have filed our Q1 numbers.

Speaker 4

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 you guys make public to us?

Speaker 2

Well, if I could speak on the timing from the SEC, I would love to, but your guess is as good as ours. You hope it's quick considering it's only 7 more questions, but you are talking about the SEC as well. So I don't know if we have

Speaker 1

a good answer for that. We are optimistic, but cautiously optimistic as well. And 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. Yes, Brian, this is Stan. We'll get this thing filed and submitted just as quick as possible.

Speaker 1

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 fingers tips as well. So all that gets submitted, hopefully, because our examiner and who we're working with is now being involved with this process for some time, has a very clear understanding of what's going on.

Speaker 1

So hopefully, it will 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. And so 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, 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 a very few numbers and this is answers are at our fingertips.

Speaker 1

So all that stuff is getting ready to be submitted right away.

Speaker 2

Yes, Brian, keep an eye on CHLOE, so CLOE, keep an eye on their SEC filings because it's all there. So you'll see our S4A and whatnot because we filed them publicly. We don't file them confidentially. So keep an eye on that as well.

Speaker 4

Super. One last question I have for you guys. Are we as shareholders still expecting 4 shares of Chloe for every one?

Speaker 1

Yes, I mean that's essentially the ratio as of this moment. Yes, so that is 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.

Speaker 4

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?

Speaker 2

Yes. So you're right. 20% will be immediately distributed. So that will be a record date here pretty much after the consummation of the transaction. And then it will be a 6 month holding period for the remaining 80%.

Speaker 2

And since it's over 4 months, because the 6 months was pretty much required in what Clover wanted and I think might have been that's just your comment, I'm not sure. But so there will have to be a second record date since that 6 month mark. So there will be a second record date for the remaining 80%

Speaker 1

of the shares that are

Speaker 2

being held within Digital Ally.

Speaker 1

Ally. Yes, Brian, this is Dan. Keep in mind, the value that Clover has right now, far as for its shareholders and when this transaction is 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 custom entertainment now post split real 6 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 customer 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 our Custom Entertainment has because when this is completed, the Custom Entertainment current shareholders and obviously the Digital Ally shareholders that are now getting to understand a little bit more about what custom 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.

Speaker 1

All right. Well, listen, I thank everybody for their time today. We really appreciate it. And like Brody said and I repeated, please take a look. There's been some amazing improvements on a tremendous amount of fronts on behalf of Digital Ally and it's and we couldn't be more excited about the future that we have in front of us.

Speaker 1

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

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

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Key Takeaways

  • Digital Ally ended 2023 with $15.6 M in current assets and successfully rightsized inventory to $3.8 M, while deferred revenue rose over 200% since 2021 to $10.3 M, underlining strength of its subscription model.
  • The company delivered a significant turnaround in gross profit, climbing to $5.8 M in 2023 from $2.3 M in 2022, and cut SG&A by $4 M year-over-year to support margin expansion.
  • Digital Ally is progressing on its planned business combination with Clover, having filed its Form S-4 updates and targeting an effective date within weeks, with a 4-for-1 share distribution for Custom Entertainment shareholders.
  • Key strategic moves include the recent acquisition of Country Stampede and the ongoing development of the TicketSmarter ticketing platform, broadening the company’s footprint in live events and secondary ticket markets.
  • Despite receiving a Nasdaq notice for board composition non-compliance, management intends to cure the deficiency by the end of 2024 through its upcoming annual meeting and the merger with Clover.
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Earnings Conference Call
Digital Ally Q4 2023
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