Good morning, ladies and gentlemen, and welcome to the Digital Ally, Inc. Q2 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. If anyone has difficulties hearing the conference, please press star 0 for 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 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 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 is being recorded on August 15th, 2023. I will now turn the call over to Stan Ross, CEO. Please go ahead, Mr. Ross.
Thanks, Michelle. Thanks, everybody, for joining us today. Also in the room with me is Brody Green, President, and Tom Heckman, that has called in, as the CFO. Brody and I will be conducting the call today. I'd 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, a lot of folks had to wear a lot of different hats, but it was real nice to see that everyone pulled together and got it done on time. Also, you know, 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 were making to get away from some of the contracts that we were in, in regards to TicketSmarter, that has really helped dramatically bring down, down a lot of the expenses.
While the revenue side was off a little, you know, that is very explainable, recognizing that, you know, we had such a massive amount of capital allocated towards some, some programs that just were not successful for us. Getting through those and getting those unwind was quite, quite a project. The other thing is, you know, this was a very important 10-Q to get completed, as it is also now gives us, you know, 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 agreement. 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.
Thanks, Stan, and I'm just gonna-- Like Stan said, I'm gonna roll through the numbers. I'll start with the balance sheet, 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, as I'm sure that's gonna be a hot topic for this call. I'll just briefly go through the balance sheet. As you can, 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 non-current assets, our total asset value at June 30th was $53.5 million. Our current liabilities sat at $23.4 million, with long-term liabilities, bringing our total liabilities to $31 million. You can see as total stockholders' equity at June 30th of about $22.5 million, with, you know, 2.8 million shares outstanding at June 30th, 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, we'll go down this P&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, you know, reap the benefits that we were hoping for with, with a high price tag. Our cost of revenue for the quarter was $5.5 million, bringing the gross profit to $2.7 million for the second quarter of 2023. That's up over $1 million from the same quarter in 2022. You know, kind of like, as Stan mentioned, we really focused on working on our cost of revenue, increasing those margins, which you can see in a $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 the 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 always like to touch on is our deferred revenue balance. That's up $1.5 million from the beginning of the year.
We have a current balance of $9.5 million in deferred revenue at June 30, 2023. That's related to the subscription model, and that, you know, 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. You can see those subscription models are just starting to stack up as, as we've discussed historically. Just I think that deferred revenue number is just gonna 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 will be at $5.50 exercise price, $6.50, and $7.50, each tiered up as we've disclosed in the 8-K previously. That's all high-level stuff. We also, during the quarter, completed our first event under the Kustom 440 division. That featured Chris Young and Gabby Barrett. It was a very successful show. I think everybody that attended had a great time. We were pleased with how it went, and 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.
It's, it's good to get the first one under our belt and, you know, grow from there. Outside of that, you know, we have some new products coming out on the Digital Ally side that we're 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. 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. For any further details, in more detail, I encourage you guys to all read the Form 10-Q, we filed yesterday afternoon. With that, I'll just turn it back over to Stan, and I'm sure we'll go into more detail from there.
Yeah. Thanks, Brody. And again, a couple things that, you know, I understand the environment that the, you know, the stock market's in and, and, you know, how hard it is sometimes to really get a lot of exposure out there, especially going through the summer, too, when there's, there's so many people doing their vacations and they're off on their trips. School's kicking back up, and I think people will start focusing again on their investments.
To sit there and, and, again, Digital Ally having a market cap of only, you know, $10.5 million, and, you know, shareholder equity's at $22.5 million, deferred revenue that, that, that Brody was talking about is, is really just the video solutions side of things at $9.5 million. You know, and then you, then you look at the, the value that, the medical billing company, continues to, to, generate and build. Right now, you know, again, with the, the ticketing platform and the, and the Kustom 440, having the ability and, and has had its, very first, production or concert or festival, whatever you wanna call it, which really did well. We're very pleased.
It probably exceeded by as much as 20% of what our, our target was. The turnout was great, the lineup was great. The it went without any hiccups in regards to the event. 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 similar festivals in other parts of the country, in which we will also be utilizing our ticketing platform, you know, to maximize the profitability on those.
Anyways, I, I was very, very pleased and continue to be very excited about, you know, the direction that Digital Ally's 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 year's out as well. I think I'd like to go ahead and open up the floor for questions and answers.
Thank you, sir. Ladies and gentlemen, we'll conduct a question and answer session. If you have a question, please press the star key, followed by the number one on your touch-tone phone. You will hear a tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift your headset if you're using a speakerphone before pressing any keys. Once again, to ask a question, please press star one at this time. The first question in the queue comes from Allen Klee with Maxim Group. Your line is open. Please proceed.
Hi, this is Derek Greenberg in for Alan. My first question is just if you could maybe provide an update on how sales are going to fleets currently?
Sales are going to what? I'm sorry.
Sales to fleets.
Fleets.
Fleets.
Yeah, that really is a product I think we rolled out in early Q3. It's, you know, we had a quite a big pipeline prior to then, where, you know, 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 the pricing and whatnot with our large insurance partner we have, so they can push it out to their current customers as well. It, it's really starting to pick up.
It just rolled out recently, so I, 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 gonna see the fruits of that labor here pretty soon.
Yeah, Alan, one, one other thing, too, is, as you may recall, and I, I think we talked about it maybe a little bit on a, on a previous call, but the neat thing about, you know, the insurance company that we're working with, they actually did a white paper on, on our, you know, fleet in-car video system. 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% of the cost of the equipment in the very first year of a five-year contract, with just the reductions that they had in costs associated with those incidences they had the year prior.
You they clearly, clearly are, are a big fan and advocate of, of Digital Ally's commercial in-car system, and they've got, what is it? 200 reps or so, that they'll be pushing it out to some, I think, 35,000 customers that they have. 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, you know, a very strong demand and be able to have the product in-house to get it out to them.
Okay, great. Thanks for the color there. 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 and just your overall outlook?
Right now, we've really been focusing on... part of that, you know, we're buying decent model and profit-sized companies and really pushing for increased gross profits within those companies, by just some of the procedures and practices that we have in place with our managing members. I think we've, we've been in the process of maximizing the profitability of those for the time being with those four recent acquisitions. Our, our eyes are always open and looking at other opportunities as well in, in that same, same segment. Right, right now we're just working on right-sizing 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. I just have one last question, that's just relating to revenue. I was wondering what % of that is recurring?
I want to say recurring per quarter is about $750,000 every quarter. That's all pertaining to the video solution side. I would say on the video solution revenue, it's probably 35%-40% of the quarterly recognized revenue, is the recurring portion.
Got it. All right. Well, thank you for taking my question.
Absolutely. Thank you.
Thanks, Alan.
The next question in the queue comes from Rommel with Aegis Capital. Your line is open. Please proceed.
Good morning. Thank you. Just a couple of questions on the entertainment segment. One, you know, I, I appreciate your comments earlier on the Country Roots Festival. I wonder if you could just give us a little more color in terms of, you know, kind of attendance relative to expectations, the reception you had in the marketplace. Sounds like you generated some nice product revenues. As we look forward, do you expect that entertainment segment to really kind of start to generate, you know, looking at the 2024, 2025, the lion's share of its revenues from proprietary events such as this one? Thanks.
Yeah. Let's give you a little idea of how, how we have a sort of a structure. We have an entity called Kustom 440, and it is the production company that actually puts on the festival. 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, you know, obviously the facility, the food and beverage and the deal terms that we, you know, we, we do a full-blown analysis in regards to the economics of it. 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 two earlier at the T-Mobile Center. So we're essentially doing this in a minor league ballpark, in, in, in the actual baseball park. So our goal was trying to exceed over 6,000 tickets sold. 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 it about $29 as far as per head. We came in closer to $49. I think that's sometimes a real combination to weather, because weather was beautiful. I mean, we got lucky, it was just beautiful. 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 filing 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. We clearly had representatives from other venues that came to town to see what we were talking about far as the Country Roots Festival. Everything that I've heard from those that have went back is: "How soon can you come and do Country Roots at our festival?" You know: "Is there a chance that you could do one yet this year?" You know, things along those lines. It went really well. Our expectations are to, you know, try to do, you know, somewhere in...
I want -- you know, I'm, I'm afraid to throw out a number, but I will. You know, I, you know, 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 Kustom 440, you know, rock classic or something. You know, we'll just have a different mix. What you can 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. That way, then your numbers really get to looking nice because you, you essentially already have the stage, the lights, the power, you know, your arena. Everything's already there.
All you're really doing is switching out signage and changing up the theme a little bit, right? That's when, I think we're really going to start to maximize some, some numbers associated with the festivals that we'll be able to put on. You know, then possibly even a, in three day in the, the bigger cities. 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-K, and you'll be able to go on there, and it'll have some not only alert you to, you know, what happened, but also we'll go ahead and identify some of the cities that we're anticipating doing this at.
Great. Well, please do one on the East Coast, then, so I can attend. Thanks very much.
Okay, you got it.
Ladies and gentlemen, as a reminder, to ask a question, please press star one. The next question in the queue comes from Brian Ludwig with Incredible Advisors. Your line is open. Please proceed.
Good morning, boys. How are we?
Doing good, Brian.
Good. Good. Glad to see the SG&A is going down, the expenses are coming down. Obviously we're working through the cycle with the, the sponsorship deals. Are we fully through that sponsorship deal?
I think they're, they're real close, Brian. They, it probably they may have a little bit that wraps over, you know, into the remainder of the year. I think there's, there's stuff there that we, we were able to negotiate some value out of. What I mean by that is, it doesn't have to be just 100% driven by TicketSmarter. What we may be able to do is utilize the spots, the money that, that, that we're committed to spend for advertisement for Country Roots or our next festival and, or, or some things along those lines. I think, I think we're at a point where what, what little bits remaining, we're going to be able to get some value out.
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.
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 ends. I, 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, you know, some other adjustments we make along the way. I, 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.
Good. Good. Okay, 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? Okay. All right. I actually have 2 questions more I'd like if you guys can indulge me. The 1st one is, is about the actual merger. I know, Stan, you talked earlier about filing the S-4, hopefully thereafter, we can see you on that roadshow, we can, you know, start to see exactly what's going to be, you know, handed out to the shareholders.
As far as you know, the $125 million takeover, just looking at the shares that you guys have outstanding and the shares that CLOE have outstanding, if I'm reading this right, $18 million is coming in cash, and the rest of it's gonna be coming in the form of stock?
Well, the way, the way it's structured is based upon a value. Of course, with SPACs, they have the ability to do what do you want to say? Some redemptions and stuff like that. They, they had a meeting the other day and had minimal redemption. That was very, very encouraging. Once the, let's say, the SPAC really understands the Kustom Entertainment story, then, then everyone will be able to really wrap their arms around it. Then, then you really get a sense of the amount of cash versus stock. Right now, I think their stock is still trading north of $11 a share is where it's at.
Okay. All right. The, the, the formula could change, but essentially, shareholders of Digital are gonna get roughly a $125 million takeover for the Kustom Entertainment. That's the value?
Correct.
Okay. All right. Now, as far as... this might be a Brody question because obviously, Stan, we know you're gonna be moving with Kustom Entertainment. As far as just looking at you guys' balance sheet and having assets over $50 million and, you know, having $9 million in deferred income coming your way and, you know, $20 million worth of revenue roughly, that you're gonna be looking at, and then looking at a market cap of $14 million. You know, again, we find ourselves in this spot where, I don't know if you have a poison pill of protection for us, but you know, what you guys are generating, the market's just not simply giving you value on it. At some point, Brody, are you looking to, you know, shop the company?
Again, to have $50 million in, in assets out there and to have a net, you know, market cap of $15, but then to sell a portion of the, the company at $125, just the numbers are just not working out for you guys getting valued to be public.
Yeah, I think that's part of the driver for us doing this spin-off slash agreement merger agreement, is, is to kind of provide clarity between the two companies and two stocks to show, you know, what Digital Ally is and what Kustom is. Like we, 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. I think we're gonna see how it plays out post separation and see if we can start getting, you know, increased value in the marketplace for what Digital Ally is, as well as what Kustom is going to be. I think we'll go from there. There's no imminent plans to shop it around by any stretch.
Yeah, we're just-- I think we're gonna see where the market takes it after this separation, as that's kind of one of the driving forces, is the lack of value we're getting as we currently sit.
Yeah, because I mean, to have a market cap of $15 million and a portion of the company sold for $125 million, it just. You know, it's maddening for the shareholders. You guys know I've been with you guys for a long time. It just.
Yeah.
you know, for whatever reason, we're not getting the respect that we deserve. I know I said, guys, I had two. I actually, well, I have one more. This might be a, a pond question, but, you know, I, I'm gonna ask in regards to, you know, this year being really, really, you know, positive on the, the AI movement. I know you guys have had a lot of AI incorporated into your body cameras, as well as the ThermoVu 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?
Yeah, absolutely. I think the whole market's gonna trend towards AI in some way, shape, or form, and I don't see us not being included in that. I, I think you're gonna have to utilize AI in some fashion down the road. Now, to what extent, that's yet to be determined. I, I know AI is also a bit of a scare for quite a few people, so it's, it's a fine line to walk. Obviously, we know AI is coming, but you have to be careful with how, how much you dabble with it. You know, it, 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-
Yeah.
we are looking at it, and we're. It's where the market's going. We all know that.
The ThermoVu has, like, facial recognition and stuff like that included in it, right?
Mm-hmm.
Where else do you guys have AI attached to your products right now, if any?
Well, Brian, I mean, obviously, you know, the, the in-car video systems and even a lot of the body cameras have some of it. You know, 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 got a lot of people coming into arenas. We're going to be wanting to make sure and monitor that. Everything on, you know, from that on the ticketing side and 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. 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. AI is gonna be big in our, in our world throughout.
Awesome. Well, listen, guys, I'm, I'm glad to see that, you know, expenses are coming down and, you know, revenues hopefully will start going in the right direction for us. We're all very excited to see that S-4 that you're talking about, Stan, and obviously, the next leg of the, you know, the Kustom slash Digital chapter. You know, kudos to the quarter and looking forward to seeing more news from you guys soon.
Thanks.
Thanks, Brian.
Okay, I think we're gonna go ahead and wrap things up now. Really do appreciate the, you know, everyone that attended, appreciate the, the, the questions. If there, you know, 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, you know, the presentation that I, I referred to earlier. You know, if there is some additional questions, you know, feel free to give us, shoot us an email or a call, and we'll, we'll try to get back to you and, and answer those that we can, that we can answer.
Meanwhile, you know, I, I couldn't tell you, you know, on a personal front, how excited I am to see the, the direction and the, and the improvement and, and just the excitement for all the Digital Ally opportunities that are ahead of us. Hopefully, that, that turns in and, and monetizes for you all. Thank you, everyone. Have a wonderful day, and we'll talk to you all soon.
Thank you, ladies and gentlemen. This concludes your conference. Please disconnect your line.