Digital Ally Inc

NASDAQ:DGLY

Good morning, ladies and gentlemen, and welcome to Digital Ally, Inc. Q3 2023 Operating Results Conference Call. [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 or 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 the expectation or forecast of the 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 forward-looking statements expressed in this conference call. The readers are cautioned not to place undue reliance on such forward-looking statements.

We generally do not publicly update or revise any forward-looking statements expressed in this conference call, whether as a result of new information, future events or otherwise. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I would now like to remind everyone that this call is being recorded on November 15, 2023. I would now like to turn over the call to Stan Ross. Please go ahead.

Thank you. Thanks, everybody, for joining us today. I have Brody Green, the President with me today. Brody also, as many of you know, has been acting as the CFO as well during this time of our transition that -- to where we're looking at the spin-off with Kustom Entertainment and some of the parties will be going in that direction and others should be staying with the legacy business.

But what we're going to do today, Brody is going to give you a little overview of the numbers and sort of some insight to some of the things that we've done to dramatically reduce some of the expenses that we've been telling you all that we've been working on for some time, and that, I think, is clearly shown on the reduction of some of them that are out there, and you can see that the [indiscernible] again. And so we're excited about that. And then we're going to spend a little time. I know that many of you want to get an update on where we're at on sort of the timing of the spin-off of the -- with Kustom Entertainment. I will tell you, there's -- we just found out that there's been a little bit of technical difficulties with some of the software being loaded up in regards to this call, nothing to do with Digital Ally with this call. So we're going to do our best that we can to inform you as well as we can, but we will not be able to have a Q&A session at this time. So hopefully, we do a good job of bringing up to speed and anticipating what those questions may have been and can address them for you. So Brody, I'll let you give them the highlights on the numbers.

Yes. Thanks, Stan. [indiscernible] a quarter with a lot of change and a lot of improvements on the SG&A and spending side that in turn directly impacts our bottom line. So I'll just flow through the face of the financials first and then kind of through some other higher-level points we'd like to touch on and then turn it back over to Stan. So I'll start with the balance sheet. At September 30, 2023, we had our total current assets at about $19.4 million, a small decrease since December '22. Total assets was $51.4 million, a similar decrease as compared to year-end 2022. Our total current liabilities at the end of the quarter were $24.1 million and then total liabilities about $32.5 million.

So we have stockholders' equity currently sitting at $18.9 million at quarter end for Q3. On the P&L side, revenues were north of $6.3 million, a bit of a decrease for the same quarter of 2022, but part of that is part of our rightsizing, particularly in the entertainment side with the ticketing [indiscernible] our pay-per-click and marketing dollars can directly impact our revenues, but positively impact our bottom line. Similarly, with cost of revenue, you'll see a large decrease there that really correlates with the decrease in revenue. And then as we've been talking about our gross profit for Q3 of '23 was north of $1.2 million compared to the same period in '22, it was less than 600,000.

So we've more than doubled our gross profit quarter -- quarterly comparison from '22 to '23. Similarly, our SG&A was down about 800,000 to $6.4 million from the same quarter of '22. And then one other item we'll call out, that in the other income, obviously, we have the warrant derivative liabilities, which is just a change in liability for our -- the warrants we have out there just due to some accounting nuances. So that was the change in value of north of $1.8 million. So you'll see a line of gain on extinguishment of liabilities of about $0.5 million.

That is part of the reduction in sponsorship and marketing expenses we've pushed for over the past quarter in which we were able to rid ourselves the [indiscernible] liabilities and contractual obligations during the quarter and moving into Q4 as well as terminating future contracts that we weren't seeing the results out of that we wanted. So it shows a $0.5 million benefit here, but I think, internally, we know about [ the $7 million ] that we're saving moving forward. That might not necessarily be reflected on the income statement, but they will come off in future years on the expense side.

So in short, our net loss for the quarter was about $3.7 million compared to $1.9 million in the same quarter of last year. Comparatively, the same quarter of '22 had a $3.6 million gain on extinguishment of warrant derivative liabilities and $1.2 million on change in fair value. So it was [ fluff ] about $4.6 million with the warrant derivative liabilities in '22. So -- comparatively, it's still very similar and frankly, an improvement since 2022. Quarter-over-quarter, our revenues were down from Q2, but Q2 had the Kustom 440 concert that they put on in May, more of those to come, which will continue to improve revenue along with gross profits.

Our deferred revenue number, as we always like to discuss and point out is approaching $10 million. It's at $9.9 million at September 30 of '23. That's up over $2 million from December 31 of '22. So we'll just continue to see that increase over time. And obviously, like we always say, it really brings our starting sales number each month and every quarter well above 0. So we'll just continue to recognize those contracts that are 3 and 5 years and just [ continue to ] stack those up. At the same point of last year, our deferred revenue was less than $7.2 million. So really a $2.7 million increase from the same period last year. So it's over a 12-month span.

And we just -- that's only going to continue to grow and grow. So it's an exciting piece for us to have sitting on the balance sheet. Part of our net loss this quarter was due to large inventory write-off of expiring products and trying to scrap some older products that have been in our warehouse for quite some time. We had some R&D for some new products coming up. And hopefully, we'll put those out in the market here in 2024. But obviously, the R&D expenses are incurred now. Obviously, there are several expenses related to this business combination with Clover Leaf that we're pushing through, and we'll have an update on that here shortly. But there's several kind of one-off pieces in these numbers this quarter and likely in '24 -- in Q4 as well as we work towards this transition and this transaction could be completed. And then from there, I think we'll really see an improvement on all sides. Some subsequent events, I'd like to touch on, we appointed a new Board of Director, Duke Daughtery. We appointed him on October 17, [ filed in ] 8-K. So please reference that if [ you'd like some ] more information on it. We completed on October 26, the Loan Agreement and Mortgage to take out the convertible notes we had outstanding of $3 million. So we resolved those and for the mortgage on our building here currently, that was free and clear and [ paid for ] cash several years ago. Again, this is all in the 10-Q, and I encourage you guys to go into 10-Q and take a full look at all this as well in greater detail.

And lastly, a brief update on the business combination with Clover Leaf [indiscernible] in October. We've since received comments back from the SEC, and we're working to provide responses to those as soon as we can. We'll have to throw in Q3 numbers as Q2 numbers are [indiscernible]. So we'll give hopefully responses here as soon as possible back to the SEC to move this forward. And with that, I'll turn it back over to Stan and [indiscernible].

Yes. Thanks, Brody. So you can tell, in regards to the numbers, I mean, I think the fact that the reoccurring or the deferred revenue continues to grow as almost at $10 million, so there's an awful lot of the ability and longevity of what the legacy businesses are continuing to build. Medical billing is continuing to [indiscernible] along. No surprises there, continues to kick off good cash flow for us as well. And then you've got the new products that are really starting to get out there, new budgets are coming up, companies that have had long-term contracts with other vendors are now getting to see the new Digital Ally products, and again, been very well received at all the shows we've been to, and those are reflected in the reoccurring revenue/deferred revenue that we're continuing to see and building upon a subscription model for the video side of things. We do anticipate seeing -- going into the tail end of this year and obviously in 2024, some real nice improvements on the commercial lines. We've been out there with the new product. It has been well received, a lot of [ T&Es ] have been going on.

So again, I think the legacy business is poised really well to continue to be bringing in new customers and continuing to retain their existing ones with the quality of the new products that we're bringing along. Also, as Brody pointed out, the revenues quarter-over-quarter. And again, that was because of the concert that Kustom 440 put on. I think it generated almost $1.1 million, which was realized out of the box, a small concert that we did somewhat in our backyard here. We do have anticipated additional concerts that we'd look to do quite a few, obviously, not just one-offs, quite a few in 2024.

So while that may be more of an impact on the Kustom Entertainment and then at that point in time, the spin-off, that [indiscernible] should be looked at as a very positive because at the end of the day, upon the completion of this merger, you're going to -- all the Digital Ally shareholders will also be Kustom Entertainment shareholders. So excited for that to continue to move forward. I know that many of you may know this, but some of you may not. Just trying to give you an indication of timing on how these things work. But regularly, the S-4 was filed, the SEC had 30 days to get back to us. They did. Comments have been addressed.

And now it's just a matter of plugging in the new, what I want to say, third quarter numbers because Q2 is [indiscernible] in their eyes. So Q3 numbers will get plugged in, and then that will be filed with the SEC. At that point in time, they have 10 days to essentially respond. And hopefully, at that point, they come back with very few comments, if any, and should be fairly quick to respond. There shouldn't be any financial issues by any means for us, [ then the ] numbers is just a clarification. Their role is really just to try to do best they can to make sure that all investors have a real clear understanding -- idea of the investments that they may be making.

So it's more of making sure that all the disclosures are in there. And [ have no ] problems with that -- with both companies being publicly [ held ]. We've been doing that for some time. So excited about getting close to the finish line on the Kustom Entertainment spin-off. Of course, I will be going with Kustom Entertainment, usually a [ little bit of that ] background as far as, I guess, what I was raised with and very familiar with the markets. And so that I'll be going. Duke will be joining me as one of our Board members. We were able to recently -- we have identified a CFO that should be coming on board for Kustom Entertainment.

So that's getting -- all the management people are getting -- put in place. So it's closer than we think, especially with the holidays, the way they're coming up, this will fly by and will -- before we know, it would be making the announcement. And so what will happen on that too is, at that point in time, we'll make sure that, obviously, everyone know, Clover will be the one making the announcement. They'll do a quick shareholder vote/hopefully approval to go ahead and finish what we started here. Meanwhile, we will continue to move forward on building Kustom Entertainment, both the ticketing platform and the production platform in the coming weeks, coming months and I think you'll see some announcements on that. I really apologize.

We're unclear on why we can't bring up the Board and everything to go into a Q&A. So I'm not sure where the problem is. But if there is some questions that come up or anything that we can answer that is already out there that [ you just need ] a little more clarification on, please reach out to Brody and/or I, and we'll do the best [indiscernible] to help explain anything that may be out there that we haven't addressed. Brody, you got any comments on anything or...?

No, I don't think so. Like I said earlier, I would encourage you guys to take a look at the 10-Q, it has all the details you could want. So I would dig in there. If you have further questions [indiscernible] obviously reach out to us. I think 10-Q is a great source to really see where the company is at and where we're heading. [indiscernible] good.

All right. Well, listen, thanks, everybody, for getting on. Again, deepest apologies for not being able to get into a Q&A side of things. But we will be back in touch, I'm sure, very soon, and we'll do -- we'll keep you guys abreast of the timing of the merger with Clover and Kustom Entertainment. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.