Kustom Entertainment, Inc. (KUST) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Digital Ally Inc. 2023 Year-end Earnings 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 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 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 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, transpire or prove to be accurate. 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 Ross. Please go ahead.

Thanks, Julie. Thanks, everybody, for joining us today. 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 some of the highlights for the year and then also open up the floor after a while for a Q&A. But, first of all, again, I'd like to thank everybody -- the Digital Ally employees for their hard effort this year. A tough year, as far as 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-K 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-4 looking for the SEC's final approval so that the merger can happen and we can move forward on that. So I am 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 Kustom Entertainment on the spin-off. Hopefully, that holds true as we move forward and get close to the actual execution date of the merger. So right now, it's a 4:1 in Clover. So CLOE is their ticker symbol. So anyways, a lot has been accomplished in subsequential events that we could touch on, including a couple of acquisitions that have been done on the Kustom Entertainment and development of a new ticketing platform that will enhance the additional efforts that TicketSmarter has already succeeded to have. Anyways, I'll quit talking for a little bit, let Brody jump in on the numbers, and then we'll get back to opening this us up for Q&A. Brody?

Yes. Thanks, Stan. 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, and I would encourage all of you to take a dive into the full 10-K 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 $1.6 million of the receivables at $3.1 million, with our inventories down to $3.8 million for the year, which is part of our goal during the year was to get our -- we kind of rightsized 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 solutions side, some of the old stale inventory we have there and kind of cleaning that up along with TicketSmarter's reduction in 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 $6.4 million bringing our total current assets to $15.6 million at year-end with other total assets, including PPE at $7.3 million, some goodwill and other intangibles at $16.5 million. So of that $16.5 million, about $12 million of that's goodwill and unamortized intangibles with $4.5 million of that being other intangibles, mostly related to the TicketSmarter acquisition from September of '21. Other assets are at $6.6 million, bringing our total assets at year-end to $47 million. Down on liabilities, we have AP of $10.7 million, other accrued expenses of $3.3 million, other lease obligations of $300,000 with contract liabilities of $2.9 million. All of this brings our current liabilities to $22.5 million. And then we have other long-term liabilities, including the mortgage on our building, which was a piece of debt we pulled out during '23, brings our total liabilities to $35.6 million, which has our total equity at $11.4 million at year-end. Stock wise, we still are just sitting at an extent at 2.8 million 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 the balance sheet. Our deferred revenue is now sitting at $10.3 million at year-end. That's up from just under $8 million at year-end '22 but it's up from $4.3 million at year-end '21. So really, that's grown by over 200% since '22. So over 2 years, it's grown from about $4.3 million to $10.3 million. 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 near 3 of that, so 1 or 2 more years until we have a full runway versus onetime sales of 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. So that's the reason for that decrease, and that was all our intent for the year. Income statement-wise, our total revenue for the year was $28.2 million, with our cost of revenue being $22.5 million. So we had gross profits of $5.8 million, which was a dramatic improvement from 2022 where our gross profits were only $2.3 million on even higher revenues. So our goal to rightsize our profit margins and focus on profitability and our margins paid off this year in '23. You'll see in our SG&A, we continue to do in R&D. That's mostly on the video solutions side. So that was $2.6 million as we innovate several new products that we're excited to get to market, hopefully, the latter half of this year of '24. And that was some other products we did -- we were able to launch throughout '23. And then selling and advertising, that was down by about $2.2 million to $7.1 million for '23 as another part of us trying to rent 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 $2.2 million year-over-year bringing our total SG&A to $28 million, down by just about $4 million since '22. There are some other income items you'll see on our P&L. A few of them are pretty substantial. So you have a $3.1 million interest expense related to the convertible note we did throughout the year. We wrote off a legal -- part of the legal settlement we're doing with one of the lawsuits we're in for the [indiscernible] was about a $1.1 million write-off along with loss on conversion of convertible debt of $1.1 million 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 it pertain to. Similarly, the shareholders' equity, like we touched on, relatively unchanged from year-over-year. And we had 2.72 million shares outstanding at 12/22 and we're at 2.8 at 12/23. So really a minimal change in stock -- shares outstanding at year-end. Again, we want to highlight the gross profit improvement. That was a big piece for the year as really part of our main goal along with rightsizing inventory and just working on bringing down the SG&A. So obviously, there's still more work to do on all of those line items, but it was nice to see progress. I mean there's significant improvements in gross profit at the video side went from a $1.2 million gross loss last year to a $1.3 million gross profit this year. Similarly on the entertainment side, only a $300,000 gross profit in '22 and a $1.7 million gross profit here in '23. So both of those were greatly improving the margins year-over-year. And again, throughout the 10-K, you'll see the segment data. It's in there probably 2 or 3 times particularly in the footnote. So that -- 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-K. And as Stan mentioned, it's quite a busy beginning of 2024, as we had a lot of subsequent events here in the first 3 months of '24. I'll bore you the details without going into every single one of them, but a few of the notable ones were the acquisition of Country Stampede, we completed on March 1 of '24. 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&A. So we did give a notice of [indiscernible] listing rule from NASDAQ on March 14. That was due to a Board member having to step down during Q1. So we have until the end of the year or our next annual meeting to get that resolved, and our plan is to give you that results here shortly at our annual meeting this summer, it will pretty much be resolved with a split and a successful transaction of 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. And then as Stan touched on as well, that the business combination with Clover as far as the S-4 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 had to submit to the SEC, and we will get the thumbs up and be able to go effective here in the next 4 or 5 weeks. Stan, I'll turn it back over to you.

Thanks, Brody. Yes, this has been a long, long journey in regards to this acquisition with Clover in regards to Kustom Entertainment and spinning that out. But as you could tell, and again, like Brody said, please take an in-depth look at the 10-K because there's tremendous amount of improvements have been made in so many different areas on behalf of Digital Ally. And so 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 Nobility Healthcare, I think, have a lot of things right sized and then we're going to continue to make those improvements. Only Kustom Entertainment, I was excited about having the opportunity and I 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 and definitely in the state of Kansas, if not throughout the Midwest. In it's hay day, 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. 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 Kustom 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 Kustom 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 Kustom Entertainment team can bring to the table. So very pleased with that acquisition, very excited about just the newly launched Kustom tickets. 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 really excited. I do think that we're close on getting the revised S-4 submitted now that the numbers are fresh. And like Brody said, hopefully, this is the last go-around because there were just a minimum amount of questions that the SEC had concerning the transaction. So Julie, let's go ahead and open up the lines for Q&A, please.

[Operator Instructions] Your first question comes from Rommel Dionisio from Aegis Capital.

I wonder, Stan, could you walk us through kind of the calendar here over the next few months as we start to get into spring season relatively soon for the -- with regards to the TicketSmarter business, do you kind of have a full lineup of proprietary events? And maybe you could just give us a little color on sort of what's coming over the next few months and quarters, that could be a little catalyst for that business?

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 being 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 million visitors a month that come to their site. So well established, been around well known, well trusted, delivered a really good product at a good price. So they're teed up for, again, a nice 2024 and 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 second quarter here as the last of some of the trailing media relationships that got into that did not deliver and hurt these numbers dramatically. But that seems to be getting there by the wayside and definitely not making that mistake again. On Kustom Entertainment side with the Kustom tickets, that platform, you'll see quite a bit of growth coming in, but it's going to take a little different approach. And I think the best way to explain this as many of you know that we've done video work for NASCAR and [indiscernible] and others. And if you sector and you look at the Roger Penske and the [indiscernible] Ray Hall, they have more than 1 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, just 1 car is in there. And if there's a mistake or an accident, rack -- then they're out of the race and not have a chance to win. So by 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. 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, I would just say, for easy math, let's just say $10 million is generated from concert 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, $1 million that could go to the bottom line because you have the capability of doing the ticketing in-house. 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 or won't be so much working and ensuring the capital needs that we both are strapped with right now because it's a lot of expansion, if you can only imagine the costs associated with doing the events, the concerts, the costs 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. You just got to keep your head down and you'll get there. So 2025, clearly, we'll be on our own, we will have made -- completed the merger, hopefully with Clover. It is well capitalized. So Kustom walks into a pretty nice situation there with the capital that it has in-house. Brody will be obviously well rewarded and 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, the 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, have gotten inventory down and overall margins are just really improved. So teed up for some really good stuff. 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 to the legacy business because Brody has -- 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.

[Operator Instructions] Your next question comes from Bryan Lubitz from Equitable Advisors.

Brody, you had alluded earlier to the S-4 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 to 4 weeks. Can you 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?

Yes. So our numbers from Q3 went stale back on February 15. So -- and that was on our latest S-4A filing out there in the beginning of February. So the SEC still responded to the S-4A with their comments noting the numbers were stale so we had to wait until we got the 10-K out of the door to then update the S-4 with our full '23 numbers along with responses to their -- I think it was only 7 or 8 comments were remaining at that point in time. So now it's just dropping in the new numbers, slowing it through cleaning up the S-4 because now we can pull out '21. So it's more so just the cleanup and updating numbers for both Clover's 10-K and our 10-K and the stand-alone Kustom numbers to then throw in the S-4 and the responses to their 7 questions the SEC had. So that's when I -- hopefully, in the next week or 2, we can throw the next S-4A out the door, submitted back to the SEC and then we'll have until May 15 as the next Families Day. So hopefully, prior to that, we get the thumbs up and the effect of the ability to go effective from the SEC.

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

Correct. Because then we'll have filed our Q1 numbers.

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 time line how long we should expect before the SEC comes back to you guys? And will that be something that you guys make public to us?

Well, if I could speak on the timing from the SEC, I would love to, but your guess is as good as ours. So we 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 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, then we'll probably be more so at Clover's discretion rather than our own.

Bryan, this is Stan. We'll get the same file and submit it just as quick as possible. Obviously, all of us on both sides, I mean, not only Clover, but for 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 has now been involved with us with this process for some time, has a very clear understanding of what's going on. 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 number is 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 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, there's very few numbers, and this is -- answers are at our fingertips. So all that stuff is getting ready to be submitted right away.

Yes, Bryan, keep an eye on CLOE, keep an eye on their SEC filings because it's all there. So you'll see our S-4A and whatnot because we filed them publicly. We don't file them confidentially. So keep an eye on that as well.

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

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.

And if I remember correctly, we're gonna have 20% released right away. Can you just speak to 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?

Yes. So you're right, 20% will be immediately distributed. So that will be a record date here pretty much after the consolation of the transaction. And then it will be a 6-month holding period for the remaining 80%. And since it's over 4 months because the 6 months was pretty much required and what Clover wanted and, I think, might have been -- this is [indiscernible] I'm not sure. But we have to be a second record date since we're at that 6-month mark. So there will be a second record date for the remaining 80% of the shares that are being held within Digital Ally.

Yes, Bryan, this is Stan. Keep in mind, the value that Clover has right now as 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 Kustom 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 Kustom 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 all Kustom Entertainment has because when this is completed, the Kustom Entertainment's current shareholders, and obviously, the Digital Ally shareholders that are now getting to understand a little bit more about what Kustom 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. All right. Well, listen, thank you, 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 we couldn't be more excited about the future that we have in front of us. 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.

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