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

Good morning, ladies and gentlemen, and welcome to the Digital Ally Second Quarter Earnings Conference Call. [Operator Instructions]. This call is being recorded on August 19, 2024. 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 forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. I would now like to turn the conference over to Stan Ross, CEO. Please go ahead.

Thank you. Thanks, everybody, for joining us today. With me is Brody Green, the company's President, he'll do a high-level overview of our numbers, and then we'll start getting into answering a lot of the e-mails and text messages we've had over the last several weeks concerning the status of the merger of Kustom Entertainment with Clover Leaf group. And so a lot's happened on that, that we would like to share with you and some timing issues concerning the first round of dividends and then the second round of stock dividends as well. And maybe give you just some insight on associated value that this entails in regards to Digital Ally and its shareholders. So with that being said, I will pass the call over to Brody.

Yes. Thanks, Stan. Like you said, I'll just do a brief overview of the financials. Greater detail will be in the Form 10-Q up on the SEC's website. Feel free to take a deep dive in there just for further details. I think the more pressing conversation is going to be regarding the business combination. So we'll get to that as soon as we can. So the current assets of the company at June 30, 2024, were $14.2 million, down about $1.3 million from year-end Similarly, with the total assets, that was at $43.3 million compared to $47 million on December 31. Total current liabilities bumped up to $27.6 million. The chunk of that is about a little less than $4 million attributable to the warrant derivative liabilities, which is just the Black-Scholes value of the warrants, some from earlier transactions and some from the June 25 transaction as well. That's a noncash liability but nonetheless liability on the books. Total liabilities is $40.3 million. Now you can see our contract liabilities sitting on the balance sheet were $3.1 million as current portion and about $7 million for long term. That's our deferred -- deferred revenue for our 3- and 5-year contracts. So that's -- those are really going to find their way up to the -- find a way into the P&L as those mature and come due. Total stockholders equity at the end of Q2 was a little over $3 million. So that wraps up the balance sheet. Again, further details what you'll find on the Q. And then for the P&L side, our total revenue for the quarter was $5.6 million with a total gross profit of $242,000. We had an operating loss of $3.9 million with a net loss of $5 million. And then the net loss per share of $1.74. And then our current -- at the end of Q2, our current shares outstanding were 3.5 million. And -- think that's really a summary. One good thing to call out is our deferred revenue continues to grow. I think it's up to -- it's a little over $10.5 million at this point, I believe. So again, continuing to grow quarter-over-quarter and it will continue to be recognized in the quarter in which it's renewed. So this continue to grow and hit the P&L just every year moving forward. And as that balance increases that's pretty much the goal of what we're trying to do with the subscription model. So it continues to work, and I know we had a few big events this quarter on the entertainment side as well with them having their festival at the end of June. And I'll let Stan touch on that along with a few other items. So I'll turn it back over to Stan.

Good. Thanks, Brody. Yes, much -- a lot of the calls and as I said, e-mails, even text messages have been around the business combination agreement where Digital Ally is selling one of its subsidiaries, which is Kustom Entertainment to Clover Leaf Capital they are currently a NASDAQ company. I just looked up their stock. It's still trading nicely, $12.40. We've already done the record date for the first round of dividends. So there will be approximately almost 2.3 million shares of Clover that will be sent out to the Digital Ally shareholders. That's the equivalent, just using today's price. Let's just say, after the merger is completed and the price, let's say, it stays where it's at, that'd be almost a $7.70 stock dividend that those shareholders of record will be getting. And the shareholders of record were those that were shareholders at the end of business on August 12, so last week. So that should be happening. What I'll also transpire is Digital Ally itself will then be receiving and holding on to almost 7.6 million shares. And so you can do the back of the envelope math on that. It's an astronomical number and a lot of value that comes into Digital Ally especially if the stock holds strong where it's at. And eventually, the goal is to go ahead and dividend out those shares as well. There'll be a new record date established and those will be sent out in about a 6-month period of time as well. So now the timing -- those who have been following closely know that Clover got their SEC approval of the registration. So it's active. They are now having their shareholder vote to complete this transaction. I want to say it's at 10:00 Eastern time this coming Friday. Once that is completed, and we continue to move forward on cross the t's and dot the i's and making sure all the things that have been agreed upon in the business combination agreement are there, then we'll move forward the following week into completing that transaction. So well, this has been a very, very, very long haul. As you recall, we sort of announced this project back in December of '22. And then started going down this path and negotiating in about March of '23, actually entered into an agreement, I want to say it was in June of '23. So it's just been a long, long road but I'm excited about the prospects and the value that it brings into Digital Ally for its shareholders and the opportunity for clarity on the companies as well. So it puts a situation where one of the the ticketing platform and the festival platform is now out there on its own. So you essentially have now video solutions and the medical billing company, they're a part of Digital Ally and it makes it a little clearer to define Digital Ally and who they are by getting this customer entertainment moved down. So excited about that, excited for the value. I'm sure that both companies will be reporting the outcome of the votes, we probably -- it's not always going to be doing news releases on a Friday, but the importance of this, clearly, will have us running something as soon as we know what the outcome of that vote was. And at that point in time, I'm sure we'll be trying to establish a closing date that we will try to include in that release as well. So -- it's been a long time coming. Exciting it's here for, again, like I said, all the Digital Ally shareholders, Digital Ally and also the new Kustom Entertainment. With that being said, we'll touch real quickly on our festivals. It's our first year that we acquired Country Stampede. We were at a new location. We had a lineup that was very good, and we're excited about the future that, that Country Stampede holds. It's a 28-year-old Country Festival, one of the largest and, if not the largest in the state of Kansas and probably throughout the Midwest. We look to up our game a little bit next year. We've already got offers into a new lineup for 2025. And looking at multiple festivals that we'll be doing under the Kustom 440 as part of the Kustom entertainment spin-off. So with that being said, why don't we go ahead and open up the lines for Q&A, please.

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

The first is just a housekeeping question. Could you like just clarify please shares outstanding? I turned to 3.5 million, but I thought you had 2.8 million -- and there's 1.2 million from the offering, where's my math off on that? I thought it would be more like 4.0 million and I could see...

Yes. So it's 3.5 million at quarter end because the prefunded warrants had yet to be exercised from the deal. So now it is up to -- I believe you're -- I think it's sort of [indiscernible]. Yes, a little less than 3.7 million now. But at quarter end, it was 3 -- it was -- what was the number? It was 3.5 million at quarter end. And then now let me just double check the face of -- but it shouldn't be -- yes little less than 3.9 million at this point after all the warrants were exercised.

Great. Perfect. Okay. And just more of a fundamental question. I wonder if you could just give us an update on the first few [indiscernible] some of these models that we've launched over the year. It sounds like the deferred revenue number is really growing. So can you just comment on the execution of that strategy that you've been laying out for the last few quarters and how that's all going?

Yes. We continue versus that first you pro out in all the docking stations, they are [ there in ] '24. It's kind of a -- I mean it's -- we did the subscription model more for financing purposes, instead of a massive CapEx for these municipalities cities and especially on the commercial side, too. It kind of -- it gives them time to -- it's more of a annual fee rather than a massive undertaking in year 1 than they used for 5 years. So it's worked well on our -- the sports teams, they've enjoyed the subscription model as well as the Royal Caribbean cruise lines and several other colleges and whatnot outside of just law enforcement as well that they sign up to these 3- or 5-year contracts in which they can say off cash flow rather than off of big CapEx spends throughout the -- they don't have to make a massive investment. So yes, we're happy with that balance continuing to grow -- and we hope for to just continue to compile and then obviously, the recurring revenue for us year-over-year, not just from a financial reporting standpoint, but also from a cash flow standpoint.

[Operator Instructions] And there are no further questions at this time. I will turn the call back over to Stan Ross for closing remarks.

Well, again, thanks, everybody, for jumping on real quick and I also want to again point out that both Digital Ally currently have the shareholder vote coming up here this Friday and Clover Leaf Capital also has one on Friday concerning the business combination agreement. And so we will keep you posted through both the press release and 8-K as soon as we have the outcome of those numbers. So Thanks, everybody. Have a great week, and we'll talk soon.

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