Digital Ally, Inc. (Nasdaq: DGLY), which develops, manufactures and
markets advanced video surveillance products for law enforcement,
homeland security and commercial applications, today announced its
operating results for the third quarter of 2019. An investor
conference call is scheduled for 11:15 a.m. EST on Thursday,
November 14, 2019 (see details below).
Highlights for Quarter Ended September
30, 2019
- Total revenues increased in third quarter 2019 to $2,923,148
from $2,878,059 in third quarter 2018. The primary reason for the
revenue increases in the third quarter 2019 is the 38% increase in
service and other revenues from 2018 levels. Revenues from product
sales declined 7% during the third quarter 2019 compared to the
third quarter 2018. We continue to face challenges for our in-car
and body-worn systems because our competitors have released new
products with advanced features and have maintained their product
price cuts. Our law enforcement product sale revenues declined over
the prior period due to price-cutting, willful infringement of our
patents and other actions by our competitors and adverse
marketplace effects related to the patent litigation.
- We introduced a new product platform, the EVO-HD,
specifically for in-car systems for law enforcement late in June
2019 to address our competitors’ new product features and we
experienced positive traction in third quarter 2019; however, we
expect potential customers to review and test the EVO-HD prior to
adopting the new platform for deployment. This new product platform
utilizes advanced chipsets that will generate new and highly
advanced products for our law enforcement and commercial customers.
We believe the EVO-HD will improve product revenues in future
quarters as customers become aware of and commit to it.
- Our objective is to expand our recurring service revenue to
help stabilize our revenues on a quarterly basis. Revenues from
extended warranties have been increasing and were approximately
$379,989 for the third quarter 2019, an increase of $101,054 (36%)
over the comparable quarter in 2018. Revenues from product
installations have increased steadily in recent quarters and
reached $129,757 in the third quarter 2019, an increase of $100,642
(346%) over the comparable quarter in 2018. Additionally, revenues
from cloud storage has been increasing in recent quarters and
reached $194,661 in the third quarter 2019, an increase of $21,097
(12%) over the comparable quarter in 2018. We are pursuing several
new market channels that do not involve our traditional law
enforcement and private security customers, such as our NASCAR
affiliation, which we believe will help expand the appeal of our
products and service capabilities to new commercial markets. If
successful, we believe that these new market channels could yield
recurring service revenues for us in the future.
- We asserted two significant patent infringement lawsuits
involving Axon and WatchGuard that have had significant impacts on
our quarterly results primarily due to the timing and amount of
legal fees expended on such lawsuits. We settled the WatchGuard
lawsuit in May 2019 for $6.0 million. In June 2019 the Court
granted Axon’s Motion for Summary Judgment, accepted Axon’s
position that it did not infringe on our patents and dismissed the
lawsuit. We have appealed the Court’s ruling and believe this
ruling will be reversed on appeal. The Company filed its Opening
Appeal Brief on August 26, 2019 and Axon filed its Responsive Brief
on November 6, 2019. The Company will file its Reply Brief
responding to Axon no later than November 27, 2019. Future
quarterly results during 2019 and beyond will continue to be
impacted as this appeal is heard and if the case moves to trial. If
we win the appeal and the case moves to trial, the jury will
determine whether Axon infringed our patents.
Management Comments
“In June 2019 we introduced the EVO-HD, an
important and revolutionary new product platform. The EVO-HD is
designed specifically for law enforcement in-car systems to address
our customers’ needs and competitors’ new product features. We
believe the flexibility of our new modular design, which is
cloud-based and comes with embedded VuLink technology, will be
attractive to customers and help us regain market share. As
customers evaluate and test our new EVO-HD systems, we continue to
face challenges for our existing in-car and body-worn systems due
to our competitors releasing new products with advanced features,
maintaining their product price cuts and, in some cases, infringing
on our patents,” stated Stanton E. Ross, Chief Executive Officer of
Digital Ally. “We continue to expand our recurring service-based
revenue to help stabilize and grow our revenues on a quarterly
basis. We are also pursuing several new market channels that do not
involve our traditional law enforcement and private security
customers, including our technology partner affiliation with
NASCAR, MetLife Stadium, KMC Brands and the Kansas City Chiefs,
which we believe will help expand the appeal of our products and
service capabilities to new commercial markets. If successful,
these new market channels could yield recurring service revenues in
the future.”
“We are pleased that we have settled our lawsuit
with WatchGuard. The settlement should serve notice to the industry
that we are the rightful owner of ‘auto-activation’ patents and
that we intend to defend our patents and to hold infringing parties
responsible for their actions. We are disappointed with what we
believe is the Court’s misreading of our patent rights in our
lawsuit with Axon; however, we remain confident that the ruling
will be reversed on appeal,” concluded Ross.
Third Quarter Operating
Results
For the three months ended September 30, 2019,
our total revenue increased by 2% to approximately $2.92 million,
compared with revenue of approximately $2.88 million for the three
months ended September 30, 2018. The primary reason for the revenue
increase in the third quarter 2019 is that our service and other
revenues were up 38% from the prior year period.
Our gross margin increased 1% to $1,188,262 for
the three months ended September 31, 2019 versus $1,177,289 in
2018. The gross margin increase is commensurate with the 2%
increase in total revenues and the cost of sales as a percentage of
revenues remaining steady at 59% during the three months ended
September 30, 2019 and 2018. We believe that gross margins will
improve during 2019 if we improve revenue levels primarily through
the introduction of products such as the EVO-HD, continue to reduce
product warranty issues and shift our revenues to higher-margin
cloud services.
Selling, General and Administrative (“SG&A”)
expenses increased approximately 12% to $3,468,709 in the three
months ended September 30, 2019 versus $3,087,005 a year earlier. A
portion of the increase is attributable to increased research and
development expense dedicated to activities for new products like
the EVO-HD. We expect our research and development activities will
continue to trend higher in future quarters as we continue to
expand our product offerings based on our new EVO-HD product
platform. Additionally, we increased our staffing from 83 at
September 30, 2018 to 114 at September 30, 2019 which resulted in
increased payroll expenses.
We reported an operating loss of $2,280,447 for
the three months ended September 30, 2019, compared with an
operating loss of 1,909,716 in the previous year.
We elected to record the obligation related to
the Proceeds Investment Agreement (“PIA”) at fair-value.
Accordingly, the estimated fair value of the obligation increased
as a result of the $6.0 million litigation settlement with
WatchGuard and the delay in the Axon patent litigation caused by
the unfortunate ruling on the motion for Summary Judgment. We will
now have to wait while the Appellate Court considers our appeal.
The increase in fair value of the PIA resulted in a non-cash charge
of $177,000 for the three months ended September 30, 2019.
We elected to account for the secured
convertible notes that we issued in August of 2019 on its fair
value. Therefore, we determined the fair value of the secured
convertible notes as of their issuance date and as of September 30,
2019 to be $1,845,512 and $1,606,305, respectively. During the
three months ended September 30, 2019, the holders converted an
aggregate of $648,067 of convertible note principal. The change in
fair value from the issuance date of August 5, 2019 and September
30, 2019 was $408,860, which was recorded as a non-cash charge
during the three months ended September 30, 2019.
We reported a net loss of ($2,985,825), or
($0.26) per share, for the third quarter of 2019, compared to a
prior-year net loss of 4,665,580, or ($0.60) per share. This is an
improvement of $1,679,755 (36%). No income tax provision or benefit
was recorded in the first nine months of either 2019 or 2018.
Nine-Month Operating
Results
For the nine months ended September 30, 2019,
our total revenue decreased by 10% to approximately $8.0 million,
compared with revenue of approximately $8.9 million for the nine
months ended September 30, 2018.
Gross profit decreased 15% to $3,320,814 for the
nine months ended September 30, 2019 versus $3,905,150 in 2018. Our
gross margin decrease is primarily attributable to the 10% decrease
in revenues and the cost of sales as percentage of revenues
increasing to 59% for the nine months ended September 30, 2019 from
56% for the nine months ended September 30, 2018.
Selling, General and Administrative (“SG&A”)
expenses decreased approximately 34% to $6,119,977 in the nine
months ended September 30, 2019 versus $9,225,491 a year earlier.
The significant decrease was fueled by the patent litigation
settlement of $6.0 million that we received during the second
quarter 2019. Exclusive of the such settlement overall selling,
general and administrative expenses as a percentage of sales
increased to 151% for the nine months ended September 30, 2019
compared to 104% in the same period in 2018.
We reported an operating loss of $2,798,963 for
the nine months ended September 30, 2019, compared to an operating
loss of $5,320,341 in the previous year.
We elected to record the obligation related to
the PIA at fair-value. Accordingly, the estimated fair value of the
obligation increased as a result of the $6.0 million litigation
settlement with WatchGuard and the delay in the Axon patent
litigation caused by the unfortunate ruling on the motion for
Summary Judgment. We will now have to wait as the Appellate Court
considers our appeal. The increase in fair value of the PIA
resulted in a non-cash charge of $3,275,000 for the nine months
ended September 30, 2019.
We elected to account for the secured
convertible notes that were issued in August of 2019 on its fair
value. Therefore, we determined the fair value of the secured
convertible notes as of their issuance date and as of September 30,
2019 to be $1,845,512 and $1,606,305, respectively. During the nine
months ended September 30, 2019, the holders converted an aggregate
of $648,067 of convertible note principal. The change in fair value
from the issuance date of August 5, 2019 and September 30, 2019 was
$408,860, which was recorded as a non-cash charge during the nine
months ended September 30, 2019.
We reported a net loss of ($6,578,925), or
($0.58) per share, in the first nine months of 2019 compared to a
prior-year net loss of $10,216,702 or ($1.40) per share. No income
tax provision or benefit was recorded in the first nine months of
either 2019 or 2018.
Investor Conference Call
The Company will host an investor
conference call at 11:15 a.m. EST on Thursday, November 14, 2019,
to discuss its operating results for the third quarter 2019 and the
status of its patent infringement litigation against Axon
Enterprise, Inc. and insight into fourth quarter 2019 and
2020. Shareholders and other interested parties
may participate in the conference call by dialing
844-761-0863 and entering conference
ID# 3162567 a few minutes before
11:15 a.m. EST on Thursday November 14, 2019.
A replay of the conference call will be
available two hours after its completion, from November 14, 2019
until 11:59 p.m. on January 14, 2020 by dialing 855-859-2056 and
entering the conference ID #
3162567.
For additional news and information please visit or follow
us on Twitter @digitalallyinc and
Facebook www.facebook.com/DigitalAllyInc
Follow additional Digital Ally Inc. social media channels
here:
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Pinterest
This press release contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Act of 1934. These
forward-looking statements are based largely on the 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 the control
of management. Therefore, actual results could differ materially
from the forward-looking statements contained in this press
release. A wide variety of factors that may cause actual results to
differ from the forward-looking statements include, but are not
limited to, the following: whether the Company will be able to
improve its revenue and operating results; whether it will be able
to resolve its liquidity and operational issues; whether it will be
able to achieve improved production and other efficiencies to
restore its gross and operating margins in the future; whether the
Company will be able to continue to expand into non-law enforcement
markets and increase its service based revenue; whether the Company
has resolved its product quality and supply chain issues; whether
the EVO-HD will help the Company increase its product revenues;
whether the Company will achieve positive outcomes in its
litigation with Axon, including whether the Appeals Court will rule
in its favor; whether and the extent to which the US Patent and
Trademark Office (USPTO) rulings will curtail, eliminate or
otherwise have an effect on the actions of Axon and others in the
marketplace respecting the Company, its products and customers; its
ability to deliver its newer product offerings as scheduled, and in
particular the new EVO-HD product platform, obtain the required
components and products on a timely basis, and have them perform as
planned; whether the new partnerships with NASCAR, KMC Brands and
the Kansas City Chiefs will help expand the appeal for the
Company’s products and services; its ability to maintain or expand
its share of the markets in which it competes, including those
outside the law enforcement industry; whether it will be able to
adapt its technology to new and different uses, including being
able to introduce new products; competition from larger, more
established companies with far greater economic and human
resources; its ability to attract and retain customers and quality
employees; the effect of changing economic conditions; and changes
in government regulations, tax rates and similar matters. These
cautionary statements should not be construed as exhaustive or as
any admission as to the adequacy of the Company’s disclosures. The
Company cannot predict or determine after the fact what factors
would cause actual results to differ materially from those
indicated by the forward-looking statements or other statements.
The reader should consider statements that include the words
“believes,” “expects,” “anticipates,” “intends,” “estimates,”
“plans,” “projects,” “should,” or other expressions that are
predictions of or indicate future events or trends, to be uncertain
and forward-looking. It does not undertake to publicly update or
revise forward-looking statements, whether because of new
information, future events or otherwise. Additional information
respecting factors that could materially affect the Company and its
operations are contained in its annual report on Form 10-K for the
year ended December 31, 2018 and quarterly report on Form 10-Q for
the three and nine months ended September 30, 2019, filed with the
Securities and Exchange Commission.
For Additional Information, Please
Contact:
Stanton E. Ross, CEO, at (913) 814-7774
or Thomas J. Heckman, CFO, at (913)
814-7774
(Financial Highlights Follow)
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2019 AND DECEMBER 31, 2018
|
|
(Unaudited) |
|
|
|
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,272,935 |
|
|
$ |
3,598,807 |
|
Accounts receivable-trade, less allowance for doubtful accounts of
$123,224 – 2019 and $70,000-2018 |
|
|
1,762,169 |
|
|
|
1,847,886 |
|
Accounts receivable-other |
|
|
468,629 |
|
|
|
382,412 |
|
Inventories, net |
|
|
6,381,713 |
|
|
|
6,999,060 |
|
Income tax refund receivable, current |
|
|
44,603 |
|
|
|
44,603 |
|
Prepaid expenses |
|
|
477,023 |
|
|
|
429,403 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,407,072 |
|
|
|
13,302,171 |
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and
equipment, net |
|
|
141,987 |
|
|
|
247,541 |
|
Intangible assets, net |
|
|
434,933 |
|
|
|
486,797 |
|
Operating lease right of use
assets |
|
|
167,443 |
|
|
|
— |
|
Income tax refund
receivable |
|
|
45,397 |
|
|
|
45,397 |
|
Other assets |
|
|
404,253 |
|
|
|
256,749 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,601,085 |
|
|
$ |
14,338,655 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Deficit |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,075,213 |
|
|
$ |
784,599 |
|
Accrued expenses |
|
|
1,077,482 |
|
|
|
2,080,667 |
|
Secured convertible notes, at fair value- current portion |
|
|
1,606,305 |
|
|
|
— |
|
Current portion of operating lease obligations |
|
|
248,603 |
|
|
|
— |
|
Contract liabilities-current |
|
|
1,698,560 |
|
|
|
1,748,789 |
|
Income taxes payable |
|
|
5,833 |
|
|
|
3,689 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,711,996 |
|
|
|
4,617,744 |
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Proceeds investment agreement, at fair value- less current
portion |
|
|
6,417,000 |
|
|
|
9,142,000 |
|
Contract liabilities-long term |
|
|
1,830,471 |
|
|
|
1,991,091 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
14,959,467 |
|
|
|
15,750,835 |
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s Deficit: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares authorized;
shares issued: 12,079,095 – 2019 and 10,445,445 – 2018 |
|
|
12,079 |
|
|
|
10,445 |
|
Additional paid in capital |
|
|
82,748,400 |
|
|
|
78,117,507 |
|
Treasury stock, at cost (63,518 shares) |
|
|
(2,157,226 |
) |
|
|
(2,157,226 |
) |
Accumulated deficit |
|
|
(83,961,635 |
) |
|
|
(77,382,906 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit |
|
|
(3,358,382 |
) |
|
|
(1,412,180 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit |
|
$ |
11,601,085 |
|
|
$ |
14,338,655 |
|
(FOR ADDITIONAL INFORMATION, PLEASE REFER
TO THE COMPANY’S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 2019 FILED WITH THE SEC)
DIGITAL ALLY,
INC.CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONSFOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2019 AND
2018 (Unaudited)
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
2,173,257 |
|
|
$ |
2,334,863 |
|
|
$ |
6,039,445 |
|
|
$ |
7,319,676 |
|
Service and other |
|
|
749,891 |
|
|
|
543,196 |
|
|
|
1,981,482 |
|
|
|
1,593,446 |
|
Total revenue |
|
|
2,923,148 |
|
|
|
2,878,059 |
|
|
|
8,020,927 |
|
|
|
8,913,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
1,601,913 |
|
|
|
1,592,072 |
|
|
|
4,333,812 |
|
|
|
4,672,432 |
|
Service and other |
|
|
132,973 |
|
|
|
108,698 |
|
|
|
366,301 |
|
|
|
335,540 |
|
Total cost of revenue |
|
|
1,734,886 |
|
|
|
1,700,770 |
|
|
|
4,700,113 |
|
|
|
5,007,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,188,262 |
|
|
|
1,177,289 |
|
|
|
3,320,814 |
|
|
|
3,905,150 |
|
Selling, general and
administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense |
|
|
517,010 |
|
|
|
323,981 |
|
|
|
1,562,086 |
|
|
|
1,097,861 |
|
Selling, advertising and promotional expense |
|
|
877,218 |
|
|
|
711,506 |
|
|
|
2,871,154 |
|
|
|
2,097,919 |
|
Stock-based compensation expense |
|
|
405,579 |
|
|
|
669,480 |
|
|
|
1,715,972 |
|
|
|
1,757,227 |
|
General and administrative expense |
|
|
1,668,902 |
|
|
|
1,382,038 |
|
|
|
5,970,565 |
|
|
|
4,272,484 |
|
Patent litigation settlement |
|
|
— |
|
|
|
— |
|
|
|
(6,000,000 |
) |
|
|
— |
|
Total selling, general and
administrative expenses |
|
|
3,468,709 |
|
|
|
3,087,005 |
|
|
|
6,119,777 |
|
|
|
9,225,491 |
|
Operating loss |
|
|
(2,280,447 |
) |
|
|
(1,909,716 |
) |
|
|
(2,798,963 |
) |
|
|
(5,320,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
6,667 |
|
|
|
2,206 |
|
|
|
30,279 |
|
|
|
4,507 |
|
Interest expense |
|
|
(37,037 |
) |
|
|
(1,083,317 |
) |
|
|
(37,037 |
) |
|
|
(1,366,520 |
) |
Change in warrant derivative liabilities |
|
|
— |
|
|
|
(9,799 |
) |
|
|
— |
|
|
|
(319,105 |
) |
Secured convertible notes
issuance expense |
|
|
(89,148 |
) |
|
|
— |
|
|
|
(89,148 |
) |
|
|
(220,312 |
) |
Loss on the extinguishment of
secured convertible debentures |
|
|
— |
|
|
|
(100,000 |
) |
|
|
— |
|
|
|
(600,000 |
) |
Change in fair value of
proceeds investment agreement |
|
|
(177,000 |
) |
|
|
(98,487 |
) |
|
|
(3,275,000 |
) |
|
|
(98,487 |
) |
Change in fair value of
secured convertible note |
|
|
(408,860 |
) |
|
|
— |
|
|
|
(408,860 |
) |
|
|
— |
|
Change in fair value of
secured convertible debentures |
|
|
— |
|
|
|
(1,466,467 |
) |
|
|
— |
|
|
|
(2,296,444 |
) |
Loss before income tax
benefit |
|
|
(2,985,825 |
) |
|
|
(4,665,580 |
) |
|
|
(6,578,729 |
) |
|
|
(10,216,702 |
) |
Income tax benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net loss |
|
$ |
(2,985,825 |
) |
|
$ |
(4,665,580 |
) |
|
$ |
(6,578,729 |
) |
|
$ |
(10,216,702 |
) |
Net loss per share
information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.26 |
) |
|
$ |
(0.60 |
) |
|
$ |
(0.58 |
) |
|
$ |
(1.40 |
) |
Diluted |
|
$ |
(0.26 |
) |
|
$ |
(0.60 |
) |
|
$ |
(0.58 |
) |
|
$ |
(1.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
11,637,289 |
|
|
|
7,725,877 |
|
|
|
11,296,999 |
|
|
|
7,295,098 |
|
Diluted |
|
|
11,637,289 |
|
|
|
7,725,877 |
|
|
|
11,296,999 |
|
|
|
7,295,098 |
|
(FOR ADDITIONAL INFORMATION, PLEASE REFER TO THE
COMPANY’S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 2019 FILED WITH THE SEC)
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