Item
1 – Financial Statements.
DIGITAL
ALLY, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30, 2020 AND DECEMBER 31, 2019
|
|
September 30,
2020 (Unaudited)
|
|
|
December 31,
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,130,331
|
|
|
$
|
359,685
|
|
Accounts receivable-trade, less allowance for doubtful accounts
of $123,224 – 2020 and 2019
|
|
|
1,799,935
|
|
|
|
1,071,018
|
|
Accounts receivable-other
|
|
|
884,853
|
|
|
|
514,730
|
|
Inventories, net
|
|
|
5,993,627
|
|
|
|
5,280,412
|
|
Income tax refund receivable, current
|
|
|
—
|
|
|
|
44,650
|
|
Prepaid expenses and other current assets
|
|
|
2,295,945
|
|
|
|
381,090
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,104,691
|
|
|
|
7,651,585
|
|
|
|
|
|
|
|
|
|
|
Land, building and equipment, net
|
|
|
681,315
|
|
|
|
197,063
|
|
Intangible assets, net
|
|
|
379,351
|
|
|
|
413,268
|
|
Operating lease right of use assets, net
|
|
|
792,121
|
|
|
|
122,459
|
|
Other assets
|
|
|
893,180
|
|
|
|
532,500
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,850,658
|
|
|
$
|
8,916,875
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,058,739
|
|
|
$
|
2,339,985
|
|
Accrued expenses
|
|
|
616,343
|
|
|
|
845,881
|
|
Operating lease obligations – Current
|
|
|
83,094
|
|
|
|
159,160
|
|
Contract liabilities – Current
|
|
|
1,702,587
|
|
|
|
1,707,943
|
|
Debt obligations – Current
|
|
|
791,521
|
|
|
|
1,827,748
|
|
Income taxes payable
|
|
|
1,158
|
|
|
|
5,934
|
|
Total current liabilities
|
|
|
4,253,442
|
|
|
|
6,886,651
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Proceeds investment agreement obligation, at fair value – Long-term
|
|
|
—
|
|
|
|
6,500,000
|
|
Operating lease obligation – Long-term
|
|
|
754,031
|
|
|
|
44,460
|
|
Debt obligations – Long-term
|
|
|
777,379
|
|
|
|
—
|
|
Contract liabilities – Long-term
|
|
|
1,663,481
|
|
|
|
1,803,143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,448,333
|
|
|
|
15,234,254
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value per share; 100,000,000 and 50,000,000 shares authorized, respectively; shares issued: 26,836,209 – September 30, 2020 and 12,079,095 – December 31, 2019
|
|
|
26,836
|
|
|
|
12,079
|
|
Additional paid in capital
|
|
|
106,225,896
|
|
|
|
83,216,387
|
|
Treasury stock, at cost (63,518 shares)
|
|
|
(2,157,226
|
)
|
|
|
(2,157,226
|
)
|
Accumulated deficit
|
|
|
(89,693,181
|
)
|
|
|
(87,388,619
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficit)
|
|
|
14,402,325
|
|
|
|
(6,317,379
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
21,850,658
|
|
|
$
|
8,916,875
|
|
See
Notes to the Unaudited Condensed Consolidated Financial Statements.
DIGITAL
ALLY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED
SEPTEMBER
30, 2020 AND 2019
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
2,958,579
|
|
|
$
|
2,173,257
|
|
|
$
|
5,778,695
|
|
|
$
|
6,039,445
|
|
Service and other
|
|
|
630,061
|
|
|
|
749,891
|
|
|
|
1,967,881
|
|
|
|
1,981,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,588,640
|
|
|
|
2,923,148
|
|
|
|
7,746,576
|
|
|
|
8,020,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
2,177,676
|
|
|
|
1,601,913
|
|
|
|
4,332,450
|
|
|
|
4,333,812
|
|
Service and other
|
|
|
188,316
|
|
|
|
132,973
|
|
|
|
533,690
|
|
|
|
366,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
2,365,992
|
|
|
|
1,734,886
|
|
|
|
4,866,140
|
|
|
|
4,700,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,222,648
|
|
|
|
1,118,262
|
|
|
|
2,880,436
|
|
|
|
3,320,814
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
405,083
|
|
|
|
517,010
|
|
|
|
1,250,528
|
|
|
|
1,562,086
|
|
Selling, advertising and promotional expense
|
|
|
789,854
|
|
|
|
877,218
|
|
|
|
1,958,884
|
|
|
|
2,871,154
|
|
General and administrative expense
|
|
|
1,871,668
|
|
|
|
2,074,481
|
|
|
|
5,585,500
|
|
|
|
7,686,537
|
|
Patent litigation settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
|
3,066,605
|
|
|
|
3,468,709
|
|
|
|
8,794,912
|
|
|
|
6,119,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,843,957
|
)
|
|
|
(2,280,447
|
)
|
|
|
(5,914,476
|
)
|
|
|
(2,798,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,339
|
|
|
|
6,667
|
|
|
|
33,208
|
|
|
|
30,279
|
|
Interest expense
|
|
|
(4,940
|
)
|
|
|
(37,037
|
)
|
|
|
(338,136
|
)
|
|
|
(37,037
|
)
|
Secured convertible notes issuance expense
|
|
|
—
|
|
|
|
(89,148
|
)
|
|
|
(34,906
|
)
|
|
|
(89,148
|
)
|
Change in fair value of proceeds investment agreement
|
|
|
2,365,000
|
|
|
|
(177,000
|
)
|
|
|
5,250,000
|
|
|
|
(3,275,000
|
)
|
Change in fair value of secured convertible notes
|
|
|
—
|
|
|
|
(408,860
|
)
|
|
|
(1,300,252
|
)
|
|
|
(408,860
|
)
|
Total other income (expense)
|
|
|
2,371,399
|
|
|
|
(705,378
|
)
|
|
|
3,609,914
|
|
|
|
(3,779,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
527,442
|
|
|
|
(2,985,825
|
)
|
|
|
(2,304,562
|
)
|
|
|
(6,578,729
|
)
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
527,442
|
|
|
$
|
(2,985,825
|
)
|
|
$
|
(2,304,562
|
)
|
|
$
|
(6,578,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.58
|
)
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,613,109
|
|
|
|
11,637,289
|
|
|
|
19,861,694
|
|
|
|
11,296,999
|
|
Diluted
|
|
|
26,627,941
|
|
|
|
11,637,289
|
|
|
|
19,861,694
|
|
|
|
11,296,999
|
|
See
Notes to the Unaudited Condensed Consolidated Financial Statements.
DIGITAL
ALLY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
stock
|
|
|
deficit
|
|
|
Total
|
|
Balance, December 31, 2018
|
|
|
10,445,445
|
|
|
$
|
10,445
|
|
|
$
|
78,117,507
|
|
|
$
|
(2,157,226
|
)
|
|
$
|
(77,382,906
|
)
|
|
$
|
(1,412,180
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
725,198
|
|
|
|
—
|
|
|
|
—
|
|
|
|
725,198
|
|
Restricted common stock grant
|
|
|
522,110
|
|
|
|
522
|
|
|
|
(522
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted common stock forfeitures
|
|
|
(2,500
|
)
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock upon exercise of common stock purchase warrants
|
|
|
161,000
|
|
|
|
161
|
|
|
|
515,839
|
|
|
|
—
|
|
|
|
—
|
|
|
|
516,000
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,205,174
|
)
|
|
|
(3,205,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
11,126,055
|
|
|
|
11,126
|
|
|
|
79,358,024
|
|
|
|
(2,157,226
|
)
|
|
|
(80,588,080
|
)
|
|
|
(3,376,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
585,195
|
|
|
|
—
|
|
|
|
—
|
|
|
|
585,195
|
|
Issuance of common stock upon exercise of common stock purchase warrants
|
|
|
368,000
|
|
|
|
368
|
|
|
|
1,047,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,048,000
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(387,730
|
)
|
|
|
(387,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
|
11,494,055
|
|
|
|
11,494
|
|
|
|
80,990,851
|
|
|
|
(2,157,226
|
)
|
|
|
(80,975,810
|
)
|
|
|
(2,130,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
405,579
|
|
|
|
—
|
|
|
|
—
|
|
|
|
405,579
|
|
Restricted common stock forfeitures
|
|
|
(2,870
|
)
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock purchase warrants related to secured convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
535,739
|
|
|
|
—
|
|
|
|
—
|
|
|
|
535,739
|
|
Issuance of common stock upon conversion of secured convertible notes and interest
|
|
|
498,625
|
|
|
|
499
|
|
|
|
697,568
|
|
|
|
—
|
|
|
|
—
|
|
|
|
698,067
|
|
Issuance of common stock related to the issuance of secured convertible notes
|
|
|
89,285
|
|
|
|
89
|
|
|
|
118,660
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,749
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,985,825
|
)
|
|
|
(2,985,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
|
12,079,095
|
|
|
$
|
12,079
|
|
|
$
|
82,748,400
|
|
|
$
|
(2,157,226
|
)
|
|
$
|
(83,961,635
|
)
|
|
$
|
(3,358,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
12,079,095
|
|
|
$
|
12,079
|
|
|
$
|
83,216,387
|
|
|
$
|
(2,157,226
|
)
|
|
$
|
(87,388,619
|
)
|
|
$
|
(6,317,379
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
311,677
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311,677
|
|
Restricted common stock grant
|
|
|
530,050
|
|
|
|
530
|
|
|
|
(530
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted common stock forfeitures
|
|
|
(22,500
|
)
|
|
|
(23
|
)
|
|
|
23
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock upon conversion of secured convertible notes and interest
|
|
|
959,543
|
|
|
|
960
|
|
|
|
1,342,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,343,360
|
|
Issuance of common stock through underwritten public offering at $1.15 per share (net of offering expenses and underwriters’ discount)
|
|
|
2,521,740
|
|
|
|
2,522
|
|
|
|
2,499,614
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,502,136
|
|
Issuance of common stock purchase warrants in connection with issuance of unsecured promissory note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
20,806
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,806
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,334,110
|
)
|
|
|
(2,334,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
|
16,067,928
|
|
|
|
16,068
|
|
|
|
87,390,377
|
|
|
|
(2,157,226
|
)
|
|
|
(89,722,729
|
)
|
|
|
(4,473,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
376,738
|
|
|
|
—
|
|
|
|
—
|
|
|
|
376,738
|
|
Restricted common stock grant
|
|
|
135,450
|
|
|
|
135
|
|
|
|
(135
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Restricted common stock forfeitures
|
|
|
(12,750
|
)
|
|
|
(13
|
)
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock upon conversion of secured convertible notes and interest
|
|
|
1,664,669
|
|
|
|
1,665
|
|
|
|
1,679,660
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,681,325
|
|
Issuance of common stock through underwritten public offering at $1.65 per share (net of offering expenses and underwriters’ discount)
|
|
|
3,554,545
|
|
|
|
3,554
|
|
|
|
5,346,859
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,350,413
|
|
Issuance of common stock through underwritten public offering at $2.15 per share (net of offering expenses and underwriters’ discount)
|
|
|
2,539,534
|
|
|
|
2,540
|
|
|
|
4,974,152
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,976,692
|
|
Issuance of common stock upon exercise of common stock purchase warrants
|
|
|
2,693,867
|
|
|
|
2,694
|
|
|
|
5,200,428
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,203,122
|
|
Issuance of common stock upon exercise of stock options
|
|
|
1,875
|
|
|
|
2
|
|
|
|
7,798
|
|
|
|
|
|
|
|
|
|
|
|
7,800
|
|
Issuance of common stock purchase warrants in connection with issuance of secured convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
721,141
|
|
|
|
—
|
|
|
|
—
|
|
|
|
721,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(497,894
|
)
|
|
|
(497,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
|
26,645,118
|
|
|
|
26,645
|
|
|
|
105,697,031
|
|
|
|
(2,157,226
|
)
|
|
|
(90,220,623
|
)
|
|
|
13,345,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
498,356
|
|
|
|
—
|
|
|
|
—
|
|
|
|
498,356
|
|
Restricted common stock grant
|
|
|
181,091
|
|
|
|
181
|
|
|
|
(181
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock for services rendered
|
|
|
10,000
|
|
|
|
10
|
|
|
|
30,690
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,700
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
527,442
|
|
|
|
527,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020
|
|
|
26,836,209
|
|
|
$
|
26,836
|
|
|
$
|
106,225,896
|
|
|
$
|
(2,157,226
|
)
|
|
$
|
(89,693,181
|
)
|
|
$
|
14,402,325
|
|
See
Notes to the Unaudited Condensed Consolidated Financial Statements.
DIGITAL
ALLY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
|
|
2020
|
|
|
2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,304,562
|
)
|
|
$
|
(6,578,729
|
)
|
Adjustments to reconcile net loss to net cash flows used in by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
189,390
|
|
|
|
287,184
|
|
Stock based compensation
|
|
|
1,186,771
|
|
|
|
1,715,972
|
|
Provision for inventory obsolescence
|
|
|
254,109
|
|
|
|
47,637
|
|
Amortization of discount on unsecured promissory notes
|
|
|
86,867
|
|
|
|
—
|
|
Change in fair value of secured convertible notes
|
|
|
1,300,252
|
|
|
|
408,860
|
|
Change in fair value of proceeds investment agreement
|
|
|
(5,250,000
|
)
|
|
|
3,275,000
|
|
Provision for doubtful accounts receivable
|
|
|
—
|
|
|
|
53,224
|
|
Issuance of common stock for services rendered
|
|
|
30,700
|
|
|
|
—
|
|
Debt issuance costs
|
|
|
34,906
|
|
|
|
89,148
|
|
Interest on secured convertible notes paid through issuance of common stock
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable – trade
|
|
|
(728,917
|
)
|
|
|
32,493
|
|
Accounts receivable – other
|
|
|
(370,123
|
)
|
|
|
(86,217
|
)
|
Inventories
|
|
|
(967,324
|
)
|
|
|
569,710
|
|
Income tax refund receivable
|
|
|
44,650
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
(1,914,855
|
)
|
|
|
(47,620
|
)
|
Operating lease right of use assets
|
|
|
(669,662
|
)
|
|
|
333,308
|
|
Other assets
|
|
|
(110,679
|
)
|
|
|
(147,504
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,281,246
|
)
|
|
|
1,290,614
|
|
Accrued expenses
|
|
|
(129,593
|
)
|
|
|
(1,003,185
|
)
|
Income taxes payable
|
|
|
(4,776
|
)
|
|
|
2,144
|
|
Operating lease obligations
|
|
|
633,505
|
|
|
|
(252,148
|
)
|
Contract liabilities
|
|
|
(145,018
|
)
|
|
|
(210,849
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(10,115,605
|
)
|
|
|
(170,958
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property, building and equipment
|
|
|
(599,449
|
)
|
|
|
(78,584
|
)
|
Additions to intangible assets
|
|
|
(40,277
|
)
|
|
|
(51,182
|
)
|
Additions to investments
|
|
|
(250,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(889,726
|
)
|
|
|
(129,766
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from unsecured promissory note payable, related party
|
|
|
319,000
|
|
|
|
—
|
|
Proceeds from unsecured promissory note payable
|
|
|
100,000
|
|
|
|
—
|
|
Proceeds from promissory notes payable
|
|
|
1,568,900
|
|
|
|
—
|
|
Proceeds from issuance of common stock upon exercise of warrants
|
|
|
5,203,122
|
|
|
|
1,564,000
|
|
Proceeds from issuance of secured convertible notes payable
|
|
|
1,500,000
|
|
|
|
2,500,000
|
|
Proceeds from sale of common stock in underwritten public offering
|
|
|
12,829,241
|
|
|
|
—
|
|
Proceeds from exercise of stock options
|
|
|
7,800
|
|
|
|
—
|
|
Principal payment on subordinated notes payable
|
|
|
(400,000
|
)
|
|
|
—
|
|
Principal payment on secured convertible notes
|
|
|
(748,180
|
)
|
|
|
—
|
|
Principal payments on unsecured promissory note payable, related party
|
|
|
(319,000
|
)
|
|
|
—
|
|
Debt issuance costs
|
|
|
(34,906
|
)
|
|
|
(89,148
|
)
|
Principal payment on proceeds investment agreement
|
|
|
(1,250,000
|
)
|
|
|
(6,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
18,775,977
|
|
|
|
(2,025,148
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,770,646
|
|
|
|
(2,325,872
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
359,685
|
|
|
|
3,598,807
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
8,130,331
|
|
|
$
|
1,272,935
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
128,911
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes
|
|
$
|
4,776
|
|
|
$
|
3,856
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Restricted common stock grant
|
|
$
|
845
|
|
|
$
|
522
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock forfeitures
|
|
$
|
36
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of common stock purchase warrants
|
|
$
|
7
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Impact of Adoption of ASC 842 - obtaining right of use asset for lease liability
|
|
$
|
—
|
|
|
$
|
500,751
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of secured convertible notes
|
|
$
|
3,024,685
|
|
|
$
|
698,067
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to common stock purchase warrants in connection with issuance of unsecured promissory note payable
|
|
$
|
741,947
|
|
|
$
|
535, 739
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock related to the issuance of secured convertible notes
|
|
$
|
—
|
|
|
$
|
118,749
|
|
See
Notes to the Unaudited Condensed Consolidated Financial Statements.
DIGITAL
ALLY, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations:
Digital
Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc. and Shield Products, LLC collectively, “Digital
Ally,” “Digital,” and the “Company”) produces digital video imaging, storage products and disinfectant
and related safety products for use in law enforcement, security and commercial applications. The Company’s products include,
among others; in-car digital video/audio recorders contained in a rear-view mirror for use in law enforcement and commercial
fleets; a system that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free
automatic activation of body-worn cameras and in-car video systems; a miniature digital video system designed to be worn on an
individual’s body; and cloud storage solutions. The Company has recently added two new lines of branded products: (1) the
ThermoVu™ line, which is a line of self-contained temperature monitoring stations that provides alerts and controls facility
access when an individual’s temperature exceeds a pre-set threshold and (2) the Shield™ disinfectant and cleanser
line, which is for use against viruses and bacteria and which we began offering to the Company’s law enforcement and commercials
customers beginning late in the second quarter of 2020. Both product lines are manufactured by third parties. In addition, the
Company has active research and development programs to adapt its technologies to other applications. It can integrate electronic,
radio, computer, mechanical, and multi-media technologies to create unique solutions to address needs in a variety of other industries
and markets, including mass transit, school bus, taxicab and the military. The Company sells its products to law enforcement agencies,
private security customers and organizations, and consumer and commercial fleet operators through direct sales domestically and
third-party distributors internationally.
The
Company was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November
30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed
Digital Ally, Inc.
Basis
of Presentation:
The
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in
the United States for interim financial information and with the general instructions to Form 10-Q and Article 8 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in
the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods
ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
The
balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all
the information and footnotes required by generally accepted accounting principles in the United States for complete financial
statements.
For
further information, refer to the audited financial statements and footnotes included in the Company’s annual report on
Form 10-K for the year ended December 31, 2019 and the unaudited financial statements and footnotes included in the Company’s
quarterly report on Form 10-Q for the quarter ended September 30, 2020.
COVID-19
pandemic:
The
COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different
global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business
partners.
Like
most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March
2020. By that time, much of our first fiscal quarter was completed. During the quarter ended September 30, 2020, we observed
recent decreases in demand from certain customers, including primarily our law-enforcement and commercial customers.
Given
the fact that our products are sold through a variety of distribution channels, we expect our sales will experience more volatility
as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. We
are aware that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from
COVID-19 on future operating results. Although we observed significant declines in demand for our products from certain customers
during the three months ended September 30, 2020, we believe that it remains too early for us to know the exact impact COVID-19
will have on the long-term demand for our products. We also cannot be certain how demand may shift over time as the impacts of
the COVID-19 pandemic may go through several phases of varying severity and duration.
In
light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we
have taken, and continue to take targeted steps to lower our operating expenses because of the COVID-19
pandemic. We continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a
significant number of factors that are not entirely within our control and are discussed in this and other sections of this
quarterly report on Form 10-Q. We do not expect there to be material changes to our assets on our balance sheet or our
ability to timely account for those assets. Further, in connection with the preparation of this quarterly report on Form 10-Q
and the interim financial statements contained herein, we reviewed the potential impacts of the COVID-19 pandemic on goodwill
and intangible assets and have determined there to be no material impact at this time. We have also reviewed the potential
impacts on future risks to the business as it relates to collections, returns and other business-related items.
To
date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver
products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities
in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist
our customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect
these restrictions on personal travel to be material to our business operations or financial results. We have taken steps to restrain
and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between
costs and revenues.
Like
most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions
and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating
our business effectively. To date, we have been able to operate our business effectively using these measures and to maintain
all internal controls as documented and posted. We also have not experienced challenges in maintaining business continuity and
do not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have
remained unpredictable and it remains possible that challenges may arise in the future.
The
actions we have taken so far during the COVID-19 pandemic include, but are not limited to:
|
●
|
requiring
all employees who can work from home to work from home;
|
|
|
|
|
●
|
increasing
our IT networking capability to best assure employees can work effectively outside the office; and
|
|
|
|
|
●
|
for
employees who must perform essential functions in one of our offices:
|
|
●
|
Having
employees maintain a distance of at least six feet from other employees whenever possible;
|
|
|
|
|
●
|
Having
employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
|
|
|
|
|
●
|
Having
employees stay segregated from other employees in the office with whom they require no interaction; and
|
|
|
|
|
●
|
Requiring
employees to wear masks while they are in the office whenever possible.
|
We
currently believe revenue for the year ending December 31, 2020 may decline year over year due to the conditions
noted. In April 2020, we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses during the pandemic.
Actions taken to date include work hour and salary reductions for senior management. These cost reductions are in addition to
the significant restructuring actions we initiated in the first quarter of 2020. Based on our current cash position, our projected
cash flow from operations and our cost reduction and cost containment efforts to date, we believe that we will have sufficient
capital and or have access to sufficient capital through public and private equity and debt offerings to sustain operations for
a period of one year following the date of this filing. If business interruptions resulting from the COVID-19 pandemic were to
be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively
impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.
Management’s
Liquidity Plan and Going Concern:
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred operating
losses for the nine months ended September 30, 2020 and for the year ended December 31, 2019 primarily due to reduced revenues
and gross margins caused by a variety of factors, including the COVID-19 pandemic and its related effects on our customers and
our supply chain, and by competitors’ introduction of newer products with more advanced features together with significant
price cutting of their products. The Company incurred net losses of approximately $2.3 million during the nine months ended September
30, 2020 and $10.0 million for the year ended December 31, 2019 and it had an accumulated deficit of $89.7 million as of September
30, 2020. During 2019, the Company settled one of its patent infringement cases and received a lump sum payment of $6.0 million,
which was used to pay its obligations under its Proceeds Investment Agreement, and on July 20, 2020, the Company and BKI executed
a Termination Agreement which terminated the PIA and released the parties from any further liability under the PIA obligation
upon payment of $1,250,000 by the Company to BKI. Such $1,250,000 payment was made on July 22, 2020 and the PIA obligation was
extinguished, as more fully described in Note 4 — “Proceeds Investment Agreement Obligation”. In recent
years the Company has accessed the public and private capital markets to raise funding through the issuance of debt and equity.
In that regard, the Company raised $12.8 million in underwritten public offerings of its common stock, raised $5.2 million through
the exercise of common stock purchase warrants and options, raised $1.6 million through the issuance of promissory notes through
the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) and the Economic
Injury Disaster Loan (“EIDL”) programs, raised $1.5 million through the issuance of secured convertible notes and
raised $419,000 in unsecured promissory notes and detachable warrants during the nine months ended September 30, 2020. In addition,
the Company raised $1,564,000 in the year ended December 31, 2019 from the exercise of warrants, the Company borrowed $300,000
pursuant to a short-term promissory note payable on December 23, 2019 with detachable warrants to purchase 107,000 shares of common
stock and on August 5, 2019, it raised funds from the issuance of $2.78 million principal balance of secured convertible notes
with detachable warrants to purchase 571,248 shares of common stock with the net proceeds being used for working capital purposes
as more fully described in Note 3 – “Debt Obligations”. These debt and equity raises were utilized to
fund its operations and management expects to continue this pattern until it achieves positive cash flows from operations, although
it can offer no assurance in this regard.
On
May 4, 2020, the Company issued a promissory note in connection with the receipt of a loan of $1,418,900 (the “PPP
Loan”) under the SBA’s PPP under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The PPP Loan has a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred
for nine months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.
Such promissory note contains events of default and other provisions customary for a loan of this type. The PPP provides that
the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES
Act. The Company intends to use the majority of the PPP Loan amount for qualifying expenses and to apply for forgiveness of the
loan in accordance with the terms of the CARES Act. As of September 30, 2020, the Company has used the entirety of the PPP Loan
proceeds for purposes consistent with the PPP and has not taken any actions that it believes will reduce the amount eligible for
forgiveness. As such, the Company believes that the entire amount of the PPP Loan will be forgiven. However, to the extent any
portion of the PPP Loan is determined to be ineligible for forgiveness, we will be required to repay any portion of the outstanding
principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for
loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA. On April 23, 2020, the SBA issued
guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be
able to make the certification required to obtain a PPP loan in good faith. The lack of clarity regarding loan eligibility under
the CARES Act PPP has resulted in significant media coverage and controversy with respect to public companies applying for and
receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we are later
determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such
as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties,
including significant civil, criminal and administrative penalties, and could be required to repay the PPP Loan in its entirety.
In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by
the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.
On
July 2, 2020 the SEC declared the Company’s shelf registration statement on Form S-3 effective (the “Shelf Registration
Statement”). The Shelf Registration Statement will provide the Company with access to liquidity from the public markets
should it decide to utilize it for such purposes. The Shelf Registration Statement allows the Company to offer and sell, from
time to time in one or more offerings, any combination of our common stock, debt securities, debt securities convertible into
Common Stock or other securities in any combination thereof, rights to purchase shares of Common Stock or other securities in
any combination thereof, warrants to purchase shares of Common Stock or other securities in any combination thereof or units consisting
of Common Stock or other securities in any combination thereof having an aggregate initial offering price not exceeding $125,000,000.
The
Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital
to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no
assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing
when needed, and obtain it on terms acceptable or favorable to the Company.
The
Company has increased its addressable market to non-law enforcement customers and obtained new non-law enforcement contracts in
2020 and 2019, which contracts include recurring revenue during the period 2020 to 2023. Further, it added two new product lines
in response to the Covid-19 pandemic. The Company believes that its quality control and cost cutting initiatives, expansion to
non-law enforcement sales channels and new product introductions will eventually restore positive operating cash flows and profitability,
although it can offer no assurances in this regard. The extent to which its future operating results are affected by COVID-19
will largely depend on future developments which cannot be accurately predicted, including the duration and scope of the pandemic,
governmental and business responses to the pandemic and the impact on the global economy, our customers’ demand for our
products and services, and our ability to provide our products and services, particularly as result of our employees working remotely
and/or the closure of certain offices and facilities. While degree of impact of these factors is uncertain, we believe that the
COVID-19 pandemic or the perception of its effects will have a material adverse effect on our business, financial condition, results
of operations, and cash flows.
Based
on the uncertainties described above, the Company believes its business plan does not alleviate the existence of substantial doubt
about its ability to continue as a going concern within one year from the date of the issuance of these unaudited condensed consolidated
financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related
to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Basis
of Consolidation:
The
accompanying financial statements include the consolidated accounts of Digital Ally and its wholly-owned subsidiaries, Digital
Ally International, Inc. and Shield Products, LLC. All intercompany balances and transactions have been eliminated during consolidation.
The
Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products. The Company
formed Shield Products, LLC in May 2020 to facilitate the sales of its Shield™ line of disinfectant/cleanser products and
ThermoVu™ line of temperature monitoring equipment.
Revenue
Recognition:
The
Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers,
and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control
to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle,
the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance
obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations
in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The
Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with
the customer. In situations where sales are to a distributor, the Company had concluded its contracts are with the distributor
as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of its consideration
for the contract, the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each
contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance
obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment
to determine the net consideration to which it expects to be entitled. As the Company’s standard payment terms are less
than one year, it has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant
financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling
price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable
input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of
the product is transferred to the customer (i.e. when the Company’s performance obligations is satisfied), which typically
occurs at shipment. Further in determining whether control has been transferred, the Company considers if there is a present right
to payment and legal title, along with risks and rewards of ownership having transferred to the customer. Customers do not have
a right to return the product other than for warranty reasons for which they would only receive repair services or replacement
product. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for product sales when
incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
The
Company sells its products and services to law enforcement and commercial customers in the following manner:
|
●
|
Sales
to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through
its sales force, which is composed of its employees. Revenue is recorded when the product is shipped to the end customer.
|
|
|
|
|
●
|
Sales
to international customers are made through independent distributors who purchase products from the Company at a wholesale
price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor
retains the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory,
customer receivables and all related risks and rewards of ownership. Accordingly, upon application of steps one through five
above, revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.
|
|
|
|
|
●
|
Repair
parts and services for domestic and international customers are generally handled by its inside customer service employees.
Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.
|
Sales
taxes collected on products sold are excluded from revenues and are reported as accrued expenses in the accompanying balance sheets
until payments are remitted.
Service
and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue
is recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services.
Revenue for extended warranty, cloud service or other software-based products is over the term of the contract warranty or service
period. A time-elapsed method is used to measure progress because the Company transfers control evenly over the contractual period.
Accordingly, the fixed consideration related to these revenues is generally recognized on a straight-line basis over the contract
term, as long as the other revenue recognition criteria have been met.
Contracts
with some of the Company’s customers contain multiple performance obligations that are distinct and accounted for separately.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”).
The Company determined SSP for all the performance obligations using observable inputs, such as standalone sales and historical
pricing. SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of service
being provided. SSP also reflects the amount the Company would charge for the performance obligation if it were sold separately
in a standalone sale. Multiple performance obligations consist of product, software, cloud subscriptions and extended warranties.
The
Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined
points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the
life of the multi-year contract to future deliverables using management’s best estimate of selling price.
Contract
liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported
separately as current liabilities and non-current liabilities in the Condensed Consolidated Balance Sheets. Such amounts consist
of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective
performance obligations are satisfied. Total contract liabilities consist of the following: Contract liabilities consist of deferred
revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities
and non-current liabilities in the Condensed Consolidated Balance Sheets. Such amounts consist of extended warranty contracts,
prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations
are satisfied.
Accounts
Receivable:
Accounts
receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding
amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables
are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
A
trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30)
days beyond terms. No interest is charged on overdue trade receivables.
Segments
of Business:
Management
has determined that its operations comprise one reportable segment: the sale of digital audio and video recording and speed detection
devices. For the three and nine months ended September 30, 2020 and 2019, sales by geographic area were as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Sales by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States of America
|
|
$
|
3,569,452
|
|
|
$
|
2,854,501
|
|
|
$
|
7,667,267
|
|
|
$
|
7,846,560
|
|
Foreign
|
|
|
19,188
|
|
|
|
68,647
|
|
|
|
79,309
|
|
|
|
174,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,588,640
|
|
|
$
|
2,923,148
|
|
|
$
|
7,746,576
|
|
|
$
|
8,020,927
|
|
Sales
to customers outside of the United States are denominated in U.S. dollars. All Company assets are physically located within the
United States.
Recent
Accounting Pronouncements:
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-13, “Financial Instruments – Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU
2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In
April 2019 and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial
Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No.
2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional
implementation guidance on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial
Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the
effective date for public filers that are considered small reporting companies (“SRC”) as defined by the
Securities and Exchange Commission (the “SEC”) to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. Since the Company is an SRC, implementation will not be required until January 1,
2023. The Company will continue to evaluate the effect that adopting ASU 2016-13 will have on the Company’s
consolidated financial statements.
In
2020, FASB issued ASU No. 2020-06 to simplify the accounting for convertible debt instruments as the current accounting guidance
was determined to be unnecessarily complex and difficult to navigate. The ASU primarily does three things: (1) The ASU eliminates
the beneficial conversion feature model and the cash conversion model. The elimination of these models will result in more convertible
instruments (convertible debt instruments or convertible preferred stock instruments) being reported as a single liability instrument.
The ASU also makes targeted improvements to the related disclosures, (2) The ASU eliminates certain settlement conditions that
are required to qualify for derivative scope exception which will allow for less equity contracts to be accounted for as a derivative
and (3) The ASU aligns the diluted EPS calculation for convertible instruments by requiring the use of the if-converted method
and requiring share settlement be included in the calculation when the contract includes an option of cash or share settlement.
ASU No. 2020-06 is effective for fiscal years
beginning after December 15, 2021 with early adoption permitted for fiscal years beginning after December 15, 2020.
In
2020, FASB issued ASU No. 2020-01 which represents a consensus of the Emerging Issues Task Force and it clarifies certain items
related to ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities. The ASU (1) clarifies that when an entity is either applying the equity method or upon discontinuing
the equity method it should consider observable price changes in orderly transactions for the identical or a similar investment
with the same issuer for valuing basis of the investment and (2) clarifies that when determining the accounting for certain forward
contracts and purchased options an entity should not consider, whether upon settlement or exercise, if the underlying securities
would be accounted for under the equity method or fair value option. ASU
No. 2020-01 is effective for fiscal years beginning after December 15, 2020 with early adoption permitted.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which
is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income
Taxes. The amendment also improves consistent application and simplifies GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. The adoption of this standard did not have a significant impact on the Company’s financial position and
results of operations.
NOTE
2. INVENTORIES
Inventories
consisted of the following at September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Raw material and component parts
|
|
$
|
2,450,244
|
|
|
$
|
4,481,611
|
|
Work-in-process
|
|
|
820
|
|
|
|
35,858
|
|
Finished goods
|
|
|
5,535,073
|
|
|
|
4,906,956
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
7,986,137
|
|
|
|
9,424,425
|
|
Reserve for excess and obsolete inventory
|
|
|
(1,992,510
|
)
|
|
|
(4,144,013
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,993,627
|
|
|
$
|
5,280,412
|
|
Finished
goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such
units totaled $152,609 and $80,711 as of September 30, 2020 and December 31, 2019, respectively.
NOTE
3. DEBT OBLIGATIONS
Debt
obligations is comprised of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Payroll protection program loan (PPP)
|
|
$
|
1,418,900
|
|
|
$
|
—
|
|
Economic injury disaster loan (EIDL)
|
|
|
150,000
|
|
|
|
—
|
|
2019 Secured convertible notes, at fair value
|
|
|
—
|
|
|
|
1,593,809
|
|
Unsecured promissory notes payable, less unamortized discount of $-0- and $66,061 at September 30, 2020 and December 31, 2019, respectively
|
|
|
—
|
|
|
|
233,939
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
|
1,568,900
|
|
|
|
1,827,748
|
|
Less: current maturities of debt obligations
|
|
|
791,521
|
|
|
|
1,827,748
|
|
Debt obligations, long-term
|
|
$
|
777,379
|
|
|
$
|
—
|
|
Debt
obligations mature as follows as of September 30, 2020:
|
|
September 30, 2020
|
|
2020 (October 1, 2020 to December 31, 2020)
|
|
$
|
68,241
|
|
2021
|
|
|
948,391
|
|
2022
|
|
|
401,321
|
|
2023
|
|
|
3,166
|
|
2024
|
|
|
3,286
|
|
2025 and thereafter
|
|
|
144,495
|
|
|
|
|
|
|
Total
|
|
$
|
1,568,900
|
|
2020
Small Business Administration Notes.
On
May 4, 2020, the Company issued a promissory note in connection with the receipt of the PPP Loan of $1,418,900 under the
SBA’s PPP Program under the CARES Act. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum.
Monthly principal and interest payments are deferred for nine months after the date of disbursement and total $79,850.57 per month
thereafter. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note contains
events of default and other provisions customary for a loan of this type. The PPP provides that the PPP Loan may be partially
or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to
use the majority of the PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with
the terms of the CARES Act. The Company is in process of applying for forgiveness of the PPP Loan.
On
May 12, 2020 the Company received $150,000 in loan funding from the SBA under the EIDL program administered by the SBA, which
program was expanded pursuant to the recently enacted CARES Act. The EIDL is evidenced by a promissory note, dated May 8, 2020,
in the original principal amount of $150,000 with the SBA, the lender.
Under
the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum.
The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal
and interest payments are deferred for twelve months after the date of disbursement and total $731.00 per month thereafter. Such
note may be prepaid in part or in full, at any time, without penalty.
2019
Secured Convertible Notes.
On
August 5, 2019, the Company entered into a securities purchase agreement with several accredited investors providing for the issuance
of (i) the Company’s 8% secured convertible notes due August 4, 2020 with a principal face amount of $2,777,777.78, which
convertible notes are, subject to certain conditions, convertible into 1,984,126 shares of the Company’s common stock, at
a price per share of $1.40 (the “2019 Convertible Notes”); (ii) five-year warrants to purchase an aggregate of 571,428
shares of Common Stock at an exercise price of $1.8125, which warrants are immediately exercisable upon issuance and on a cashless
basis if the Warrants have not been registered 180 days after the date of issuance; and (iii) the issuance of shares of common
stock equal to 5% of the aggregate purchase price of the convertible notes, with an aggregate value of $125,000 (the “Commitment
Shares”). The accredited investors purchased the foregoing securities for an aggregate cash purchase price of $2,500,000.
Under
the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited
from exercising their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such
holder, together with its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock
outstanding immediately after giving effect to such exercise. However, the investors may increase or decrease such percentage
to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61
days after such notice to the Company.
The
Company elected to account for the secured convertible notes on the fair value basis. Therefore, the Company determined the fair
value of the (1) secured convertible notes, (2) the Commitment Shares and (3) the common stock purchase warrants which yielded
estimated fair values of the secured convertible notes including their embedded derivatives, the Commitment Shares and the detachable
common stock purchase warrants. The following represents the resulting fair value as determined on August 5, 2019, the date of
origination:
Secured convertible notes
|
|
$
|
1,845,512
|
|
Common stock issued as Commitment Shares
|
|
|
118,749
|
|
Common stock purchase warrants
|
|
|
535,739
|
|
|
|
|
|
|
Gross cash proceeds
|
|
$
|
2,500,000
|
|
During
the nine months ended September 30, 2020, the holders of the 2019 Convertible Notes exercised their right to convert principal
balances aggregating $1,259,074 into equity. In addition, the Company paid regular monthly principal payments totaling $172,839
during the nine months ended September 30, 2020 and on March 3, 2020, the Company exercised its right to prepay in cash the remaining
outstanding principal balance aggregating $574,341. There remains no outstanding 2019 Convertible Notes as of September 30, 2020
as a result of these conversions and prepayments.
Under
the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of
the secured convertible notes at each reporting date with the resulting charge or credit being reflected in the condensed consolidated
statement of operations. Following is an analysis of the activity in the secured convertible notes during the nine months ended
September 30, 2020:
|
|
Amount
|
|
Balance at December 31, 2019
|
|
$
|
1,593,809
|
|
Principal repaid during the period by issuance of common stock
|
|
|
(1,259,074
|
)
|
Principal repaid during the period by payment of cash
|
|
|
(747,180
|
)
|
Change in fair value of secured convertible note during the period
|
|
|
412,445
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
$
|
—
|
|
Following
is a range of certain estimates and assumptions utilized as of December 31, 2019 to determine the fair value of secured convertible
notes:
|
|
December 31, 2019
|
|
|
|
Assumptions
|
|
Volatility – range
|
|
|
115
|
%
|
Risk-free rate
|
|
|
1.60
|
%
|
Contractual term
|
|
|
0.6 years
|
|
Calibrated stock price
|
|
$
|
1.06
|
|
Debt yield
|
|
|
123.6
|
%
|
2020
Secured Convertible Notes.
On
April 17, 2020, the Company entered into a securities purchase agreement with several accredited investors providing for the issuance
of (i) the Company’s 8% secured convertible notes due April 16, 2021 with a principal face amount of $1,666,666, which convertible
notes are, subject to certain conditions, convertible into 1,650,164 shares of the Company’s common stock, at a price per
share of $1.01 (the “2020 Convertible Notes”), and (ii) five-year warrants to purchase an aggregate of 1,237,624 shares
of Common Stock at an exercise price of $1.31, which warrants are immediately exercisable upon issuance and on a cashless basis
if the Warrants have not been registered 180 days after the date of issuance. The accredited investors purchased the foregoing
securities for an aggregate cash purchase price of $1,500,000.
Under
the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited
from exercising their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such
holder, together with its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock
outstanding immediately after giving effect to such exercise. However, the investors may increase or decrease such percentage
to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61
days after such notice to the Company.
The
Company elected to account for the secured convertible notes on the fair value basis. Therefore, the Company determined the fair
value of the secured convertible notes and the common stock purchase warrants which yielded estimated fair values of the secured
convertible notes including their embedded derivatives and the detachable common stock purchase warrants. The following represents
the resulting fair value as determined on April 17, 2020, the date of origination:
Secured convertible notes
|
|
$
|
778,859
|
|
Common stock purchase warrants
|
|
|
721,141
|
|
|
|
|
|
|
Gross cash proceeds
|
|
$
|
1,500,000
|
|
During
the nine months ended September 30, 2020, the holders of the 2020 Convertible Notes exercised their right to convert principal
balances aggregating $1,665,666 into equity. In addition, on June 12, 2020, the Company exercised its right to prepay in cash
the remaining outstanding principal balance aggregating $1,000. There remains no outstanding 2020 Convertible notes as of September
30, 2020 as a result of these conversions and prepayments.
Under
the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of
the secured convertible notes at each reporting date with the resulting charge or credit being reflected in the condensed consolidated
statement of operations. Following is an analysis of the activity in the secured convertible notes during the nine months ended
September 30, 2020:
|
|
Amount
|
|
Balance at December 31, 2019
|
|
$
|
—
|
|
Issuance of 2020 convertible notes at fair value
|
|
|
778,859
|
|
Principal repaid during the period by issuance of common stock
|
|
|
(1,665,666
|
)
|
Principal repaid during the period by payment of cash
|
|
|
(1,000
|
)
|
Change in fair value of secured convertible note during the period
|
|
|
887,807
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
$
|
—
|
|
Following
is a range of certain estimates and assumptions utilized as of the April 17, 2020 issuance date to determine the fair value of
secured convertible notes:
|
|
April 17, 2020
|
|
|
|
Assumptions
|
|
Volatility – range
|
|
|
90
|
%
|
Risk-free rate
|
|
|
0.36
|
%
|
Contractual term
|
|
|
1.0 years
|
|
Stock price
|
|
$
|
0.92
|
|
Debt yield
|
|
|
132.2
|
%
|
Unsecured
Promissory Notes Payable.
On
December 23, 2019, the Company, borrowed $300,000 under an unsecured note payable to a private, third-party lender. The promissory
note bore interest at the rate of 8% per annum with principal and accrued interest payable on or before its maturity date of March
31, 2020 (this note was repaid in full on May 6, 2020). The Company granted the lender warrants exercisable to purchase a total
of 107,000 shares of its common stock at an exercise price of $1.40 per share until December 23, 2024. The Company allocated $71,869
of the proceeds of the promissory note to additional paid-in-capital, which represented the grant date relative fair value of
the warrants issued to the lender. The discount was amortized to interest expense ratably over the term of the promissory note
which approximates the effective interest method. The amortization of discount resulted in $66,061 of the discount amortized to
interest expense during the nine months ended September 30, 2020.
On
January 17, 2020, the Company borrowed $100,000 under an unsecured note payable to a private, third-party lender. The promissory
note bore interest at the rate of 8% per annum with principal and accrued interest payable on or before its maturity date of April
17, 2020. The Company granted the lender warrants exercisable to purchase a total of 35,750 shares of its common stock at an exercise
price of $1.40 per share until January 17, 2025. The Company allocated $20,806 of the proceeds of the promissory note to additional
paid-in-capital, which represented the grant date relative fair value of the warrants issued to the lender. The note was repaid
in full on March 12, 2020 and the discount was amortized to interest expense through the date of payment. The amortization of
discount resulted in $20,806 of the discount amortized to interest expense during the nine months ended September 30, 2020.
Unsecured
Promissory Notes Payable – Related party
During
February and April 2020, the Company borrowed a total of $319,000 from the Company’s Chairman, CEO & President under
an unsecured promissory note bearing interest at 6% through its May 28, 2020 maturity date. The proceeds from the note were used
for general corporate purposes. The principal balance and related accrued interest were paid in full during the nine months ended
September 30, 2020. Total interest accrued and paid on this note was $5,236.
NOTE
4. PROCEEDS INVESTMENT AGREEMENT OBLIGATION
The
proceeds investment agreement obligations are comprised of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Proceeds investment agreement, at fair value
|
|
$
|
—
|
|
|
$
|
6,500,000
|
|
Less: Current portion
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Proceeds investment agreement, at fair value - Long-term
|
|
$
|
—
|
|
|
$
|
6,500,000
|
|
On
July 31, 2018, the Company entered into a Proceeds Investment Agreement (the “PIA”) with Brickell Key Investments
LP (“BKI”), pursuant to which BKI funded an aggregate of $500,000 (the “First Tranche”) to be used (i)
to fund the Company’s litigation proceedings relating to the infringement of certain patent assets listed in the PIA and
(ii) to repay the Company’s existing debt obligations and for certain working capital purposes set forth in the PIA. Pursuant
to the PIA, BKI was granted an option to provide the Company with an additional $9.5 million, at BKI’s sole discretion (the
“Second Tranche”). On August 21, 2018, BKI exercised its option on the Second Tranche for $9.5 million which completed
the $10.0 million funding.
Pursuant
to the PIA and in consideration for the $10.0 million in funding, the Company agreed to assign to BKI (i) 100% of all gross, pre-tax
monetary recoveries paid by any defendant(s) to the Company or its affiliates agreed to in a settlement or awarded in judgment
in connection with the patent assets, plus any interest paid in connection therewith by such defendant(s) (the “Patent Assets
Proceeds”), up to the minimum return (as defined in the PIA) and (ii) if BKI has not received its minimum return by the
earlier of a liquidity event (as defined in the PIA) and July 31, 2020, then the Company agreed to assign to BKI 100% of the Patent
Asset Proceeds until BKI has received an amount equal to the minimum return on $4.0 million.
Pursuant
to the PIA, the Company granted BKI (i) a senior security interest in the Patent Assets, the claims (as defined in the PIA) and
the Patent Assets Proceeds until such time as the minimum return is paid, in which case, the security interest on the patent assets,
the claims and the Patent Assets Proceeds will be released, and (ii) a senior security interest in all other assets of the Company
until such time as the minimum return is paid on $4.0 million, in which case, the security interest on such other assets will
be released.
The
security interest is enforceable by BKI if the Company is in default under the PIA which would occur if (i) the Company fails,
after five (5) days’ written notice, to pay any due amount payable to BKI under the PIA, (ii) the Company fails to comply
with any provision of the PIA or any other agreement or document contemplated under the PIA Agreement, (iii) the Company becomes
insolvent or insolvency proceedings are commenced (and not subsequently discharged) with respect to the Company, (iv) the Company’s
creditors commence actions against the Company (which are not subsequently discharged) that affect material assets of the Company,
(v) the Company, without BKI’s consent, incurs indebtedness other than immaterial ordinary course indebtedness up to $500,000,
(vi) the Company fails, within five (5) business days following the closing of the second tranche, to fully satisfy its obligations
to certain holders of the Company’s senior secured convertible promissory notes listed in the PIA and fails to obtain unconditional
releases from such holders as to the Company’s obligations to such holders and the security interests in the Company held
by such holders or (vii) there is an uncured non-compliance of the Company’s obligations or misrepresentations by the Company
under the PIA.
Under
the PIA, the Company issued BKI a warrant to purchase up to 465,712 shares of the Company’s common stock (the “PIA
Warrant”), at an exercise price of $2.60 per share provided that the holder of the PIA Warrant will be prohibited from exercising
the PIA Warrant if, as a result of such exercise, such holder, together with its affiliates, would own more than 4.99% of the
total number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise. However,
such holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase
in such percentage shall not be effective until 61 days after such notice to the Company. The PIA Warrant is exercisable for five
years from the date of issuance and is exercisable on a cashless exercise basis if there is no effective registration statement.
No contractual registration rights were given.
The
Company elected to account for the PIA on the fair value basis. Therefore, the Company determined the fair value of the PIA and
PIA Warrants which yielded estimated fair values of the PIA including their embedded derivatives and the detachable PIA Warrants
as follows:
Proceeds investment agreement
|
|
$
|
9,067,513
|
|
Common stock purchase warrants
|
|
|
932,487
|
|
|
|
|
|
|
Gross cash proceeds
|
|
$
|
10,000,000
|
|
The
Company utilized a probability weighted present value of expected patent asset proceeds for the litigation involving both Axon
Enterprises, Inc. (“Axon,” formerly known as Taser International, Inc.) and WatchGuard (see Note 9 – “Commitments
and Contingencies”) which involved estimates of the amount and timing of the expected patent asset proceeds from the
alleged patent infringement. The fair value of the PIA is updated for actual and estimated activity affecting the probability
weighted present value of expected patent asset proceeds at each reporting date with the change charged/credited to operations.
Following is a range of certain estimates and assumptions utilized as of December 31, 2019 to probability weighted present value
of expected patent asset proceeds for the litigation involving both Axon and WatchGuard:
|
|
December 31, 2019
|
|
Discount rate
|
|
|
3.0% -16.6
|
%
|
Expected term to patent asset proceeds payment
|
|
|
0.58 years - 4 years
|
|
Probability of success
|
|
|
5.9% -38.5
|
%
|
Estimated minimum return payable to BKI
|
|
|
$ 21 million
|
|
Negotiation discount
|
|
|
43.3
|
%
|
In
May 2019, the Company settled its patent infringement litigation with WatchGuard whereby it received a lump-sum payment of $6.0
million as further described in Note 9 – “Commitments and Contingencies”. In accordance with the terms
of the PIA, the Company remitted the $6.0 million as a principal payment toward its minimum return payment obligations
under the PIA.
On
July 20, 2020, the Company and BKI executed a Termination Agreement and Mutual Release (the “Termination Agreement”).
Under the terms of the Termination Agreement the parties agreed to terminate the PIA and to release each other from any further
liability under the PIA obligation.
Under
the terms of the Termination Agreement, upon payment of $1,250,000 by the Company to BKI both parties agreed to terminate the
PIA and to release each other from any further liability thereunder. Such $1,250,000 payment was made on July 22, 2020. In addition
to the $1,250,000 payment, the Company further agreed to pay BKI the following: (a) a contingent payment in the amount of $2,750,000
following the closing of an asset purchase, membership interest purchase, or similar transaction between the Company and a specified
third-party (the “Purchase Transaction”) and (b) any and all future proceeds received from Watchguard and its successors
and assigns by the Company for WatchGuard’s use of U.S. Patent Nos. 8,781,292 and 9,253,452. For clarity, the Company and
BKI further agreed that the payment of the contingent payment would only be due and payable upon the closing of the specified
Purchase Transaction and the relevant contingent payment portion of the Termination Agreement, and any obligations stemming therefrom,
would automatically terminate if the specified Purchase Transaction is abandoned prior to its closing, including its failure to
close within three years from the date of the Termination Agreement.
The
parties abandoned the Purchase Transaction during the quarter ended September 30, 2020 and therefore, the contingent payment obligation
automatically terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does
not anticipate any future recoveries from Watchguard and its successors and assigns relative to WatchGuard’s use of U.S.
Patent Nos. 8,781,292 and 9,253,452. As a result, the PIA obligation was extinguished upon the payment of the $1,250,000 required
under the Termination Agreement.
The
following represents activity in the PIA during the nine months ended September 30, 2020:
Beginning balance as of December 31, 2019
|
|
$
|
6,500,000
|
|
Repayment of obligation
|
|
|
(1,250,000
|
)
|
Change in the fair value during the period
|
|
|
(5,250,000
|
)
|
Ending balance as of September 30, 2020
|
|
$
|
—
|
|
NOTE
5. FAIR VALUE MEASUREMENT
In
accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
●
|
Level
1 — Quoted prices in active markets for identical assets and liabilities
|
|
|
●
|
Level
2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)
|
|
|
●
|
Level
3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)
|
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of September 30, 2020 and December 31, 2019:
|
|
|
September 30, 2020
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Proceeds investment agreement obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,593,809
|
|
|
$
|
1,593,809
|
|
Proceeds investment agreement obligation
|
|
|
—
|
|
|
|
—
|
|
|
|
6,500,000
|
|
|
|
6,500,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,093,809
|
|
|
$
|
8,093,809
|
|
The
following table represents the change in Level 3 tier value measurements:
|
|
2019
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
Secured
|
|
|
Proceeds
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Investment
|
|
|
|
|
|
|
Notes
|
|
|
Notes
|
|
|
Agreement
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
1,593,809
|
|
|
$
|
—
|
|
|
$
|
6,500,000
|
|
|
$
|
8,093,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of secured convertible debt
|
|
|
—
|
|
|
|
778,859
|
|
|
|
—
|
|
|
|
778,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of secured convertible debentures
|
|
|
(1,259,074
|
)
|
|
|
(1,665,666
|
)
|
|
|
—
|
|
|
|
(2,924,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of proceeds investment agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,250,000
|
)
|
|
|
(1,250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of secured convertible notes
|
|
|
(747,180
|
)
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
(748,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of secured convertible debentures and proceeds investment agreement
|
|
|
412,445
|
|
|
|
887,807
|
|
|
|
(5,250,000
|
)
|
|
|
(3,949,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE
6. ACCRUED EXPENSES
Accrued
expenses comprised of the following at September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Accrued warranty expense
|
|
$
|
50,637
|
|
|
$
|
17,838
|
|
Accrued litigation costs
|
|
|
250,000
|
|
|
|
295,000
|
|
Accrued sales commissions
|
|
|
45,000
|
|
|
|
28,480
|
|
Accrued payroll and related fringes
|
|
|
79,426
|
|
|
|
233,254
|
|
Accrued insurance
|
|
|
—
|
|
|
|
78,579
|
|
Accrued sales returns and allowances
|
|
|
23,799
|
|
|
|
18,258
|
|
Accrued sales taxes
|
|
|
53,126
|
|
|
|
50,136
|
|
Other
|
|
|
114,355
|
|
|
|
124,336
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
616,343
|
|
|
$
|
845,881
|
|
Accrued
warranty expense comprised of the following for the nine months ended September 30, 2020:
Beginning balance
|
|
$
|
17,838
|
|
Provision for warranty expense
|
|
|
107,934
|
|
Charges applied to warranty reserve
|
|
|
(75,135
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
50,637
|
|
NOTE
7. INCOME TAXES
The
effective tax rate for the nine months ended September 30, 2020 and 2019 varied from the expected statutory rate due to the Company
continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to
continue the full valuation allowance on net deferred tax assets as of September 30, 2020 primarily because of the Company’s
history of operating losses.
The
Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at September
30, 2020. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits
to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore,
it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue
to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its
ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is
more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
As of September 30, 2020, it had approximately $66,925,000 of net operating loss carryforwards and $1,795,000 of research and
development tax credit carryforwards as determined on December 31, 2019 available to offset future net taxable income.
NOTE
8. OPERATING LEASES
On
May 13, 2020, the Company entered into an operating lease for new warehouse and office space which will serve as its new principal
executive office and primary business location. The original lease agreement was amended on August 28, 2020 to correct the footage
under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the
first nine months and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 2026. The
Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its
new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s
office and warehouse operating lease as of September 30, 2020 was seventy-four months. The Company’s previous office and
warehouse space lease expired in April 2020 and the Company paid holdover rent for the time period until it moved to and commenced
occupying the new space on June 15, 2020.
The
Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes.
The terms of the lease include 48 monthly payments of $1,598 with a maturity date of October 2023. The Company has the option
to purchase the equipment at maturity for its estimated fair market value at that point in time. The remaining lease term for
the Company’s copier operating lease as of September 30, 2020 was 37 months.
Lease
expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease
terms. Total lease expense was $302,836 for the nine months ended September 30, 2020.
The
discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined
the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement
date, the operating lease liabilities reflect a weighted average discount rate of 8%.
The
following sets forth the operating lease right of use assets and liabilities as of September 30, 2020:
Assets:
|
|
|
|
|
Operating lease right of use assets
|
|
$
|
792,121
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Operating lease obligations-Long-term portion
|
|
$
|
754,031
|
|
Operating lease obligations-Current portion
|
|
|
83,094
|
|
Total operating lease obligations
|
|
$
|
837,125
|
|
The
components of lease expense were as follows for the nine months ended September 30, 2020:
Selling, general and administrative expenses
|
|
$
|
302,836
|
|
Following
are the minimum lease payments for each year and in total.
Year ending December 31:
|
|
|
|
2020 (October 1, to December 31, 2020)
|
|
$
|
17,192
|
|
2021
|
|
|
176,465
|
|
2022
|
|
|
184,412
|
|
2023
|
|
|
184,523
|
|
2024
|
|
|
171,924
|
|
Thereafter
|
|
|
334,001
|
|
Total undiscounted minimum future lease payments
|
|
|
1,068,517
|
|
Imputed interest
|
|
|
(231,392
|
)
|
Total operating lease liability
|
|
$
|
837,125
|
|
NOTE
9. COMMITMENTS AND CONTINGENCIES
COVID-19
pandemic
The
COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different
global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business
partners.
Like
most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March
2020. By that time, much of our first fiscal quarter was completed. During the quarter ended September 30, 2020, we observed
recent decreases in demand from certain customers, including primarily our law-enforcement and commercial customers.
Given
the fact that our products are sold through a variety of distribution channels, we expect our sales will experience more volatility
as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. We
are aware that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from
COVID-19 on future operating results. Although we observed significant declines in demand for our products from certain customers
during the three months ended September 30, 2020, we believe that it remains too early for us to know the exact impact COVID-19
will have on the long-term demand for our products. We also cannot be certain how demand may shift over time as the impacts of
the COVID-19 pandemic may go through several phases of varying severity and duration.
In
light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have
taken, and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic. We
continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number
of factors that are not entirely within our control and are discussed in this and other sections of this quarterly report on Form
10-Q. We do not expect there to be material changes to our assets on our balance sheet or our ability to timely account for those
assets. Further, in connection with the preparation of this quarterly report on Form 10-Q and the interim financial statements
contained herein, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and have determined
there to be no material impact at this time. We have also reviewed the potential impacts on future risks to the business as it
relates to collections, returns and other business-related items.
To
date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver
products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities
in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist
our customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect
these restrictions on personal travel to be material to our business operations or financial results. We have taken steps to restrain
and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between
costs and revenues.
Like
most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions
and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating
our business effectively. To date, we have been able to operate our business effectively using these measures and to maintain
all internal controls as documented and posted. We also have not experienced challenges in maintaining business continuity and
do not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have
remained unpredictable and it remains possible that challenges may arise in the future.
The
actions we have taken so far during the COVID-19 pandemic include, but are not limited to:
|
●
|
requiring
all employees who can work from home to work from home;
|
|
|
|
|
●
|
increasing
our IT networking capability to best assure employees can work effectively outside the office; and
|
|
|
|
|
●
|
for
employees who must perform essential functions in one of our offices:
|
|
●
|
Having
employees maintain a distance of at least six feet from other employees whenever possible;
|
|
|
|
|
●
|
Having
employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
|
|
|
|
|
●
|
Having
employees stay segregated from other employees in the office with whom they require no interaction; and
|
|
|
|
|
●
|
Requiring
employees to wear masks while they are in the office whenever possible.
|
We
currently believe revenue for the year ending December 31, 2020 may decline year over year due to the conditions noted.
In April 2020, we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses during the pandemic.
Actions taken to date include work hour and salary reductions for senior management. These cost reductions are in addition to
the significant restructuring actions we initiated in the first quarter of 2020. Based on our current cash position, our projected
cash flow from operations and our cost reduction and cost containment efforts to date, we believe that we will have sufficient
capital and or have access to sufficient capital through public and private equity and debt offerings to sustain operations for
a period of one year following the date of this filing. If business interruptions resulting from the COVID-19 pandemic were to
be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively
impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.
Litigation.
From
time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to
not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After
carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded,
we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable.
When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the
amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and
disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the
specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of
any potential loss. We reevaluate and update accruals as matters progress over time.
While
the ultimate resolution is unknown, based on the information currently available, we do not expect that these lawsuits will individually,
or in the aggregate, have a material adverse effect to our results of operations, financial condition and cash flows. However,
the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that
may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts
recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition
or cash flows.
Axon
The
Company owns U.S. Patent No. 9,253,452 (the “ ‘452 Patent”), which generally covers the automatic activation
and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating
the light bar on the vehicle.
The
Company filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (the “U.S. District Court”)
(Case No: 2:16-cv-02032) against Axon, alleging willful patent infringement against Axon’s body camera product line and
Signal auto-activation product. The Company is seeking both monetary damages and a permanent injunction against Axon for infringement
of the ‘452 Patent.
In
December 2016 and January 2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452
Patent. The United States Patent and Trademark Office (“USPTO”) rejected both of Axon’s petitions. Axon is now
statutorily precluded from filing any more IPR petitions against the ‘452 Patent.
The
U.S. District Court litigation was temporarily stayed following the filing of the petitions for IPR. However, on November 17,
2017, the U.S. District Court of Kansas rejected Axon’s request to maintain the stay. With this ruling, the parties proceeded
towards trial, after which the parties filed motions for summary judgment on January 31, 2019.
On
June 17, 2019, the U.S. District Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s
patent and dismissed the case. The U.S. District Court’s ruling did not find that the ‘452 Patent was invalid. It
also did not address any other issue, such as whether the Company’s requested damages were appropriate, and it did not impact
the Company’s ability to file additional lawsuits to hold other competitors accountable for patent infringement. This ruling
solely related to an interpretation of the Company’s claims as they relate to Axon and was unrelated to the supplemental
briefing the Company filed on its damages claim and the WatchGuard settlement. Those issues are separate and the U.S. District
Court’s ruling on the motion for summary judgment had nothing to do with the Company’s damages request.
The
Company filed an opening appeal brief on August 26, 2019 with the U.S. Court of Appeals for the Tenth Circuit (the “Court
of Appeals”), appealing the U.S. District Court’s granting of Axon’s motion for summary judgment. Axon responded
by filing a responsive brief on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019. The
Court of Appeals scheduled oral arguments on our appeal of the U.S. District Court’s summary judgment ruling on April 6,
2020. This appeal was intended to address the Company’s position that the U.S. District Court incorrectly dismissed our
claims against Axon. If the Court of Appeals overturns the ruling of the U.S. District Court, the case will be remanded to the
U.S District Court before a new judge. On March 12, 2020, the panel of judges for the Court of Appeals issued an order cancelling
the oral arguments previously set for April 6, 2020, having determined that the appeal will be decided solely based on the parties’
briefs. On April 22, 2020, a three-judge panel of the United States Court of Appeals denied our appeal and affirmed the District
Court’s previous decision to grant Axon summary judgment. On May 22, 2020, we filed a petition for panel rehearing requesting
that we be granted a rehearing of our appeal of the U.S. District Court’s summary judgment ruling. Furthermore, we requested
that we be given an opportunity to make our case through oral argument in front of the three-judge panel of the Court of Appeals,
which was also denied. The Company has abandoned its right to any further appeals.
WatchGuard
On
May 27, 2016, the Company filed suit against WatchGuard (Case No. 2:16-cv-02349-JTM-JPO) alleging patent infringement based on
WatchGuard’s VISTA Wifi and 4RE In-Car product lines.
On
May 13, 2019, the parties resolved the dispute and executed a settlement agreement in the form of a Release and License Agreement.
The litigation has been dismissed as a result of this settlement.
The
Release and License Agreement contains the following key terms:
|
●
|
WatchGuard
paid Digital Ally a one-time, lump settlement payment of $6,000,000.
|
|
|
|
|
●
|
Digital
Ally granted WatchGuard a perpetual covenant not to sue if WatchGuard’s products incorporate agreed-upon modified recording
functionality. Digital Ally also granted WatchGuard a license to the ‘292 Patent and the ‘452 Patent (and related
patents, now existing and yet-to-issue) through December 31, 2023. The parties agreed to negotiate in good faith to attempt
to resolve any alleged infringement that occurs after the license period expires.
|
|
●
|
The
parties further agreed to release each other from all claims or liabilities pre-existing the settlement.
|
|
|
|
|
●
|
As
part of the settlement, the parties agreed that WatchGuard made no admission that it infringed any of Digital Ally’s
patents.
|
Upon
receipt of the $6,000,000 the parties filed a joint motion to dismiss the lawsuit with the court, which was granted.
NOTE
10. STOCK-BASED COMPENSATION
The
Company recorded pretax compensation expense related to the grant of stock options and restricted stock issued of $498,356 and
$405,579 for the three months ended September 30, 2020 and 2019 and $1,186,771 and $1,715,972 for the nine months ended September
30, 2020 and 2019, respectively.
As
of September 30, 2020, the Company had adopted seven separate stock option and restricted stock plans: (i) the 2005 Stock Option
and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006
Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option
and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011
Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option
and Restricted Stock Plan (the “2015 Plan”), (viii) the 2018 Stock Option and Restricted Stock Plan (the “2018
Plan”) and (ix) the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”). The 2005 Plan, 2006 Plan,
2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan and 2020 Plan are referred to as the “Plans.”
These
Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total
of 5,675,000 shares of common stock. The 2005 Plan terminated during 2015 with 19,678 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding
as of September 30, 2020 total 7,563. The 2006 Plan terminated during 2016 with 25,849 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding
as of September 30, 2020 total 39,750. The 2007 Plan terminated during 2017 with 89,651 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2007 Plan that remain unexercised and outstanding
as of September 30, 2020 total 5,000. The 2008 Plan terminated during 2018 with 9,249 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2008 Plan that remain unexercised and outstanding
as of September 30, 2020 total 31,250.
Our
Board of Directors adopted the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”) on September 30, 2020
and the Company’s stockholders approved the 2020 Plan at the Annual Meeting held on September 9, 2020. The 2020 Plan authorizes
us to issue 1,500,000 shares of Common Stock upon exercise of options and grant of restricted stock awards. A total of 438,341
options and restricted stock have been granted under the 2020 Plan to date. The 2020 Plan also authorizes us to grant (i) to the
key employees incentive stock options to purchase shares of Common Stock and non-qualified stock options to purchase shares of
Common Stock and restricted stock awards and (ii) to non-employee directors and consultants non-qualified stock options and restricted
stock.
The
Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have
been granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally
vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide
for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of common
stock that are issuable under its Plans with the SEC, except for shares of Common Stock issuable under the 2020 Plan, which the
Company expects to register prior to December 31, 2020. A total of 1,062,846 shares remained available for awards under the various
Plans as of September 30, 2020.
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.
Activity
in the various Plans during the nine months ended September 30, 2020:
Options
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2019
|
|
|
|
589,125
|
|
|
$
|
3.74
|
|
Granted
|
|
|
|
255.000
|
|
|
|
2.09
|
|
Exercised
|
|
|
|
(1,875
|
)
|
|
|
4.16
|
|
Forfeited
|
|
|
|
(3,937
|
)
|
|
|
(12.14
|
)
|
Outstanding at September 30, 2020
|
|
|
|
838,313
|
|
|
$
|
3.20
|
|
Exercisable at September 30, 2020
|
|
|
|
669,563
|
|
|
$
|
3.48
|
|
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The total estimated
grant date fair value stock options issued during the nine months ended September 30, 2020 was $415,742. Following are
certain estimates and assumptions utilized as of the issuance date to determine the grant-date fair value of the stock options
issued during 2020:
Volatility – range
|
|
|
104
|
%
|
Risk-free rate
|
|
|
0.28
|
%
|
Contractual term
|
|
|
5.5 years
|
|
Exercise price
|
|
$
|
2.09
|
|
The
Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with
an intrinsic value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant
to cashless exercises during the nine months ended September 30, 2020 and 2019.
At
September 30, 2020, the aggregate intrinsic value of options outstanding was approximately $12,750 and the aggregate intrinsic
value of options exercisable was approximately $4,313.
As
of September 30, 2020, the unrecognized portion of stock compensation expense on all existing stock options was $275,123 which
will be amortized to expense over the next seven months.
The
following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable
options under the Company’s option plans as of September 30, 2020:
|
|
|
Outstanding options
|
|
|
Exercisable options
|
|
Exercise price
range
|
|
|
Number of
options
|
|
|
Weighted average
remaining
contractual life
|
|
|
Number of
options
|
|
|
Weighted average
remaining
contractual life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01 to $3.49
|
|
|
|
725,313
|
|
|
|
8.4 years
|
|
|
|
556,563
|
|
|
|
8.0 years
|
|
$
|
3.50 to $4.99
|
|
|
|
64,000
|
|
|
|
3.6 years
|
|
|
|
64,000
|
|
|
|
3.6 years
|
|
$
|
5.00 to $6.49
|
|
|
|
—
|
|
|
|
—
years
|
|
|
|
—
|
|
|
|
—
years
|
|
$
|
6.50 to $7.99
|
|
|
|
7,250
|
|
|
|
1.1 years
|
|
|
|
7,250
|
|
|
|
1.1 years
|
|
$
|
8.00 to $9.99
|
|
|
|
2,500
|
|
|
|
0.7 years
|
|
|
|
2,500
|
|
|
|
0.7 years
|
|
$
|
10.00 to $19.99
|
|
|
|
39,250
|
|
|
|
0.3 years
|
|
|
|
39,250
|
|
|
|
0.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838,313
|
|
|
|
7.6 years
|
|
|
|
669,563
|
|
|
|
7.0 years
|
|
Restricted
stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are
valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to four
years corresponding to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may be forfeited
upon the termination of service to or employment with the Company, depending upon the circumstances of termination. Except for
restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s
rights, including voting rights and the right to receive cash dividends.
A
summary of all restricted stock activity under the equity compensation plans for the nine months ended September 30, 2020 is as
follows:
|
|
Number of
Restricted
shares
|
|
|
Weighted
average
grant date
fair
value
|
|
Nonvested balance, January 1, 2020
|
|
|
514,875
|
|
|
$
|
2.97
|
|
Granted
|
|
|
846,591
|
|
|
|
1.02
|
|
Vested
|
|
|
(591,466
|
)
|
|
|
(1.77
|
)
|
Forfeited
|
|
|
(35,250
|
)
|
|
|
(1.84
|
)
|
Nonvested balance, September 30, 2020
|
|
|
734,750
|
|
|
$
|
1.75
|
|
The
Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant.
As of September 30, 2020, there were $316,398 of total unrecognized compensation costs related to all remaining non-vested restricted
stock grants, which will be amortized over the next 15 months in accordance with their respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Years ended
|
|
Number of
shares
|
|
|
|
|
|
2020 (October 1, 2020 through December 31, 2020)
|
|
|
13,125
|
|
2021
|
|
|
480,250
|
|
2022
|
|
|
241,375
|
|
NOTE
11. COMMON STOCK PURCHASE WARRANTS
The
Company has issued common stock purchase warrants in conjunction with various debt and equity issuances. The warrants are either
immediately exercisable, or have a delayed initial exercise date, no more than six months from their respective issue date and
allow the holders to purchase up to 3,388,364 shares of common stock at $1.40 to $16.50 per share as of September 30, 2020. The
warrants expire from January 22, 2021 through January 17, 2025 and allow for cashless exercise.
The
following table summarizes information about shares issuable under warrants outstanding during the nine months ended September
30, 2020:
|
|
Warrants
|
|
|
Weighted
average
exercise
price
|
|
Vested
Balance, January 1, 2020
|
|
|
4,824,573
|
|
|
$
|
5.15
|
|
Granted
|
|
|
1,273,374
|
|
|
|
1.31
|
|
Exercised
|
|
|
(2,704,583
|
)
|
|
|
(1.95
|
)
|
Cancelled
|
|
|
(5,000
|
)
|
|
|
(16.50
|
)
|
Vested
Balance, September 30, 2020
|
|
|
3,388,364
|
|
|
$
|
6.24
|
|
The
total intrinsic value of all outstanding warrants aggregated $-0- as of September 30, 2020 and the weighted average remaining
term is 18.8 months.
During
the nine months ended September 30, 2020, warrants to purchase 2,686,582 common shares were exercised for cash proceeds of $5,203,122
and warrants to purchase 18,000 common shares were exercised on a cashless basis through the forfeiture of 10,715 common shares.
The
following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable
warrants to purchase common shares as of September 30, 2020:
|
|
|
Outstanding and exercisable warrants
|
|
Exercise price
|
|
|
Number of warrants
|
|
|
Weighted
average remaining
contractual life
|
|
$
|
2.60
|
|
|
|
465,712
|
|
|
|
2.8 years
|
|
$
|
3.00
|
|
|
|
316,800
|
|
|
|
2.5 years
|
|
$
|
3.36
|
|
|
|
166,667
|
|
|
|
1.4 years
|
|
$
|
3.36
|
|
|
|
566,666
|
|
|
|
2.4 years
|
|
$
|
3.65
|
|
|
|
167,000
|
|
|
|
1.7 years
|
|
$
|
3.75
|
|
|
|
25,753
|
|
|
|
1.9 years
|
|
$
|
5.00
|
|
|
|
800,000
|
|
|
|
1.2 years
|
|
$
|
13.43
|
|
|
|
879,766
|
|
|
|
0.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,388,364
|
|
|
|
1.6 years
|
|
NOTE
12. STOCKHOLDERS’ EQUITY (DEFICIT)
Amendment
to Articles of Incorporation
The
Company held its annual meeting of the shareholders on September 9, 2020. At such meeting a proposed amendment to the Company’s
Articles of Incorporation to increase the number of authorized shares of capital stock that the Company may issue from 50,000,000
to 100,000,000, of which all 100,000,000 shares shall be classified as Common Stock, was approved.
Underwritten
Public Offerings
On
March 3, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters
and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten
public offering (the “Offering”) an aggregate of 2,521,740 shares of the Company’s common stock at a public
price of $1.15 per share. The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional
378,261 shares of common stock to cover over-allotments, if any. The Offering was registered and the common stock was issued pursuant
to the Company’s effective shelf registration statement on Form S-3 (File No. 333-225227), which was initially filed with
the SEC on May 25, 2018 and was declared effective on June 6, 2018.
The
underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to
closing, indemnification obligations of the Company and the Underwriters. The Underwriters received discounts and commissions
of seven percent (7%) of the gross cash proceeds received by the Company from the sale of the common stock in the Offering. In
addition, the Company agreed to pay the Underwriters (a) a non-accountable expense reimbursement of 1% of the gross proceeds received
and (b) “road show” expenses, diligence fees and the fees and expenses of the Underwriters’ legal counsel not
to exceed $50,000. The net proceeds to the Company from the Offering totaled approximately $2,502,136, after deducting underwriting
discounts and commissions and estimated expenses payable by the Company.
On
June 2, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters
and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten
public offering an aggregate of 3,090,909 shares of the Company’s common stock, at a public price of $1.65 per share (the
“June 2nd Offering”). The Company also granted the underwriters a forty-five (45)-day option to purchase
up to an additional 463,636 shares of common stock to cover over-allotments, if any (the “June 2nd Option Shares”).
The June 2nd Offering was registered and the common stock was issued pursuant to the Company’s shelf registration
statement on Form S-3 (File No. 333-225227), which was initially filed with the SEC on May 25, 2018 and was declared effective
on June 6, 2018.
On
June 8, 2020, the Underwriters fully exercised their over-allotment option to acquire the June 2nd Option Shares at
$1.65 per share, and the offering of the June 2nd Option Shares closed on June 10, 2020. The exercise of such over-allotment
option resulted in additional gross proceeds, before deducting underwriting discounts and commissions and other estimated offering
expenses, of $765,000, which the Company intends to use for general corporate purposes,
including for compliance with certain Nasdaq continued listing requirements and continued investments in the Company’s commercialization
efforts.
The
underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to
closing, indemnification obligations of the Company and the Underwriters. The Underwriters received discounts and commissions
of seven percent (7%) of the gross cash proceeds received by the Company from the sale of the common shares in the June 2nd
Offering. In addition, the Company agreed to pay the Underwriters “road show” expenses, diligence fees and the
fees and expenses of the Underwriters’ legal counsel not to exceed $30,000. The net proceeds to the Company from the June
2nd Offering totaled $5,350,413, including the exercise of the underwriter’s overallotment option and after deducting
underwriting discounts and commissions and estimated expenses payable by the Company.
On
June 8, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters
and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten
public offering an aggregate of 2,325,581 shares of common stock at a public price of $2.15 per share (the “June 8th
Offering”). The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional
213,953 shares of common stock to cover over-allotments, if any (the “June 8th Option Shares”).The June
8th Offering was registered and the common stock was issued pursuant to the Company’s shelf registration statement
on Form S-3 (File No. 333-225227), which was initially filed with the SEC on May 25, 2018 and was declared effective on June 6,
2018.
On
June 10, 2020, the Underwriters fully exercised their over-allotment option to acquire the June 8th Option Shares at
$2.15 per share, and the offering of the June 8th Option Shares closed on June 10, 2020. The exercise of such over-allotment
option resulted in additional gross proceeds, before deducting underwriting discounts and commissions and other estimated Offering
expenses, of $460,000, which the Company intends to use for general corporate purposes,
including for compliance with certain Nasdaq continued listing requirements and continued investments in the Company’s commercialization
efforts.
The
underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to
closing, indemnification obligations of the Company and the Underwriters. The Underwriters received discounts and commissions
of seven percent (7%) of the gross cash proceeds received by the Company from the sale of the common shares in the June 8th
Offering. In addition, the Company agreed to pay the Underwriters “road show” expenses, diligence fees and the
fees and expenses of the Underwriters’ legal counsel not to exceed $30,000. The net proceeds to the Company from the June
8th Offering totaled $4,976,692, including the exercise of the underwriter’s overallotment option and after deducting
underwriting discounts and commissions and estimated expenses payable by the Company.
2020
Issuances of Restricted Common Stock.
On
January 3, 2020, the board of directors approved the grant of 530,050 shares of restricted common stock to officers and employees
of the Company. Such shares will generally vest one-half on January 2, 2021 and one half on January 2, 2022, provided that each
grantee remains an officer or employee on such dates.
In
April 17, 2020 the Compensation Committee of the Board of Directors of the Company determined that the cash portion of the annual
base salaries of the Company’s President and Chief Executive Officer, and the Company’s Chief Financial Officer, Treasurer
and Secretary, would be reduced to annual rates of $150,000 each for the balance of 2020 commencing May 1, 2020.
The
Committee also decided that the reduction of the base annual salaries of Company’s President and Chief Executive Officer,
and the Company’s Chief Financial Officer, Treasurer and Secretary, for 2020, which totaled $69,231 and $55,384, respectively,
as of May 1, 2020 was paid through the issuance of shares of restricted stock under the 2018 Stock Option and Restricted Stock
Plan with the Company paying the applicable federal and state taxes on such amounts. Accordingly, the Company issued the Company’s
President and Chief Executive Officer, and the Company’s Chief Financial Officer, Treasurer and Secretary 75,250 shares
and 60,200 shares, respectively, effective April 17, 2020 based on a closing price of $0.92 per share on such date. In addition,
on September 9, 2020 a total of 178,091 shares of restricted stock were issued to five employees in consideration for their agreement
to voluntary reduce their cash compensation by a total of $165,625 with the Company paying the applicable federal and state taxes
on such amounts.
On
July 1, 2020, the Company entered into a commission agreement with an individual who provides services for our Shield and ThermoVU
product lines. Pursuant to such agreement, we issued a total of 10,000 shares of common stock valued at $30,700 based on the closing
market price which has been expensed during the nine months ended September 30, 2020.
Shelf
Registration Statement on Form S-3
On
July 2, 2020 the SEC declared the Company’s shelf registration statement on Form S-3 (the “Shelf Registration Statement”)
effective. The Shelf Registration Statement allows the Company to offer and sell, from time to time in one or more offerings,
any combination of our common stock, debt securities, debt securities convertible into common stock or other securities in any
combination thereof, rights to purchase shares of common stock or other securities in any combination thereof, warrants to purchase
shares of common stock or other securities in any combination thereof or units consisting of common stock or other securities
in any combination thereof having an aggregate initial offering price not exceeding $125,000,000.
NOTE
13. NET INCOME (LOSS) PER SHARE
The
calculation of the weighted average number of shares outstanding and income (loss) per share outstanding for the three and nine
months ended September 30, 2020 and 2019 are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator for basic and diluted income per share – Net loss
|
|
$
|
527,442
|
|
|
$
|
(2,985,825
|
)
|
|
$
|
(2,304,562
|
)
|
|
$
|
(6,578,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share – weighted average shares outstanding
|
|
|
26,613,109
|
|
|
|
11,637,289
|
|
|
|
19,861,694
|
|
|
|
11,296,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of shares issuable under stock options outstanding
|
|
|
14,832
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of shares issuable under common stock purchase warrants and convertible debt outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per share – adjusted weighted average shares outstanding
|
|
|
26,627,941
|
|
|
|
11,637,289
|
|
|
|
19,861,694
|
|
|
|
11,296,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.58
|
)
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.58
|
)
|
Basic
income (loss) per share is based upon the weighted average number of common shares outstanding during the respective periods.
For the three months ended September 30, 2020, certain shares issuable upon exercise of outstanding stock options were dilutive
and such dilutive effect was determined under the treasury stock method and reflected in diluted average shares outstanding. For
the nine months ended September 30, 2020 and for the three and nine months ended September 30, 2019, all shares issuable upon
conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not
included in the computation of diluted income (loss) per share.
NOTE
14. SUBSEQUENT EVENTS
In
October 2020, the Company advanced a total of $500,000 to American Rebel Holdings, Inc. (AREB) under two separate secured promissory
notes. The CEO, President and Chairman of AREB is the brother of the Company’s CEO, President and Chairman. Such notes bear
interest at 8%, mature in January 2021 and are secured by substantially all tangible and intangible assets of AREB. The Company
also received warrants to purchase 2,500,000 shares of AREB common stock at an exercise price of $0.10 per share.
*************************************
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This
quarterly report on Form 10-Q of Digital Ally, Inc. (the “Company”, “we”, “us”, or “our”)
contains 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, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,”
“intend,” “estimate,” “may,” “should,” “could,” “will,”
“plan,” “future,” “continue,” and other expressions that are predictions of or indicate future
events and trends and that do not relate to historical matters identify 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 contained in this document, and readers are cautioned not to place
undue reliance on such forward-looking statements.
We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues,
profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document
will, in fact, transpire or prove to be accurate.
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (1) our losses in recent years, including during the nine months ended
September 30, 2020 and the 2019 fiscal year; (2) economic and other risks for our business from the effects of the COVID-19 pandemic,
including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital
as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current
economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology
and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement
agencies, including the timing, amount and restrictions on such funding; (6) our ability to deliver our new product offerings
as scheduled in 2020, such as the Shield™ disinfectant/sanitizers products and ThermoVU™ temperature screening systems,
whether such new products perform as planned or advertised and whether they will help increase our revenues; (7) whether we will
be able to increase the sales, domestically and internationally, for our products in the future; (8) our ability to maintain or
expand our share of the market for our products in the domestic and international markets in which we compete, including increasing
our international revenues; (9) our ability to produce our products in a cost-effective manner; (10) competition from larger,
more established companies with far greater economic and human resources; (11) our ability to attract and retain quality employees;
(12) risks related to dealing with governmental entities as customers; (13) our expenditure of significant resources in anticipation
of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (14) characterization of our market
by new products and rapid technological change; (15) our dependence on sales of our EVO-HD, DVM-800, FirstVU HD and DVM-250 products;
(16) potential that stockholders may lose all or part of their investment if we are unable to compete in our markets and return
to profitability; (17) defects in our products that could impair our ability to sell our products or could result in litigation
and other significant costs; (18) our dependence on key personnel; (19) our reliance on third-party distributors and sales representatives
for part of our marketing capability; (20) our dependence on a few manufacturers and suppliers for components of our products
and our dependence on domestic and foreign manufacturers for certain of our products; (21) our ability to protect technology through
patents and to protect our proprietary technology and information as trade secrets and through other similar means; (22) our ability
to generate more recurring cloud and service revenues; (23) risks related to our license arrangements; (24) our revenues and operating
results may fluctuate unexpectedly from quarter to quarter; (25) sufficient voting power by coalitions of a few of our larger
stockholders, including directors and officers, to make corporate governance decisions that could have significant effect on us
and the other stockholders; (26) sale of substantial amounts of our common stock, par value $0.001 per share (the “Common
Stock”), that may have a depressive effect on the market price of the outstanding shares of our Common Stock; (27) possible
issuance of Common Stock subject to options and warrants that may dilute the interest of stockholders; (28) our nonpayment of
dividends and lack of plans to pay dividends in the future; (29) future sale of a substantial number of shares of our Common Stock
that could depress the trading price of our Common Stock, lower our value and make it more difficult for us to raise capital;
(30) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our
Common Stock; (31) the likely high volatility of our stock price due to a number of factors, including a relatively limited public
float; (32) whether our technology will have a significant impact on our revenues in the long-term; and (33) indemnification
of our officers and directors.
Current
Trends and Recent Developments for the Company
Overview
We
produce digital video imaging, storage products and
disinfectant and related safety products for use in law enforcement, security and commercial
applications. Our current products include, in-car digital video/audio recorders contained in a rear-view mirror for use
in law enforcement and commercial fleets; a system that provides its law enforcement customers with audio/video surveillance from
multiple vantage points and hands-free automatic activation of body-worn cameras and in-car video systems; a miniature digital
video system designed to be worn on an individual’s body; and cloud storage solutions. We have active research and development
programs to adapt our technologies to other applications. We sell our products to law enforcement agencies, private security customers
and organizations and consumer and commercial fleet operators through direct sales domestically and third-party distributors internationally.
We
supply technology-based products utilizing our portable digital video and audio recording capabilities, for the law enforcement
and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio,
computer, mechanical, and multi-media technologies to create unique solutions to address
needs in a variety of other industries and markets, including mass transit, school bus, taxicab and the military. Our products
include the DVM-800 in-car digital video mirror systems for use by law enforcement; the FirstVU and the FirstVU HD which are body-worn
cameras, our patented VuLink product, which integrates our body-worn cameras with our in-car systems by providing hands-free automatic
activation and which we supply to both law enforcement and commercial markets; the DVM-250 and DVM-250 Plus, a commercial line
of digital video mirrors that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVU
and VuLink, which are cloud-based evidence management systems. We introduced the EVO-HD product in late June 2019 and began full-scale
deliveries in the third quarter 2019. It is designed and built on a new and highly advanced technology platform that we expect
to become the platform for a new family of our in-car video solution products for the law enforcement and commercial markets.
We believe that the launch of these new products will help to reinvigorate our in-car and body-worn systems revenues while diversifying
and broadening the market for our product offerings as circumstances normalize in a post-COVID-19 economy, although we can offer
no assurance in this regard. The Company has recently added two new lines of branded products: (1) the ThermoVu™ which is
a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s
temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses
and bacteria and began offering such products to its law enforcement and commercials customers beginning late in the second quarter
of 2020. Total revenues for these two new products for the third quarter 2020 approximated $1.1 million. We are ramping
up our supply chain for both of these new product lines, which are manufactured by third-parties.
We
experienced operating losses for all of our fiscal quarters during 2020 and 2019 and for the first three quarters of 2020. We
generated net income during the three months ended September 30, 2020 primarily due to a gain from the extinguishment of the Proceeds
Investment Obligation. The following is a summary of our recent operating results on a quarterly basis:
|
|
September 30,
2020
|
|
|
June 30,
2020
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
September 30,
2019
|
|
Total revenue
|
|
$
|
3,588,640
|
|
|
$
|
1,732,192
|
|
|
$
|
2,425,745
|
|
|
$
|
2,420,437
|
|
|
$
|
2,923,148
|
|
Gross profit (loss)
|
|
|
1,222,648
|
|
|
|
392,758
|
|
|
|
1,265,028
|
|
|
|
(88,185
|
)
|
|
|
1,188,262
|
|
Gross profit margin %
|
|
|
34.1
|
%
|
|
|
22.7
|
%
|
|
|
52.2
|
%
|
|
|
(3.6
|
)%
|
|
|
40.7
|
%
|
Total selling, general and administrative expenses
|
|
|
3,066,606
|
|
|
|
2,535,912
|
|
|
|
3,192,396
|
|
|
|
3,145,633
|
|
|
|
3,468,709
|
|
Operating income (loss)
|
|
|
(1,843,958
|
)
|
|
|
(2,143,154
|
)
|
|
|
(1,927,368
|
)
|
|
|
(3,233,819
|
)
|
|
|
(2,280,447
|
)
|
Operating income (loss) %
|
|
|
(51.4
|
)%
|
|
|
(123.7
|
)%
|
|
|
(79.5
|
)%
|
|
|
(133.6
|
)%
|
|
|
(78.0
|
)%
|
Net income (loss)
|
|
$
|
527,442
|
|
|
$
|
(497,894
|
)
|
|
$
|
(2,334,110
|
)
|
|
$
|
(3,426,984
|
)
|
|
$
|
(2,985,825
|
)
|
Our
business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and
operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing
of large individual orders; (2) the traction gained by newer products, such as the recently released EVO-HD, the ThermoVU™
and the Shield™ line; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual
increases in operating expenses, such as the timing of trade shows and bonus compensation; (5) the timing of patent infringement
litigation settlements, such as the $6.0 million settlement we obtained from WatchGuard during the second quarter of 2019 and
(5) the impact of patent infringement and other litigation including all related obligations and expenses respecting such litigation
and (6) most recently, the impact of COVID-19 on the economy and our business.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have material current or future effect on our
financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources,
or significant components of revenue or expenses.
For
the Three Months Ended September 30, 2020 and 2019
Results
of Operations
Summarized
immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the
three months ended September 30, 2020 and 2019, represented as a percentage of total revenues for each respective year:
|
|
Three months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
66
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
34
|
%
|
|
|
41
|
%
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
11
|
%
|
|
|
18
|
%
|
Selling, advertising and promotional expense
|
|
|
22
|
%
|
|
|
30
|
%
|
Stock-based compensation expense
|
|
|
14
|
%
|
|
|
14
|
%
|
General and administrative expense
|
|
|
38
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
|
85
|
%
|
|
|
119
|
%
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(51
|
)%
|
|
|
(78
|
)%
|
|
|
|
|
|
|
|
|
|
Change in fair value of proceeds investment agreement
|
|
|
66
|
%
|
|
|
(6
|
)%
|
Change in fair value of secured convertible notes
|
|
|
—
|
%
|
|
|
(14
|
)%
|
Other income and interest expense, net
|
|
|
-
|
%
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit
|
|
|
15
|
%
|
|
|
(102
|
)%
|
Income tax (provision)
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
15
|
%
|
|
|
(102
|
)%
|
|
|
|
|
|
|
|
|
|
Net loss per share information:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
(0.26
|
)
|
Revenues
We
sell our products and services to law enforcement and commercial customers in the following manner:
|
●
|
Sales
to domestic customers are made directly to the end customer (typically a law enforcement agency or a commercial customer)
through our sales force, comprised of our employees. Revenue is recorded when the product is shipped to the end customer.
|
|
●
|
Sales
to international customers are made through independent distributors who purchase products from us at a wholesale price and
sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains
the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory, customer
receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the distributor
consistent with the terms of the distribution agreement.
|
|
|
|
|
●
|
Repair
parts and services for domestic and international customers are generally handled by our inside customer service employees.
Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.
|
We
may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.
The
COVID-19 pandemic had an impact on our revenues in the third quarter 2020 and we expect it to adversely affect our revenues during
the remainder of 2020. The COVID-19 pandemic had a negative impact generally on our legacy products and, in particular our commercial
event recorder hardware (DVM-250 Plus) and in-car hardware for law enforcement (DVM-800) during the quarter. The COVID-19 pandemic
had a positive impact generally on our new Shield disinfectant/sanitizer and ThermoVU product lines.
Revenues
for each of the third quarters of 2020 and 2019 were derived from the following sources:
|
|
Three months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
DVM-800
|
|
|
21
|
%
|
|
|
34
|
%
|
Repair and service
|
|
|
10
|
%
|
|
|
19
|
%
|
ThermoVU
|
|
|
30
|
%
|
|
|
—
|
%
|
Shield disinfectants/sanitizers
|
|
|
1
|
%
|
|
|
—
|
%
|
DVM-250 Plus
|
|
|
1
|
%
|
|
|
14
|
%
|
FirstVu HD
|
|
|
11
|
%
|
|
|
10
|
%
|
Cloud service revenue
|
|
|
6
|
%
|
|
|
7
|
%
|
EVO-HD
|
|
|
6
|
%
|
|
|
4
|
%
|
VuLink
|
|
|
1
|
%
|
|
|
1
|
%
|
Accessories and other revenues
|
|
|
13
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Product
revenues for the three months ended September 30, 2020 and 2019 were $2,958,579 and $2,173,257 respectively, an increase of $785,322
(36%), due to the following factors:
|
●
|
The
Company generated revenues totaling over $1,128,849 during the three months ended September 30, 2020 compared to $-0- for
the same period in 2019 from its new product lines. Late in the second quarter of 2020, the Company launched two product lines
in direct response to the increased safety precautions that organizations and individuals are taking due to the COVID-19 pandemic.
ThermoVu™ was launched as a non-contact temperature-screening instrument that measures temperature through the wrist
and controls entry to facilities when temperature measurements exceed pre-determined parameters. ThermoVu™ has optional
features such as facial recognition to improve facility security by restricting access based on temperature and/or facial
recognition reasons. ThermoVu™ provides an instant pass/fail audible tone with its temperature display and controls
access to facilities based on such results. We believe that it can be widely applied in schools, office buildings, subway
stations, airports and other public venues. The Company also launched its Shield™ disinfectant/sanitizer product lines
to fulfill demand by current customers and others for a disinfectant and sanitizer that is less harsh than many of the traditional
products now widely distributed. The Shield™ Cleanser product line contains a cleanser with no harsh chemicals or fumes.
|
|
|
The
Company began offering the Shield™ line of disinfecting products to its first responder customers including police,
fire and paramedics late in the second quarter of 2020. Commercial customers such as cruise lines, taxi-cab
and para transit may also be good candidates for the products. The Company is considering enhancing the line of disinfectant
products for additional related products including hardware to efficiently and effectively dispense the disinfectants. The
Company is hopeful that its law enforcement and commercial customers will adopt this new product offering to combat the spread
of the COVID-19 virus as well as other bacteria and viruses.
|
|
●
|
In
general, we have experienced pressure on our revenues as our in-car and body-worn systems are facing increased competition
because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined
over the prior period due to price-cutting and competitive actions by our competitors, adverse marketplace effects related
to our patent litigation proceedings and supply chain issues. We introduced our EVO-HD late in the second quarter of 2019
with the goal of enhancing our product line features to meet these competitive challenges and we started to see traction in
late 2019. We expect customers and potential customers to review and test the EVO-HD prior to committing to this new product
platform, all of which has been delayed due to the COVID-19 pandemic.
|
|
●
|
The COVID-19 pandemic delayed the shipment of law enforcement orders in the third quarter 2020 as police forces and governments dealt with its impact. In addition, our salesmen were generally unable to meet with and demonstrate our products to our law enforcement customers because of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our products to potential customers is generally required in order to obtain new customers or upgrade existing customers. Our product sales to law enforcement decreased substantially in the third quarter 2020 compared to 2019 primarily due to the impact of the COVID-19 pandemic.
|
|
|
|
|
●
|
The COVID-19 pandemic impacted the shipment of commercial orders in the third quarter 2020 as cruise lines, taxi cabs, paratransit and other commercial customers dealt with its impact. In addition, our salesmen were generally unable to meet with and demonstrate our products to our commercial customers because of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our products to potential customers is generally required in order to obtain new customers or upgrade existing customers. Our product sales to commercial customers decreased substantially in the third quarter 2020 compared to 2019 primarily due to the impact of the COVID-19 pandemic.
|
|
|
|
|
●
|
Management has been focusing on migrating customers, in particular
commercial customers, from a “hardware sale” to a service fee model. Therefore, we expect a reduction in commercial
hardware sales (principally DVM-250’s and FirstVU’s) as we convert these customers to a service model under which
we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription
agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement
agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay.
This program has gained some traction, resulting in decreased product revenues and increasing our service revenues.
|
Service
and other revenues for the three months ended September 30, 2020 and 2019 were $630,061 and $749,891, respectively, which is
a decrease of $119,930 (16%), due to the following factors:
|
●
|
Cloud
revenues were $217,535 and $194,661 for the three months ended September 30, 2020 and 2019, respectively, an increase of $22,874
(12%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of
our new cloud-based EVO-HD in-car system; however, the fallout from the COVID-19 pandemic and related business shut-downs
adversely affected our commercial customers usage of cloud services and offset increases in cloud revenues.
|
|
|
|
|
●
|
Revenues
from extended warranty services were $322,887 and $379,989 for the three months ended September 30, 2020 and 2019, respectively,
which is a decrease of $57,102 (15%). We have a number of customers that have purchased extended warranty packages,
primarily in our DVM-800 premium service program. However, the fallout from the COVID-19 pandemic and related restrictions
on travel adversely affected our sales of DVM-800 hardware systems resulting in a decrease of 13% in the 2020 period compared
to 2019 which resulted in reduced extended warranty revenues.
|
|
|
|
|
●
|
Installation
service revenues were $51,423 and $129,757 for the three months ended September 30, 2020 and 2019, respectively, which
is a decrease of $78,334 (60%). Installation revenues tend to vary more than other service revenue types and are dependent
on larger customer implementations. The decrease in installation revenues in 2020 compared to 2019 was attributable to the
COVID-19 pandemic lock-down, which prevented our technicians from completing on-site installations during the 2020 period.
|
|
●
|
Software
revenue, non-warranty repair and other revenues were $38,216 and $45,484 for the three months ended September 30, 2020 and
2019, respectively, which is a decrease of $7,268 (16%). Software revenues were $17,358 for the three months ended
September 30, 2020 compared to $22,708 for the three months ended September 30, 2019 and non-warranty repairs were $11,948
for the three months ended September 30, 2020 compared to $19,448 for the three months ended September 30, 2019. Situational
security event fees were $5,400 during the three months ended September 30, 2020 compared to $-0- during the three months
ended September 30, 2019. School rental revenues were $3,510 during the three months ended September 30, 2020 compared to
$-0- during the three months ended September 30, 2019.
|
Total
revenues for the three months ended September 30, 2020 and 2019 were $3,588,640 and $2,923,148 respectively, an increase of $892,143
(23%),due to the reasons noted above.
Cost
of Revenue
Cost
of product revenue on units sold for the three months ended September 30, 2020 and 2019 was $2,177,676 and $1,601,913, respectively,
an increase of $575,763 (36%). The increase in cost of goods sold for products is due to the 36% increase in product revenues.
Cost of goods sold for products as a percentage of product revenues remained at 74% for the three months ended September 30, 2020
and 2019. Management believes that the cost of goods sold for products as a percentage of product revenues would have improved
in the 2020 period compared to 2019 as the Company moved to new and smaller warehouse facilities during June 2020 that should
have resulted in manufacturing efficiencies during the three months ended September 30, 2020. However, our manufacturing was adversely
impacted by the COVID-19 pandemic which caused significant unfavorable overhead and labor variances for production in the third
quarter of 2020, which management decided to expense as a period cost rather than apply to finished good and work in process inventory.
Cost
of service and other revenues for the three months ended September 30, 2020 and 2019 was $188,316 and $132,973, respectively,
an increase of $55,343 (42%). The increase in service and other cost of goods sold is primarily due to an increase in the cost
of service and other revenues sold as a percentage of service and other revenues to 30% for the three months ended September 30,
2020 as compared to 18% for the three months ended September 30, 2019 offset by the 16% decrease in service and other revenues
for the 2020 period compared to the 2019 period. The increase in the cost of service and other revenues sold as a percentage of
service and other revenues is attributable to inefficiencies and additional expenses related to service technicians performing
installation and other software related services due to the effects of the COVID-19 pandemic.
Total
cost of sales as a percentage of revenues was 66% for the three months ended September 30, 2020 compared to 59% for the three
months ended September 30, 2019. We believe our gross margins will improve during the remainder of 2020 if we can increase revenues
(in particular service and other revenues) and control/manage the inefficiencies and additional expenses due to the effects of
the COVID-19 pandemic.
We
had $1,992,510 and $4,144,013 in reserves for obsolete and excess inventories at September 30, 2020 and December 31, 2019, respectively.
Total raw materials and component parts were $2,450,244 and $4,481,611 at September 30, 2020 and December 31, 2019, respectively,
which is a decrease of $2,031,367 (45%). During June 2020 the Company moved to new and smaller warehouse facilities and
during the move sorted through its entire inventory and disposed of all excess and obsolete inventory rather than moving such
distressed products to the new location which contributed to the significant decrease in the cost of raw materials and component
parts. We scrapped older version inventory component parts that were mostly or fully reserved in 2020, which was the primary cause
for the decrease in total raw materials and component parts. Finished goods balances were $5,535,073 and $4,906,956 at September
30, 2020 and December 31, 2019, respectively, an increase of $628,117 (13%) which was attributable to accumulating inventory for
the new Shield and ThermoVU product lines. The decrease in the inventory reserve is primarily due to the scrapping of older version
legacy products that were mostly or fully reserved during the 2020 as a result of moving our warehouse and office location. The
remaining reserve for inventory obsolescence is generally provided for the level of component parts of the older versions of our
printed circuit boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products. We believe that the reserves
are appropriate given our inventory levels at September 30, 2020.
Gross
Profit
Gross
profit for the three months ended September 30, 2020 and 2019 was $1,222,648 and $1,118,262, respectively, an increase of $104,386
(9%). The increase is commensurate with the 23% decrease in total revenues offset by the gross margin percentage decline to 34%
during the three months ended September 30, 2020, from 41% during the three months ended September 30, 2019. Our goal is to improve
our margins to 60% over the longer-term based on the expected margins of our EVO-HD, DVM-800, VuLink, FirstVU HD, ThermoVU™,
Shield™ disinfectants and our cloud evidence storage and management offering, if they gain traction in the marketplace and
subject to a normalizing economy in the wake of the COVID-19 pandemic. In addition, if revenues from these products increase,
we will seek to further improve our margins from them through economies of scale and more efficiently utilizing fixed manufacturing
overhead components. We plan to continue our initiative to more efficiently manage our supply chain through outsourcing production,
quantity purchases and more effective purchasing practices.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $3,066,606 and $3,468,709 for the three months ended September 30, 2020 and 2019, respectively,
which is a decrease of $402,103 (12%). The significant components of selling, general and administrative expenses are as
follows:
|
|
Three months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development expense
|
|
$
|
405,082
|
|
|
$
|
517,010
|
|
Selling, advertising and promotional expense
|
|
|
789,854
|
|
|
|
877,218
|
|
Stock-based compensation expense
|
|
|
498,356
|
|
|
|
405,579
|
|
Professional fees and expense
|
|
|
118,344
|
|
|
|
168,996
|
|
Executive, sales, and administrative staff payroll
|
|
|
506,219
|
|
|
|
735,637
|
|
Other
|
|
|
749,751
|
|
|
|
764,269
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,066,606
|
|
|
$
|
3,468,709
|
|
Research
and development expense. We continue to focus on bringing new products to market, including updates and improvements to
current products. Our research and development expenses totaled $405,082 and $517,010 for the three months ended September 30,
2020 and 2019, respectively, which is a decrease of $111,928 (22%). Most of our engineers are dedicated to
research and development activities for our new products, which are primarily the ThermoVU, Shield, EVO-HD and a non-mirror based
DVM-250 that can be located in multiple places in a vehicle. We expect our research and development activities will decrease in
future quarters as we reduce our engineering headcount to reflect lower activity on our EVO-HD product platform and we outsource
more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage
and will continue to invest in this area on a prudent basis and consistent with our financial resources.
Selling,
advertising and promotional expenses. Selling, advertising and promotional expenses totaled $789,854 and $877,218 for
the three months ended September 30, 2020 and 2019, respectively, which is a decrease of $87,364 (10%). The significant
decrease was primarily attributable to our sponsorship of a NASCAR race in May 2019 and other related sponsorship opportunities
that did not recur in 2020. Salesman salaries and commissions represent the primary components of these costs and were $336,867
and $627,841 for the three months ended September 30, 2020 and 2019, respectively, which is a decrease of $290,974 (46%). The
effective commission rate was 9.4% for the three months ended September 30, 2020 compared to 21.5% for the three months ended
September 30, 2019. We reduced the number of salesmen in our law enforcement and commercial channels beginning in the first and
second quarters of 2020, which had a full effect on the third quarter 2020. In addition, we are utilizing third-party distributors
as a major component of our new Shield and ThermoVU sales channel.
Promotional
and advertising expenses totaled $452,987 during the three months ended September 30, 2020 compared to $249,377 during the three
months ended September 30, 2019, which is an increase of $203,610 (82%). The increase is primarily attributable to our sponsorship
of several events to promote our new Shield and ThermoVU product lines including the Indianapolis 500 race that occurred in August
2020.
Stock-based
compensation expense. Stock based compensation expense totaled $498,356 and $405,579 for the three months ended September
30, 2020 and 2019, respectively, which is an increase of $92,777 (23%). The increase is primarily due to the increased amortization
during the three months ended September 30, 2020 related to the restricted stock granted during 2020 and 2019 to our officers,
directors, and other employees. We relied more on stock-based compensation during 2020 and 2019 as we reduced cash expenses for
liquidity reasons.
Professional
fees and expense. Professional fees and expenses totaled $118,344 and $168,996 for the three months ended September 30,
2020 and 2019, respectively, which is a decrease of $50,652 (30%). The decrease in professional fees is primarily attributable
to legal fees and expenses related to the Axon lawsuit and the resolution of the WatchGuard and PGA lawsuits. We resolved the
PGA lawsuit on April 17, 2019 and the WatchGuard lawsuit was settled on May13, 2019. On June 17, 2019, the U.S. District Court
granted Axon’s Motion for Summary Judgment and accepted Axon’s position that it did not infringe on our U.S. Patent
No. 9,253,452 and dismissed the lawsuit in its entirety. We appealed the U.S. District Court’s ruling and on April 22, 2020,
a three-judge panel of the United States Court of Appeals for the Tenth Circuit denied our appeal and affirmed the U.S. District
Court’s previous decision to grant Axon summary judgment. The Company filed a motion requesting a rehearing in front of
the Court of Appeals which motion was also denied on June 9, 2020.
The
Company had until November 7, 2020 to decide whether it would appeal the U.S. District Court’s and Court of Appeals’
decisions to the United States Supreme Court. Our spending on legal fees on the Axon case has slowed during 2020 as we waited
for the appeal to be heard. The Company has decided not to appeal the decisions to the United States Supreme Court and to abandon
the lawsuit against Axon which impacts the trend of legal expenses for the balance of 2020.
Executive,
sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled $506,219 and
$735,637 for the three months ended September 30, 2020 and 2019, respectively, which is a decrease of $229,418 (31%). The primary
reason for the decrease in executive, sales and administrative staff payroll was a reduction in our technical support staffing
in response to the COVID-19 pandemic and the Company expects such reductions to continue to reduce related staff expenses during
the balance of 2020. The COVID-19 pandemic has significantly impacted the Company’s new event security business channel
in the third quarter of 2020 as many sporting venues were closed including those served by these service technicians. In addition,
several members of the Company’s management accepted reductions in their cash compensation in 2020 to help the Company’s
liquidity position in light of the COVID-19 pandemic.
Other.
Other selling, general and administrative expenses totaled $749,751 and $764,269 for the three months ended September 30, 2020
and 2019, respectively, which is a decrease of $14,518 (2%). The decrease in other expenses during the three months ended September
30, 2020 compared to the same period in 2019 is primarily attributable to lower contract employee expenses and travel costs resulting
from the COVID-19 pandemic offset by large increases in the Company’s insurance costs.
Operating
Loss
For
the reasons stated above, our operating loss was $1,843,958 and our operating income was $2,280,447 for the three months ended
September 30, 2020 and 2019, respectively, which is an improvement of $436,489 (19%).
Interest
Income
Interest
income increased to $11,340 for the three months ended September 30, 2020 from $6,667 for the three months ended September 30,
2019, which reflected our higher cash and cash equivalent levels in the third quarter 2020 compared to the third quarter of 2019.
The Company raised significant amounts of cash through the closing of two underwritten public offerings and the exercise of outstanding
common stock purchase warrants during 2020, which will generate interest income in future quarters.
Interest
Expense
We
incurred interest expense of $4,940 and $37,037 during the three months ended September 30, 2020 and 2019, respectively.
On
May 4, 2020, the Company entered into a promissory note providing for a PPP Loan of $1,418,900. The PPP Loan has a two-year
term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for nine months after
the date of disbursement and total $79,850.57 per month thereafter. On May 12, 2020 the Company received $150,000 in additional
loan funding under the EIDL program administered by the SBA. Under the terms of the EIDL promissory note, interest accrues on
the outstanding principal at the rate of 3.75% per annum. The term of the EIDL promissory note is thirty years and monthly principal
and interest payments are deferred for twelve months after the date of disbursement and total $731.00 per month thereafter.
Secured
Convertible Notes Issuance Expenses
We
elected to account for and record our $2.778 million principal amount of secured convertible notes on August 5, 2019 on a fair
value basis. Accordingly, we were required to expense the related issuance costs to other expense in the condensed consolidated
statements of operations. Such costs totaled $89,148 for the three months ended September 30, 2019. The issuance costs primarily
included related legal and accounting fees. No similar debt issuances occurred during the three months ended September 30, 2020.
Change
in Fair Value of Proceeds Investment Agreement
We
recorded a gain (loss) representing the change in fair value of proceeds investment agreement of $2,365,000 and $(177,000) during
the three months ended September 30, 2020 and 2019, respectively.
We
elected to account for the PIA on its fair value basis with the change in value recorded as a gain or loss in the accompanying
condensed consolidated statements of operations. Therefore, we determined the fair value of the 2018 PIA as of September 30,
2020 and December 31, 2020 to be $-0- and $6,500,000, respectively. The change in fair value from July 1, 2020 to September 30,
2020 was $2,365,000, which was recognized as a gain in the Condensed Consolidated Statement of Operations for the three months
ended September 30, 2020. The change in fair value from July 1, 2019 to September 30, 2019 was $(177,000), which was recognized
as a loss in the Condensed Consolidated Statement of Operations for the three months ended September 30, 2019.
On
July 20, 2020, the Company and BKI executed a Termination Agreement and Mutual Release (the “Termination Agreement”).
Under the terms of the Termination Agreement, the parties agreed to terminate the PIA and to release each other from any further
liability under the PIA obligation.
Under
the terms of the Termination Agreement, upon payment of $1,250,000 by the Company to BKI, both parties agreed to terminate the
PIA and to release each other from any further liability thereunder. Such $1,250,000 payment was made on July 22, 2020. In addition
to the $1,250,000 payment, the Company further agreed to pay BKI the following: (a) a contingent payment in the amount of $2,750,000
following the closing of an asset purchase, membership interest purchase, or similar transaction between the Company and a specified
third-party (the “Purchase Transaction”) and (b) any and all future proceeds received from Watchguard and its successors
and assigns by the Company for WatchGuard’s use of U.S. Patent Nos. 8,781,292 and 9,253,452. For clarity, the Company and
BKI further agreed that the payment of the contingent payment would only be due and payable upon the closing of the specified
Purchase Transaction and the relevant contingent payment portion of the Termination Agreement, and any obligations stemming therefrom,
would automatically terminate if the specified Purchase Transaction is abandoned prior to its closing, including its failure to
close within three years from the date of the Termination Agreement.
The
parties abandoned the Purchase Transaction during the quarter ended September 30, 2020 and, therefore the contingent payment obligation
automatically terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does
not anticipate any future recoveries from Watchguard and its successors and assigns relative to WatchGuard’s use of U.S.
Patent Nos. 8,781,292 and 9,253,452. As a result, the PIA obligation was extinguished upon the payment of the $1,250,000 required
under the Termination Agreement.
Change
in Fair Value of Secured Convertible Notes
We
recorded a gain (loss) representing the change in fair value of secured convertible notes of $-0- and $(408,860) during the three
months ended September 30, 2020 and 2019, respectively.
We
elected to account for the secured convertible notes that were issued on April 17, 2020 on their fair value basis. Therefore,
we determined the fair value of the secured convertible notes as of their issuance date of April 17, 2020 and through June 12,
2020, when they were paid in full. The change in fair value from their issuance date of April 17, 2020 to their pay-off date was
$887,807, which was recognized as a charge in the Condensed Consolidated Statement of Operations for the three months ended September
30, 2020.
Income
(Loss) before Income Tax Benefit
As
a result of the above, we reported income before income tax benefit of $527,442 and a loss before income tax benefit of $2,985,825
for the three months ended September 30, 2020 and 2019, respectively, an improvement of $3,513,267 (118%).
Income
Tax Expense (Benefit)
We
did not record an income tax expense (benefit) related to our income for the three months ended September 30, 2020 due to our
overall net operating loss carryforwards available and the valuation allowance on deferred tax assets. We continue to maintain
a full valuation reserve on our net deferred tax assets as of September 30, 2020. We had approximately $66,925,000 of net operating
loss carryforwards and $1,795,000 of research and development tax credit carryforwards as determined on December 31, 2019 available
to offset future net taxable income.
Net
Income (Loss)
As
a result of the above, we reported net income of $527,442 and a net loss of $2,985,825 for the three months ended September 30,
2020 and 2019, respectively, an improvement of $3,513,267 (118%).
Basic
and Diluted Income (Loss) per Share
The
basic and diluted income (loss) per share was $0.02 and ($0.26) for the three months ended September 30, 2020 and 2019, respectively,
for the reasons previously noted. For the three months ended September 30, 2020, certain shares issuable upon exercise of outstanding
stock options were dilutive and such dilutive effect was determined under the treasury stock method and reflected in diluted average
shares outstanding. For the three months ended September 30, 2019, all shares issuable upon conversion of convertible debt and
the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted
income (loss) per share.
For
the Nine months ended September 30, 2020 and 2019
Results
of Operations
Summarized
immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the
nine months ended September 30, 2020 and 2019, represented as a percentage of total revenues for each respective year:
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
63
|
%
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37
|
%
|
|
|
41
|
%
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
16
|
%
|
|
|
19
|
%
|
Selling, advertising and promotional expense
|
|
|
25
|
%
|
|
|
36
|
%
|
Stock-based compensation expense
|
|
|
15
|
%
|
|
|
21
|
%
|
General and administrative expense
|
|
|
57
|
%
|
|
|
75
|
%
|
Patent litigation settlement
|
|
|
—
|
%
|
|
|
(75
|
)%
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
|
113
|
%
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(76
|
)%
|
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
Change in fair value of proceeds investment agreement
|
|
|
68
|
%
|
|
|
(41
|
)%
|
Change in fair value of secured convertible notes
|
|
|
(17
|
)%
|
|
|
(5
|
)%
|
Other income and interest expense, net
|
|
|
(5
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit
|
|
|
(30
|
)%
|
|
|
(82
|
)%
|
Income tax (provision)
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(30
|
)%
|
|
|
(82
|
)%
|
|
|
|
|
|
|
|
|
|
Net loss per share information:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.58
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.58
|
)
|
Revenues
We
sell our products and services to law enforcement and commercial customers as noted earlier in this quarterly report on Form 10-Q.
We
may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.
Revenues
for each of the nine months ended September 30, 2020 and 2019 were derived from the following sources:
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
DVM-800
|
|
|
25
|
%
|
|
|
37
|
%
|
Repair and service
|
|
|
14
|
%
|
|
|
18
|
%
|
ThermoVU
|
|
|
14
|
%
|
|
|
—
|
%
|
Shield disinfectants/sanitizers
|
|
|
2
|
%
|
|
|
—
|
%
|
DVM-250 Plus
|
|
|
3
|
%
|
|
|
11
|
%
|
FirstVu HD
|
|
|
12
|
%
|
|
|
13
|
%
|
Cloud service revenue
|
|
|
9
|
%
|
|
|
7
|
%
|
EVO-HD
|
|
|
7
|
%
|
|
|
2
|
%
|
VuLink
|
|
|
2
|
%
|
|
|
2
|
%
|
Accessories and other revenues
|
|
|
12
|
%
|
|
|
10
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The
COVID-19 pandemic had a negative impact on our revenues during the nine months ended September 30, 2020 and we expect it to adversely
affect our revenues during the remainder of 2020.
Product
revenues for the nine months ended September 30, 2020 and 2019 were $5,778,695 and $6,039,445 respectively, which is a decrease
of $260,750 (4%), due to the following factors:
|
●
|
The
Company generated revenues totaling over $1,182,513 during the nine months ended September
30, 2020 compared to $-0- for the same period in 2019 from its new product lines. Late
in the second quarter of 2020, the Company launched two product lines in direct response
to the increased safety precautions that organizations and individuals are taking due
to the COVID-19 pandemic. ThermoVu™ was launched as a non-contact temperature-screening
instrument that measures temperature through the wrist and controls entry to facilities
when temperature measurements exceed pre-determined parameters. ThermoVu™ has optional
features such as facial recognition to improve facility security by restricting access
based on temperature and/or facial recognition reasons. ThermoVu™ provides an instant
pass/fail audible tone with its temperature display and controls access to facilities
based on such results. We believe that it can be widely applied in schools, office buildings,
subway stations, airports and other public venues. The Company also launched its Shield™
disinfectant/sanitizer product lines to fulfill demand by current customers and others
for a disinfectant and sanitizer that is less harsh than many of the traditional products
now widely distributed. The Shield™ Cleanser product line contains a cleanser with
no harsh chemicals or fumes.
The
Company began offering the Shield™ line of disinfecting products to its first responder customers including police,
fire and paramedics late in the second quarter of 2020. Commercial customers such as cruise lines, taxi-cab
and para transit may also be good candidates for the products. The Company is considering enhancing the line of disinfectant
products for additional related products including hardware to efficiently and effectively dispense the disinfectants.
The Company is hopeful that its law enforcement and commercial customers will adopt this new product offering to combat
the spread of the COVID-19 virus as well as other bacteria and viruses.
|
|
|
|
|
●
|
In
general, we have experienced pressure on our revenues as our in-car and body-worn systems are facing increased competition
because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined
over the prior period due to price-cutting and competitive actions by our competitors, adverse marketplace effects related
to our patent litigation proceedings and supply chain issues. We introduced our EVO-HD late in second quarter of 2019 with
the goal of enhancing our product line features to meet these competitive challenges and we started to see traction in late
2019. We expect customers and potential customers to review and test the EVO-HD prior to committing to this new product platform,
all of which has been delayed due to the COVID-19 pandemic.
|
|
|
|
|
●
|
Our
salesmen were generally unable to meet with and demonstrate our products to our law enforcement and commercial customers because
of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our
products to potential customers is generally required in order to obtain new customers or upgrade existing customers. Our
product sales decreased substantially in the first nine months of 2020 compared to the 2019 period primarily due to the impact
of the COVID-19 pandemic.
|
|
|
|
|
●
|
In
addition, the COVID-19 pandemic delayed the shipment of orders late in the first quarter of 2020 as police forces and governments
dealt with its impact. Specifically, we were unable to ship the initial purchase orders under a substantial contract awarded
by a foreign country for the expected deployment of body cameras to its entire national police force. The contract was expected
to include up to 5,000 body cameras with our web-based software infrastructure service over a three-year period. The contract
was suspended pending the government’s decision to freeze the planned deployment until such time as the pandemic is
contained within its population. The initial purchase order was expected to ship during the first quarter 2020 and we believed
that it would have made a substantial impact on our product revenues for such quarter. At this point, we are unable to forecast
if and when this major project will be restarted or how it may be modified as a result of the pandemic. Upon completion, the
original contract would have been the largest body camera deployment in our history and the largest contract for recurring
service revenues for our web-based software related to the Company’s body cameras.
|
|
●
|
Management
has been focusing on migrating customers, and in particular commercial customers from a “hardware sale” to a service
fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s and FirstVU’s)
as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service
fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment
during the second quarter of 2020 which allowed law enforcement agencies to pay a monthly service fee to obtain body
worn cameras without incurring a significant upfront capital outlay. This program has gained some traction which is resulting
in decreased product revenues and increasing our service revenues.
|
Service
and other revenues for the nine months ended September 30, 2020 and 2019 were $1,967,881 and $1,981,482, respectively, which is
a decrease of $13,601 (1%), due to the following factors:
|
●
|
Cloud
revenues were $725,667 and $543,999 for the nine months ended September 30, 2020 and 2019, respectively, which is an increase
of $181,668 (33%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to
the deployment of our new cloud-based EVO-HD in-car system; however, the fallout from the COVID-19 pandemic and related business
shut-downs adversely affected our commercial customers usage of cloud services and offset increases in cloud revenues.
|
|
|
|
|
●
|
Revenues
from extended warranty services were $990,961 and $1,050,677 for the nine months ended September 30, 2020 and 2019, respectively,
which is a decrease of $59,716 (6%). We have a number of customers that have purchased extended warranty packages,
primarily in our DVM-800 premium service program. However the fallout from the COVID-19 pandemic and related restrictions
on travel adversely affected our sales of DVM-800 hardware systems resulting in a decrease of 12% in the 2020 period compared
to the 2019 period which resulted in reduced extended warranty revenues.
|
|
|
|
|
●
|
Installation
service revenues were $137,856 and $212,585 for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $74,729 (35%). Installation revenues tend to vary more than other service revenue types and are dependent
on larger customer implementations. The decrease in installation revenues in 2020 compared to 2019 was attributable to the
COVID-19 pandemic lock-down, which prevented our technicians from completing on-site installations during the 2020 period.
|
|
|
|
|
●
|
Software
revenue, non-warranty repair and other revenues were $113,397 and $174,221 for the nine months ended September 30, 2020 and
2019, respectively, which is a decrease of $60,824 (35%). Software revenues were $46,209 during the nine months ended
September 30, 2020 compared to $81,672 in the 2019 period and non-warranty repairs were $39,437 during the nine months ended
September 30, 2020 compared to $82,582 in the 2019 period. Situational security event fees were $16,200 during the nine months
ended September 30, 2020 compared to $-0- in the 2019 period. School rental revenues were $11,551 during the nine months ended
September 30, 2020 compared to $9,967 during the nine months ended September 30, 2019.
|
Total
revenues for the nine months ended September 30, 2020 and 2019 were $7,746,576 and $8,020,927, respectively, which is a decrease
of $274,351 (3%), due to the reasons noted above.
Cost
of Revenue
Cost
of product revenue on units sold for the nine months ended September 30, 2020 and 2019 was $4,332,450 and $4,333,812, respectively,
which is a decrease of $1,362 (0%). The decrease in cost of goods sold for products is primarily due to the 4% decrease in product
revenues coupled with an increase in the cost of goods sold for products as a percentage of product revenues to 75% for the nine
months ended September 30, 2020 compared to 72% for the nine months ended September 30, 2019. During June 2020, the Company moved
to new and smaller warehouse facilities and during the move sorted through its entire inventory and disposed of all excess and
obsolete inventory rather than moving such distressed products to the new location, which contributed to the increase in the cost
of goods sold for products as a percentage of product revenues to 75% for the nine months ended September 30, 2020. In addition,
the move to a new facility coupled with the manufacturing slow down caused by the COVID-19 pandemic caused significant unfavorable
overhead and labor variances for production in the first half of 2020, which management decided to expense as a period cost rather
than apply to finished good and work in process inventory.
Cost
of service and other revenues for the nine months ended September 30, 2020 and 2019 was $533,690 and $366,301, respectively, which
is an increase of $167,389 (46%). The increase in service and other cost of goods sold is primarily due to an increase in the
cost of service and other revenues sold as a percentage of service and other revenues to 27% for the nine months ended September
30, 2020 compared to 18% for the nine months ended September 30, 2019. The increase in the cost of service and other revenues
sold as a percentage of service and other revenues is attributable to inefficiencies and additional expenses related to service
technicians performing installation and other software related services due to the effects of the COVID-19 pandemic.
Total
cost of sales as a percentage of revenues was 63% for the nine months ended September 30, 2020 compared to 59% for the nine months
ended September 30, 2019. We believe our gross margins will improve during the remainder of 2020 if we can increase revenues (in
particular service and other revenues) and control/manage the inefficiencies and additional expenses due to the effects of the
COVID-19 pandemic.
We
had $1,992,510 and $4,144,013 in reserves for obsolete and excess inventories at September 30, 2020 and December 31, 2019, respectively.
Total raw materials and component parts were $2,450,244 and $4,481,611 at September 30, 2020 and December 31, 2019, respectively,
which is a decrease of $2,031,367 (45%). During June 2020 the Company moved to new and smaller warehouse facilities and during
the move sorted through its entire inventory and disposed of all excess and obsolete inventory rather than moving such distressed
products to the new location which contributed to the significant decrease in the cost of raw materials and component parts. We
scrapped older version inventory component parts that were mostly or fully reserved in 2020, which was the primary cause for the
decrease in total raw materials and component parts. Finished goods balances were $5,535,073 and $4,906,956 at September 30, 2020
and December 31, 2019, respectively, which is an increase of $628,117 (13%) that was attributable to accumulating inventory for
the new Shield and ThermoVU product lines. The decrease in the inventory reserve is primarily due to the scrapping of older version
legacy products that were mostly or fully reserved during the 2020 as a result of moving our warehouse and office location. The
remaining reserve for inventory obsolescence is generally provided for the level of component parts of the older versions of our
printed circuit boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products. We believe that the reserves
are appropriate given our inventory levels at September 30, 2020.
Gross
Profit
Gross
profit for the nine months ended September 30, 2020 and 2019 was $2,880,436 and $3,320,814, respectively, which is a decrease
of $440,378 (13%). The decrease is commensurate with the 3% decrease in total revenues and the gross margin percentage decrease
to 37% during the nine months ended September 30, 2020, from 41% during the nine months ended September 30, 2019. Our goal is
to improve our margins to 60% over the longer-term based on the expected margins of our EVO-HD, DVM-800, VuLink and FirstVU HD
ThermoVu products, Shield disinfectant/sanitizer products and our cloud evidence storage and management offering, if they gain
traction in the marketplace and subject to a normalizing economy in the wake of the COVID-19 pandemic. In addition, if revenues
from these products increase, we will seek to further improve our margins from them through economies of scale and more efficiently
utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficiently manage our supply chain
through outsourcing production, quantity purchases and more effective purchasing practices.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $8,794,912 and $6,119,777 for the nine months ended September 30, 2020 and 2019, respectively,
which is an increase of $2,675,135 (44%). The significant increase was attributable to the patent litigation settlement of $6.0
million that we received in 2019 that did not recur in 2020. Exclusive of the patent litigation settlement, overall selling, general
and administrative expenses would have decreased by $3,324,865 (27%) for the nine months ended September 30, 2020 compared to
the same period in 2019. The significant components of selling, general and administrative expenses are as follows:
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development expense
|
|
$
|
1,250,528
|
|
|
$
|
1,562,086
|
|
Selling, advertising and promotional expense
|
|
|
1,958,884
|
|
|
|
2,871,154
|
|
Stock-based compensation expense
|
|
|
1,186,771
|
|
|
|
1,715,972
|
|
Professional fees and expense
|
|
|
675,662
|
|
|
|
1,338,447
|
|
Executive, sales, and administrative staff payroll
|
|
|
1,737,869
|
|
|
|
2,440,925
|
|
Other
|
|
|
1,985,198
|
|
|
|
2,191,193
|
|
Patent litigation proceeds
|
|
|
—
|
|
|
|
(6,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,794,912
|
|
|
$
|
6,119,777
|
|
Research
and development expense. We continue to focus on bringing new products to market, including updates and improvements to
current products. Our research and development expenses totaled $1,250,528 and $1,562,086 for the nine months ended September
30, 2020 and 2019, respectively, which is a decrease of $311,558 (20%). Most of our engineers are dedicated to research and development
activities for our new products which primarily include the ThermoVU, Shield, EVO-HD and a non-mirror based DVM-250 that can be
located in multiple places in a vehicle. We expect our research and development activities will decrease in future quarters as
we reduce our engineering headcount to reflect lower activity on our EVO-HD product platform and we outsource more development
projects. We consider our research and development capabilities and new product focus to be a competitive advantage and will continue
to invest in this area on a prudent basis and consistent with our financial resources.
Selling,
advertising and promotional expenses. Selling, advertising and promotional expense totaled $1,958,884 and $2,871,154 for
the nine months ended September 30, 2020 and 2019, respectively, which is a decrease of $912,270 (32%). Salesman salaries and
commissions represent the primary components of these costs and were $1,289,699 and $1,986,970 for the nine months ended September
30, 2020 and 2019, respectively, which is a decrease of $697,271 (35%). The effective commission rate was 16.6% for the nine months
ended September 30, 2020 compared to 24.8% for the nine months ended September 30, 2019. We reduced the number of salesmen in
our law enforcement and commercial channels beginning in the first and second quarter of 2020, which had a full effect on the
third quarter of 2020. In addition, we are utilizing third-party distributors as a major component of our new Shield and ThermoVU
sales channel.
Promotional
and advertising expenses totaled $669,185 during the nine months ended September 30, 2020 compared to $884,184 during the nine
months ended September 30, 2019, which is a decrease of $214,999 (24%). The decrease is primarily attributable to our sponsorship
of the 2019 NASCAR race in Kansas City and the suspension of the 2020 NASCAR season in 2020 and a reduction in attendance at trade
shows as a result of the COVID-19 pandemic.
Stock-based
compensation expense. Stock based compensation expense totaled $1,186,771 and $1,715,972 for the nine months ended September
30, 2020 and 2019, respectively, which is a decrease of $529,201 (31%). The decrease is primarily due to the decreased amortization
during the nine months ended September 30, 2020 related to the restricted stock granted at a lower market price per share during
2020 and 2019 to our officers, directors, and other employees. We relied more on stock-based compensation during 2020 and 2019
as we attempted to reduce cash expenses for liquidity reasons.
Professional
fees and expense. Professional fees and expenses totaled $675,662 and $1,338,447 for the nine months ended September 30,
2020 and 2019, respectively, which is a decrease of $662,785 (50%). The decrease in professional fees is primarily attributable
to legal fees and expenses related to the Axon lawsuit and the resolution of the WatchGuard and PGA lawsuits. We resolved the
PGA lawsuit on April 17, 2019 and the WatchGuard lawsuit was settled on May13, 2019. On June 17, 2019, the U.S. District Court
granted Axon’s motion for summary judgment and accepted Axon’s position that it did not infringe on our ‘452
Patent and dismissed the lawsuit in its entirety. We appealed the U.S District Court’s ruling and on April 22, 2020, a three-judge
panel of the United States Court of Appeals denied our appeal and affirmed the U.S. District Court’s previous decision to
grant Axon summary judgment. The Company filed a motion requesting a rehearing in front of the Court of Appeals which was denied
on June 9, 2020.
The
Company had until November 7, 2020 to decide whether it would appeal the U.S. District Court’s and Court of Appeals’
decisions to the United States Supreme Court. Our spending on legal fees on the Axon case has slowed during 2020 as we waited
for the appeal to be heard. The Company has decided not to appeal the decisions to the United States Supreme Court and to abandon
the lawsuit against Axon, which impacts the trend of legal expenses for the balance of 2020.
Executive,
sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled $1,737,869
and $2,440,925 for the nine months ended September 30, 2020 and 2019, respectively, which is a decrease of $703,056 (29%). The
primary reason for the decrease in executive, sales and administrative staff payroll was a reduction in our technical support
staffing in response to the COVID-19 pandemic and the Company expects such reductions to continue to reduce related staff expenses
during the balance of 2020. The COVID-19 pandemic has significantly impacted the Company’s new event security business channel
in 2020 as many sporting venues were closed including those served by these service technicians. In addition, several members
of Company management accepted reductions in their cash compensation in 2020 to help the Company’s liquidity position in
light of the COVID-19 pandemic.
Other.
Other selling, general and administrative expenses totaled $1,985,198 and $2,191,193 for the nine months ended September 30,
2020 and 2019, respectively, which is a decrease of $205,995 (9%). The decrease in other expenses during the nine months ended
September 30, 2020 compared to the same 2019 period is primarily attributable to lower contract employee expenses and travel
costs, a result of the COVID-19 pandemic offset by large increases in the Company’s insurance costs.
Patent
litigation settlement. The income attributable to our patent litigation settlement was $-0- and $6,000,000 for the nine
months ended September 30, 2020 and 2019, respectively. On May 13, 2019 we reached a resolution of the pending patent infringement
litigation with WatchGuard and executed a settlement agreement that resulted in the dismissal of this case. As part of such agreement,
we received a one-time $6,000,000 payment and granted WatchGuard a perpetual covenant to not sue WatchGuard if its products incorporate
agreed-upon modified recording functionality. Additionally, we granted WatchGuard a license to the ‘292 Patent and ‘452
Patent through December 31, 2023. As part of the settlement, we and WatchGuard agreed that WatchGuard was making no admission
that it had infringed any of our patents. See Note 9 — “Commitments and Contingencies” to the September
30, 2020 Financial Statements, for the details respecting the settlement.
Operating
Loss
For
the reasons stated above, our operating loss was $5,914,476 and $2,798,963 for the nine months ended September 30, 2020 and 2019,
respectively, which is a deterioration of $3,115,513 (111%).
Interest
Income
Interest
income increased to $33,208 for the nine months ended September 30, 2020 from $30,279 in the 2019 period, which reflected our
higher cash and cash equivalent levels during the nine months ended September 30, 2020 compared to the comparable period in 2019.
The Company raised significant amounts of cash through the closing of two underwritten public offerings and the exercise of outstanding
common stock purchase warrants during 2020, which will continue to generate interest income in future quarters.
Interest
Expense
We
incurred interest expense of $338,136 and $37,037 during the nine months ended September 30, 2020 and 2019, respectively.
The
Company issued an aggregate of $1.667 million principal amount of secured convertible notes on April 20, 2020 which bore interest
at 8% per annum on the outstanding principal balance. During the nine months ended September 30, 2020, the holders of the secured
convertible notes exercised their right to convert principal balances aggregating $1.666 million into equity. In addition, the
Company exercised its right to prepay in cash the remaining outstanding principal balance aggregating $1,000. Such secured convertible
notes are no longer outstanding as of September 30, 2020, as a result of these conversions and prepayments.
The
Company issued an aggregate of $2.778 million principal amount of secured convertible notes on August 5, 2019, which bore interest
at 8% per annum on the outstanding principal balance. During the nine months ended September 30, 2020, the holders of the secured
convertible notes exercised their right to convert principal balances aggregating $1,259,074 into equity. In addition, the Company
paid regular monthly principal payments totaling $172,839 during the nine months ended September 30, 2020, and on March 3, 2020,
the Company exercised its right to prepay in cash the remaining outstanding principal balance aggregating $574,341. Such secured
convertible notes are no longer outstanding as of September 30, 2020, as a result of these conversions and prepayments.
The
Company issued an unsecured promissory note in an aggregate principal amount of $300,000 on December 23, 2019, which bore interest
at 8% per annum on the outstanding principal balance and which has been repaid in full as of September 30, 2020. In addition,
during 2020 we issued an unsecured note payable with a related party in the principal amount of $319,000, which bore interest
at 6% per annum and which has been repaid in full as of September 30, 2020, and we issued an aggregate of $100,000 principal amount
of unsecured promissory note payable, which bore interest at 8% per annum on the outstanding principal balance which remained
outstanding until it was paid in full as of September 30, 2020.
On
May 4, 2020, the Company entered into a promissory note providing for a PPP Loan of $1,418,900. The PPP Loan has a two-year
term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for nine months after
the date of disbursement and total $79,850.57 per month thereafter. On May 12, 2020 the Company received $150,000 in additional
loan funding under the EIDL program administered by the SBA. Under the terms of the EIDL promissory note, interest accrues on
the outstanding principal at the rate of 3.75% per annum. The term of the EIDL promissory note is thirty years and monthly principal
and interest payments are deferred for twelve months after the date of disbursement and total $731.00 per month thereafter.
Secured
Convertible Notes Issuance Expenses
We
incurred secured convertible note issuance expenses of $34,906 and $89,148 during the nine months ended September 30, 2020 and
2019, respectively.
We
elected to account for and record our $1.667 million principal amount of the 2020 Convertible Notes issued in April 2020 on a
fair value basis. Accordingly, we were required to expense the related issuance costs to other expense in the condensed consolidated
statements of operations. Such costs totaled $34,906 for the nine months ended September 30, 2020. The issuance costs primarily
included related legal and accounting fees.
We
elected to account for and record our $2.778 million principal amount of secured convertible notes on August 5, 2019 on a fair
value basis. Accordingly, we were required to expense the related issuance costs to other expense in the condensed consolidated
statements of operations. Such costs totaled $89,148 for the nine months ended September 30, 2019. The issuance costs primarily
included related legal and accounting fees.
Change
in Fair Value of Proceeds Investment Agreement
We
recorded a gain (loss) representing the change in fair value of proceeds investment agreement of $5,250,000 and $(3,275,000) during
the nine months ended September 30, 2020 and 2019, respectively.
We
elected to account for the PIA on its fair value basis with the change in value recorded as a gain or loss in the accompanying
condensed consolidated statements of operations. Therefore, we determined the fair value of the 2018 PIA as of September 30,
2020 and December 31, 2020 to be $-0- and $6,500,000, respectively. The change in fair value from December 31, 2020 to September
30, 2020 was $5,250,000, which was recognized as a gain in the Condensed Consolidated Statement of Operations for the nine months
ended September 30, 2020. The change in fair value from December 31, 2018 to September 30, 2019 was $(3,275,000), which was recognized
as a loss in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.
On
July 20, 2020, the Company and BKI executed a Termination Agreement and Mutual Release (the “Termination Agreement”).
Under the terms of the Termination Agreement the parties agreed to terminate the PIA and to release each other from any further
liability under the PIA obligation.
Under
the terms of the Termination Agreement, upon payment of $1,250,000 by the Company to BKI both parties agreed to terminate the
PIA and to release each other from any further liability thereunder. Such $1,250,000 payment was made on July 22, 2020. In addition
to the $1,250,000 payment, the Company further agreed to pay BKI the following: (a) a contingent payment in the amount of $2,750,000
following the closing of an asset purchase, membership interest purchase, or similar transaction between the Company and a specified
third-party (the “Purchase Transaction”) and (b) any and all future proceeds received from Watchguard and its successors
and assigns by the Company for WatchGuard’s use of U.S. Patent Nos. 8,781,292 and 9,253,452. For clarity, the Company and
BKI further agreed that the payment of the contingent payment would only be due and payable upon the closing of the specified
Purchase Transaction and the relevant contingent payment portion of the Termination Agreement, and any obligations stemming therefrom,
would automatically terminate if the specified Purchase Transaction is abandoned prior to its closing, including its failure to
close within three years from the date of the Termination Agreement.
The
parties abandoned the Purchase Transaction during the quarter ended September 30, 2020 and, therefore the contingent payment obligation
automatically terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does
not anticipate any future recoveries from Watchguard and its successors and assigns relative to WatchGuard’s use of U.S.
Patent Nos. 8,781,292 and 9,253,452. As a result the PIA obligation was extinguished upon the payment of the $1,250,000 required
under the Termination Agreement.
Change
in Fair Value of Secured Convertible Notes
We
recorded a gain (loss) representing the change in fair value of secured convertible notes of $(1,300,252) and $(408,860) during
the nine months ended September 30, 2020 and 2019, respectively.
We
elected to account for the secured convertible notes that were issued on April 17, 2020 on their fair value basis. Therefore,
we determined the fair value of the secured convertible notes as of their issuance date of April 17, 2020 and through June 12,
2020, when they were paid in full. The change in fair value from their issuance date of April 17, 2020 to their pay-off date was
$887,807, which was recognized as a charge in the Condensed Consolidated Statement of Operations for the nine months ended September
30, 2020.
We
elected to account for the secured convertible notes that were issued in August 2019 on their fair value basis. Therefore, we
determined the fair value of the secured convertible notes as of their issuance date on December 31, 2019 until they were paid
in full on March 3, 2020. The change in fair value from December 31, 2019 to their pay-off date was $412,445, which was recognized
as a charge in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020. The change in
fair value from the issuance date of August 5, 2019 and September 30, 2019 was $408,860, which was recognized as a charge in the
Condensed Consolidated Statement of Operations at September 30, 2019.
Loss
before Income Tax Benefit
As
a result of the above, we reported a loss before income tax benefit of $2,304,562 and $6,578,729 for the nine months ended September
30, 2020 and 2019, respectively, which is an improvement of $4,274,167 (65%).
Income
Tax Benefit
We
did not record an income tax benefit related to our losses for the nine months ended September 30, 2020, due to our overall net
operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred
tax assets as of September 30, 2020. We had approximately $66,925,000 of net operating loss carryforwards and $1,795,000 of research
and development tax credit carryforwards as determined on December 31, 2019 available to offset future net taxable income.
Net
Loss
As
a result of the above, we reported net losses of $2,304,562 and $6,578,729 for the nine months ended September 30, 2020 and 2019,
respectively, which is an improvement of $4,274,167 (65%).
Basic
and Diluted Loss per Share
The
basic and diluted loss per share was ($0.12) and ($0.58) for the nine months ended September 30, 2020 and 2019, respectively,
for the reasons previously noted. All outstanding stock options, warrants and convertible securities were considered antidilutive
and therefore excluded from the calculation of diluted loss per share for the nine months ended September 30, 2020 and 2019 because
of the net loss reported for such periods.
Liquidity
and Capital Resources and Going Concern
Overall:
Management’s
Liquidity Plan and Going Concern. The September 30, 2020 Financial Statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company
incurred operating losses for the nine months ended September 30, 2020 and for the year ended December 31, 2019 primarily due
to reduced revenues and gross margins caused by a variety of factors, including the COVID-19 pandemic and its related effects
on our customers and our supply chain, and by competitors’ introduction of newer products with more advanced features together
with significant price cutting of their products. The Company incurred net losses of approximately $2.3 million during the nine
months ended September 30, 2020 and $10.0 million for the year ended December 31, 2019 and it had an accumulated deficit of $89.7
million as of September 30, 2020. During 2019, the Company settled one of its patent infringement cases and received a lump sum
payment of $6.0 million, which was used to pay its obligations under its PIA Agreement, and on July 20, 2020, the Company and
BKI executed a Termination Agreement which terminated the PIA and released the parties from any further liability under the PIA
obligation upon payment of $1,250,000 by the Company to BKI. Such $1,250,000 payment was made on July 22, 2020 and the PIA obligation
was extinguished, as more fully described in Note 4 – “Proceeds Investment Agreement Obligation” to the
September 30, 2020 Financial Statements. In recent years the Company has accessed the public and private capital markets to raise
funding through the issuance of debt and equity. In that regard, the Company raised $12.8 million in underwritten public offerings
of Common Stock, $5.2 million through the exercise of common stock purchase warrants and options, $1.6 million through the issuance
of promissory notes under the SBA’s PPP and EIDL programs, raised $1.5 million through the issuance of secured convertible
notes and $419,000 in unsecured promissory notes and detachable warrants during the nine months ended September 30, 2020. In addition,
the Company raised $1,564,000 in the year ended December 31, 2019 from the exercise of warrants, borrowed $300,000 pursuant to
a short-term promissory note payable on December 23, 2019 with detachable warrants to purchase 107,000 shares of Common Stock
and on August 5, 2019, and raised funds from the issuance of $2.78 million principal balance of secured convertible notes with
detachable warrants to purchase 571,248 shares of Common Stock with the net proceeds used for working capital purposes as more
fully described in Note 3—“Debt Obligations” to the September 30, 2020 Financial Statements. These debt
and equity raises were utilized to fund the Company’s operations and management expects to continue this pattern until the
Company achieves positive cash flows from operations, although it can offer no assurance in this regard.
On
May 4, 2020, the Company issued a promissory note in connection with the receipt of a loan of $1,418,900 (the “PPP
Loan”) under the SBA’s PPP under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The PPP Loan has a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred
for nine months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.
Such promissory note contains events of default and other provisions customary for a loan of this type. The PPP provides that
the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES
Act. The Company intends to use the majority of the PPP Loan amount for qualifying expenses and to apply for forgiveness of the
loan in accordance with the terms of the CARES Act. As of September 30, 2020, the Company has used the entirety of the PPP Loan
proceeds for purposes consistent with the PPP and has not taken any actions that it believes will reduce the amount eligible for
forgiveness. As such, the Company believes that the entire amount of the PPP Loan will be forgiven. However, to the extent any
portion of the PPP Loan is determined to be ineligible for forgiveness, we will be required to repay any portion of the outstanding
principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for
loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA. On April 23, 2020, the SBA issued
guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be
able to make the certification required to obtain a PPP loan in good faith. The lack of clarity regarding loan eligibility under
the CARES Act PPP has resulted in significant media coverage and controversy with respect to public companies applying for and
receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we are later
determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such
as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties,
including significant civil, criminal and administrative penalties, and could be required to repay the PPP Loan in its entirety.
In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by
the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.
On
July 2, 2020 the SEC declared the Company’s shelf registration statement on Form S-3 effective (the “Shelf Registration
Statement”). The Shelf Registration Statement will provide the Company with access to liquidity from the public markets
should it decide to utilize it for such purposes. The Shelf Registration Statement allows the Company to offer and sell, from
time to time in one or more offerings, any combination of our common stock, debt securities, debt securities convertible into
Common Stock or other securities in any combination thereof, rights to purchase shares of Common Stock or other securities in
any combination thereof, warrants to purchase shares of Common Stock or other securities in any combination thereof or units consisting
of Common Stock or other securities in any combination thereof having an aggregate initial offering price not exceeding $125,000,000.
The
Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital
to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no
assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing
when needed, and obtain it on terms acceptable or favorable to the Company.
The
Company has increased its addressable market to non-law enforcement customers and obtained new non-law enforcement contracts in
2020 and 2019, which contracts include recurring revenue during the period from 2020 to 2023. The Company believes that its quality
control and cost cutting initiatives, expansion to non-law enforcement sales channels and new product introduction will eventually
restore positive operating cash flows and profitability, although it can offer no assurances in this regard. The extent to which
our future operating results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be
accurately predicted, including the duration and scope of the pandemic, governmental and business responses to the pandemic and
the impact on the global economy, our customers’ demand for our products and services, and our ability to provide our products
and services, particularly as result of our employees working remotely and/or the closure of certain offices and facilities. While
these factors are uncertain, we believe that the COVID-19 pandemic and/or the perception of its effects will have a material adverse
effect on our business, financial condition, results of operations and cash flows.
Based
on the uncertainties described above, the Company believes its business plan does not alleviate the existence of substantial doubt
about its ability to continue as a going concern within one year from the date of the issuance of these unaudited condensed consolidated
financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related
to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Cash,
cash equivalents: As of September 30, 2020, we had cash and cash equivalents with an aggregate balance of $8,130,331, which
is an increase from a balance of $359,685 at December 31, 2019. Summarized immediately below and discussed in more detail in the
subsequent subsections are the main elements of the $7,770,646 net increase in cash during the nine months ended September 30,
2020:
|
●
|
Operating
activities:
|
$10,115,605
of net cash used in operating activities. Net cash used in operating activities was $10,115,605 and $170,958 for
the nine months ended September 30, 2020 and 2019, respectively which is a deterioration of $10,194,647. The deterioration
was attributable to the net loss incurred for 2020, the non-cash gain attributable to the change in value of the PIA obligation,
the usage of cash to increase inventory, accounts receivable, other operating assets and the reduction of accounts payable
during the nine months ended September 30, 2020 compared to the same period in 2019.
|
|
|
|
|
|
●
|
Investing
activities:
|
$889,726
of net cash used in investing activities. Cash used in investing activities was $889,726 and $129,766 for the nine
months ended September 30, 2020 and 2019 respectively. In 2020, we incurred costs for: (i) the purchase of a warehouse building;
(ii) the build out of the new leased office and warehouse space; (iii) the tooling of new products; (iv) patent
applications on our proprietary technology utilized in our new products and included in intangible assets, and,
(v) a $250,000 equity investment the Company made in a private company.
|
|
|
|
|
|
●
|
Financing
activities:
|
$18,775,977
of net cash provided by financing activities. Cash provided by financing activities was $18,775,977 for the nine
months ended September 30, 2020 and net cash used in financing activities was $2,025,148 for the nine months ended September
30, 2019. In 2020, we closed several underwritten public offerings of our Common Stock, which generated $12.8 million of cash,
we received total proceeds of $5.2 million from the exercise of common stock purchase warrants and we received a total of
$1.6 million in borrowings under the PPP and EIDL programs administered by the SBA. In April 2020, we received net proceeds
of $1,500,000 from the issuance of the convertible notes with detachable common stock purchase warrants. In addition, we received
$419,000 in proceeds from the issuance of unsecured promissory notes payable during the nine months ended September 30, 2020.
These 2020 financing cash inflows were offset by the extinguishment of the PIA obligation and the repayment of principal on
the secured convertible notes and unsecured promissory notes. During 2019, we received $2,500,000 in proceeds from the issuance
of convertible debt and $1,564,000 of proceeds from the exercise of common stock purchase warrants offset by the $6 million
payment on the PIA.
|
The
net result of these activities was an increase in cash of $7,770,646 for the nine months ended September 30, 2020 to $8,130,331
as of September 30, 2020.
Commitments:
We
had $8,130,331 of cash and cash equivalents and net positive working capital $14,851,249 as of September 30, 2020. Accounts receivable
balances represented $1,799,935 of our net working capital at September 30, 2020. We intend to collect our outstanding receivables
on a timely basis and reduce the overall level during the balance of 2020, which would help to provide cash to support our operations
during 2020. Inventory represented $5,993,627 of our net working capital at September 30, 2020 and finished goods represented
$5,535,073 of total inventory at September 30, 2020. We are actively managing the level of inventory and our goal is to reduce
such level during the balance of 2020 by our sales activities.
Capital
Expenditures. We had no material commitments for capital expenditures at September 30, 2020.
Lease
commitments.
On
May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which will serve as its new principal
executive office and primary business location. The original lease agreement was amended on August 28, 2020 to correct the footage
under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the
first nine months and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 2026. The
Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its
new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s
office and warehouse operating lease as of September 30, 2020 was seventy-four months. The Company’s previous office and
warehouse space lease expired in April 2020 and the Company paid holdover rent for the time period until it moved to and commenced
occupying the new space on June 15, 2020.
The
Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes.
The terms of the lease include 48 monthly payments of $1,598 with a maturity date of October 2023. The Company has the option
to purchase the equipment at maturity for its estimated fair market value at that point in time. The remaining lease term for
the Company’s copier operating lease as of September 30, 2020 was 37 months .
Lease
expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease
terms. Total lease expense was $302,836 for the nine months ended September 30, 2020.
The
discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined
the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement
date, the operating lease liabilities reflect a weighted average discount rate of 8%.
The
following sets forth the operating lease right of use assets and liabilities as of September 30, 2020:
Assets:
|
|
|
|
Operating lease right of use assets
|
|
$
|
792,121
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Operating lease obligations-Long-term portion
|
|
$
|
754,031
|
|
Operating lease obligations-Current portion
|
|
|
83,094
|
|
Total operating lease obligations
|
|
$
|
837,125
|
|
The
components of lease expense were as follows for the nine months ended September 30, 2020:
Selling, general and administrative expenses
|
|
$
|
302,836
|
|
Following
are the minimum lease payments for each year and in total.
Year ending December 31:
|
|
|
|
2020 (October 1, to December 31, 2020)
|
|
$
|
17,192
|
|
2021
|
|
|
176,465
|
|
2022
|
|
|
184,412
|
|
2023
|
|
|
184,523
|
|
2024
|
|
|
171,924
|
|
Thereafter
|
|
|
334,001
|
|
Total undiscounted minimum future lease payments
|
|
|
1,068,517
|
|
Imputed interest
|
|
|
(231,392
|
)
|
Total operating lease liability
|
|
$
|
837,125
|
|
Debt
Obligations.
Debt
obligations is comprised of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Payroll protection program loan (PPP)
|
|
$
|
1,418,900
|
|
|
$
|
—
|
|
Economic injury disaster loan (EIDL)
|
|
|
150,000
|
|
|
|
—
|
|
2019 Secured convertible notes, at fair value
|
|
|
—
|
|
|
|
1,593,809
|
|
Unsecured promissory notes payable, less unamortized discount of $-0- and $66,061 at September 30, 2020 and December 31, 2019, respectively
|
|
|
—
|
|
|
|
233,939
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
|
1,568,900
|
|
|
|
1,827,748
|
|
Less: current maturities of debt obligations
|
|
|
791,521
|
|
|
|
1,827,748
|
|
Debt obligations, long-term
|
|
$
|
777,379
|
|
|
$
|
—
|
|
Debt
obligations mature as follows as of September 30, 2020:
|
|
September 30, 2020
|
|
2020 (October 1, 2020 to December 31, 2020)
|
|
$
|
68,241
|
|
2021
|
|
|
948,391
|
|
2022
|
|
|
401,321
|
|
2023
|
|
|
3,166
|
|
2024
|
|
|
3,286
|
|
2025 and thereafter
|
|
|
144,495
|
|
|
|
|
|
|
Total
|
|
$
|
1,568,900
|
|
Inflation
and Seasonality
Inflation
has not materially affected us during the past fiscal year. We do not believe that our business is seasonal in nature; however,
we usually generate higher revenues during the second half of the calendar year than in the first half.
Potential
Impacts of the COVID-19 Pandemic on Our Business and Operations
The
COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different
global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business
partners.
Like
most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March
2020. By that time, much of our first fiscal quarter was completed. During the quarter ended September 30, 2020, we observed
recent decreases in demand from certain customers, including primarily our law-enforcement and commercial customers.
Given
the fact that our products are sold through a variety of distribution channels, we expect our sales will experience more volatility
as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. We
are aware that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from
COVID-19 on future operating results. Although we observed significant declines in demand for our products from certain customers
during the three months ended September 30, 2020, we believe that it remains too early for us to know the exact impact COVID-19
will have on the long-term demand for our products. We also cannot be certain how demand may shift over time as the impacts of
the COVID-19 pandemic may go through several phases of varying severity and duration.
In
light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have
taken, and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic. We
continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number
of factors that are not entirely within our control and are discussed in this and other sections of this quarterly report on Form
10-Q. We do not expect there to be material changes to our assets on our balance sheet or our ability to timely account for those
assets. Further, in connection with the preparation of this quarterly report on Form 10-Q and the interim financial statements
contained herein, we reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and have determined
there to be no material impact at this time. We have also reviewed the potential impacts on future risks to the business as it
relates to collections, returns and other business-related items.
To
date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver
products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities
in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist
our customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect
these restrictions on personal travel to be material to our business operations or financial results. We have taken steps to restrain
and monitor our operating expenses and therefore, we do not expect any such impacts to materially change the relationship
between costs and revenues.
Like
most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions
and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating
our business effectively. To date, we have been able to operate our business effectively using these measures and to maintain
all internal controls as documented and posted. We also have not experienced challenges in maintaining business continuity and
do not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have
remained unpredictable and it remains possible that challenges may arise in the future.
The
actions we have taken so far during the COVID-19 pandemic include, but are not limited to:
|
●
|
requiring
all employees who can work from home to work from home;
|
|
|
|
|
●
|
increasing
our IT networking capability to best assure employees can work effectively outside the office; and
|
|
|
|
|
●
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for
employees who must perform essential functions in one of our offices:
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Having
employees maintain a distance of at least six feet from other employees whenever possible;
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Having
employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
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Having
employees stay segregated from other employees in the office with whom they require no interaction; and
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Requiring
employees to wear masks while they are in the office whenever possible.
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We
currently believe revenue for the year ending December 31, 2020 may decline year over year due to the conditions noted.
In April 2020, we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses during the pandemic.
Actions taken to date include work hour and salary reductions for senior management. These cost reductions are in addition to
the significant restructuring actions we initiated in the first quarter of 2020. Based on our current cash position, our projected
cash flow from operations and our cost reduction and cost containment efforts to date, we believe that we will have sufficient
capital and or have access to sufficient capital through public and private equity and debt offerings to sustain operations for
a period of one year following the date of this filing. If business interruptions resulting from the COVID-19 pandemic were to
be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively
impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.