Nevada
|
20-0064269
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
7311 W. 130th, Suite 170, Overland Park,
KS 66213
|
|
(Address
of principal executive
offices) (Zip
Code)
|
|
Registrant’s
telephone, including area code:
(913)
814-7774
|
Common Stock, $0.001 par
value
|
NASDAQ
|
(Title
of class)
|
(Name
of each exchange on which
registered)
|
Page
|
|||
Item
1.
|
Business
|
3
|
|
Item
1a.
|
Risk
Factors
|
9
|
|
Item
1b.
|
Unresolved
Staff Comments
|
17
|
|
Item
2.
|
Properties
|
17
|
|
Item
3.
|
Legal
Proceedings
|
18
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
18
|
|
Item
6.
|
Selected
Financial Data
|
21
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
|
Item
7a.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
32
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
32
|
|
Item
9.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
32
|
|
Item
9A.
|
Controls
and Procedures
|
32
|
|
Item
9B.
|
Other
Information
|
34
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
34
|
|
Item
11.
|
Executive
Compensation
|
34
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
|
35
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
35
|
|
Item
14.
|
Principal
Accounting Fees and Services
|
35
|
Item
15.
|
Exhibits,
Financial Statement Schedules
|
36
|
|
Signature
Page
|
ITEM
1.
|
Business.
|
·
|
wide
angle zoom color camera;
|
·
|
standards-based
video and audio compression and
recording;
|
·
|
system
is concealed in the rear view mirror, replacing factory rear view
mirror;
|
·
|
monitor
in rear-view mirror is invisible when not
activated;
|
·
|
eliminates
need for analog tapes to store and
catalogue;
|
·
|
easily
installs in any vehicle;
|
·
|
archive
to computers, servers, DVDs, CD-ROMs, or file
servers;
|
·
|
900
MHz audio transceiver with automatic
activation;
|
·
|
marks
exact location of incident with integrated
GPS;
|
·
|
playback
using Windows Media Player;
|
·
|
proprietary
software protects the chain of custody;
and
|
·
|
records
to rugged and durable solid state
memory.
|
·
|
virtually
the same size and shape as a traditional
flashlight;
|
·
|
easy
to use, requiring one button to start and stop
recording;
|
·
|
on-board
flash memory card;
|
·
|
extra-wide
field of view for digital video and audio
recording;
|
·
|
each
frame of video can be date and time
stamped;
|
·
|
LED
flashlight bulb is an improvement over conventional bulbs;
and
|
·
|
proprietary
chain of custody software to protect delivery of data back to the police
station.
|
LicenseType
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production
software license agreement
|
April,
2005
|
April,
2009
|
Automatically
renews for one year periods unless terminated by either
party.
|
Production
license agreement
|
October,
2008
|
October,
2011
|
Automatically
renews for one year periods unless terminated by either
party.
|
Software
sublicense agreement
|
October,
2007
|
October,
2010
|
Automatically
renews for one year periods unless terminated by either
party.
|
Technology
license agreement
|
July,
2007
|
July,
2010
|
Automatically
renews for one year periods unless terminated by either
party.
|
Limited
license agreement
|
August,
2008
|
Perpetual
|
May
be terminated by either party.
|
Limited
license agreement
|
January,
2009
|
Perpetual
|
May
be terminated by either
party.
|
·
|
attendance
at industry trade shows and
conventions;
|
·
|
use
of a cut-away police car model to demonstrate the digital video rear view
mirror product at trade shows, conventions and other marketing
venues;
|
·
|
direct
sales, with a force of industry-specific sales people who will identify,
call upon and build on-going relationships with key purchasers and
targeted industries;
|
·
|
support
of our direct sales with passive sales systems, including inside sales and
e-commerce;
|
·
|
print
advertising in journals with specialized industry
focus;
|
·
|
direct
mail campaigns targeted to potential
customers;
|
·
|
web
advertising, including supportive search engines and website and
registration with appropriate sourcing
entities;
|
·
|
public
relations, industry-specific venues, as well as general media, to create
awareness of our brand and our products, including membership in
appropriate trade organizations;
and
|
·
|
brand
identification through trade names associated with us and our
products.
|
·
|
digital
video in-car recording products not being accepted by the law enforcement
industry or digital video recording not being accepted as evidence in
criminal proceedings;
|
·
|
actual
or anticipated fluctuations in our operating
results;
|
·
|
the
potential absence of securities analysts covering us and distributing
research and recommendations about
us;
|
·
|
we
expect our actual operating results to fluctuate widely as we increase our
sales and production capabilities and other
operations;
|
·
|
we
may have a low trading volume for a number of reasons, including that a
large amount of our stock is closely
held;
|
·
|
overall
stock market fluctuations;
|
·
|
economic
conditions generally and in the law enforcement and security industries in
particular;
|
·
|
announcements
concerning our business or those of our competitors or
customers;
|
·
|
our
ability to raise capital when we require it, and to raise such capital on
favorable terms;
|
·
|
changes
in financial estimates by securities analysts or our failure to perform as
anticipated by the analysts;
|
·
|
announcements
of technological innovations;
|
·
|
conditions
or trends in the industry;
|
·
|
litigation;
|
·
|
changes
in market valuations of other similar
companies;
|
·
|
announcements
by us or our competitors of new products or of significant technical
innovations, contracts, acquisitions, strategic partnerships or joint
ventures;
|
·
|
future
sales of common stock;
|
·
|
actions
initiated by the SEC or other regulatory
bodies;
|
·
|
existence
or lack of patents or proprietary
rights;
|
·
|
departure
of key personnel or failure to hire key personnel;
and
|
·
|
general
market conditions.
|
ITEM
2.
|
Description
of Properties.
|
ITEM
3.
|
Legal
Proceedings.
|
ITEM
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
ITEM
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
High Close
|
Low Close
|
|||||||
Year Ended December 31,
2008
|
||||||||
1st
Quarter
|
$ | 7.41 | $ | 6.91 | ||||
2nd
Quarter
|
$ | 9.84 | $ | 6.80 | ||||
3rd
Quarter
|
$ | 9.10 | $ | 6.72 | ||||
4th
Quarter
|
$ | 6.90 | $ | 2.61 | ||||
Year Ended December 31,
2007
|
||||||||
1st
Quarter
|
$ | 1.80 | $ | 1.45 | ||||
2nd
Quarter
|
$ | 2.70 | $ | 1.65 | ||||
3rd
Quarter
|
$ | 3.45 | $ | 2.00 | ||||
4th
Quarter
|
$ | 7.35 | $ | 3.70 |
Plan
category
|
Number of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
(a)
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
(b)
|
|
Number
of securities
remaining available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a)
(c)
|
||
Equity
compensation plans approved by
stockholders
|
3,867,087
|
|
$
2.76
|
|
104,177
|
||
Equity
compensation plans not approved by
stockholders
1
|
1,502,540
|
|
$ 2.26
|
|
38,896
|
||
Total
|
5,369,627
|
|
$ 2.62
|
|
143,073
|
ITEM
6.
|
Selected
Financial Data.
|
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
|
2008
|
2007
|
|||||||
Revenue
|
100 | % | 100 | % | ||||
Cost
of sales
|
40 | % | 39 | % | ||||
Gross
profit
|
60 | % | 61 | % | ||||
Operating
expenses
|
44 | % | 46 | % | ||||
Operating
income
|
16 | % | 15 | % | ||||
Other
income
(expense)
|
-- | % | -- | % | ||||
Income
before income tax (provision) benefit
|
16 | % | 15 | % | ||||
Income
tax (provision) benefit
|
(6 | %) | 8 | % | ||||
Net
income
|
10 | % | 23 | % | ||||
Net
income per share information:
|
||||||||
Basic
|
$ | 0.22 | $ | 0.33 | ||||
Diluted
|
$ | 0.19 | $ | 0.28 |
Year ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Research
and development expenses
|
$ | 3,127,143 | $ | 1,518,914 | ||||
Stock-based
compensation
|
1,599,264 | 1,696,959 | ||||||
Sales
commissions
|
2,765,058 | 1,333,394 | ||||||
Professional
fees and expenses
|
1,165,111 | 660,834 | ||||||
Selling,
general and administrative salaries
|
2,217,402 | 1,269,621 | ||||||
Other
|
3,670,781 | 2,396,193 | ||||||
Total
|
$ | 14,544,759 | $ | 8,875,915 |
·
Operating
activities
:
|
$4,469,848
of net
cash used in
operating
activities, primarily from a substantial increase in accounts receivable
and inventory balances partially offset by cash provided by net income
adjusted for non-cash charges, such as stock based compensation expense
and non-cash credits, such as deferred income tax benefits and increases
in accounts payable and accrued
expenses.
|
·
Investing
activities
:
|
$1,674,863
of net
cash used
in
investing activities,
primarily to acquire equipment to expand our research, development and
production capabilities and the purchase of technology licenses utilized
in our products.
|
·
Financing
activities
:
|
$3,095,619
of net
cash provided by
financing activities, representing the proceeds from stock option
and warrants exercised and the related excess tax benefit offset by the
purchase of common shares for
treasury.
|
License
Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production
software license agreement
|
April,
2005
|
April,
2009
|
Automatically
renews for one year periods unless terminated by either
party.
|
Production
license agreement
|
October,
2008
|
October,
2011
|
Automatically
renews for one year periods unless terminated by either
party.
|
Software
sublicense agreement
|
October,
2007
|
October,
2010
|
Automatically
renews for one year periods unless terminated by either
party.
|
Technology
license agreement
|
July,
2007
|
July,
2010
|
Automatically
renews for one year periods unless terminated by either
party.
|
Limited
license agreement
|
August,
2008
|
Perpetual
|
May
be terminated by either party.
|
Limited
license agreement
|
January,
2009
|
Perpetual
|
May
be terminated by either party.
|
·
|
Historical
collections – Represented as the amount of historical uncollectible
accounts as a percent of total accounts
receivable.
|
·
|
Specific
credit exposure on certain accounts – Identified based on management’s
review of the accounts receivable portfolio and taking into account the
financial condition of customers that management may deem to be higher
risk of collection.
|
·
|
Slow
moving products – Items identified as slow moving are evaluated on a case
by case basis for impairment.
|
·
|
Obsolete/discontinued
inventory – Products identified that are near or beyond their expiration,
or new models are now available. Should this occur, we estimate
the market value of this inventory as if it were to be
liquidated.
|
·
|
Estimated
salvage value/sales price – Salvage value is estimated using management’s
evaluation of remaining value of this inventory and the ability to
liquidate this inventory.
|
|
·
|
Historical
costs - Represented as the amount of historical warranty costs as a
percent of sales.
|
|
·
|
Specific
exposure on certain products or customers - Identified by management’s
review of warranty costs and customer
responses.
|
ITEM
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
ITEM
8.
|
Financial
Statements and Supplementary Data.
|
ITEM
9.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
·
|
Provide
reasonable assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
|
March
9, 2009
Kansas
City, Missouri
|
ITEM
9B.
|
Other
Information.
|
ITEM
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
ITEM
11.
|
Executive
Compensation.
|
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
ITEM
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
ITEM
14.
|
Principal
Accounting Fees and Services.
|
ITEM
15.
|
Exhibits,
Financial Statement Schedules.
|
*
|
Information
marked [*] has been omitted pursuant to a Confidential Treatment Request
filed with the Securities and Exchange Commission. Omitted
material for which confidential treatment has been granted has been filed
separately with the Securities and Exchange
Commission.
|
Signature
and Title
|
|
Date
|
/s/
Stanton E. Ross
|
|
March
9, 2009
|
Stanton
E. Ross, Director and Chief Executive Officer
|
|
|
/s/
Leroy C. Richie
|
|
March
9, 2009
|
Leroy
C. Richie, Director
|
|
|
/s/
Edward Juchniewicz
|
|
March
9, 2009
|
Edward
Juchniewicz, Director
|
|
|
/s/
Elliot M. Kaplan
|
|
March
9, 2009
|
Elliot
M. Kaplan, Director
|
|
|
/s/
Daniel F. Hutchins
|
|
March
9, 2009
|
Daniel
F. Hutchins, Director
|
|
|
/s/
Thomas J. Heckman
|
|
March
9, 2009
|
Thomas
J. Heckman, Chief Financial Officer, Secretary, Treasurer and Principal
Accounting Officer
|
|
A.
|
Lender
and Borrower have previously entered into the above reference Loan
Agreement.
|
B.
|
Lender
and Borrower wish to modify and amend the terms and conditions of the Loan
Agreement as hereinafter provided.
|
1.
|
The
following is hereby deleted in its
entirety:
|
2.
|
The
following is hereby added:
|
3.
|
The
Loan Agreement as amended hereby shall continue in full force and effect
until such time as all of Borrower’s obligations and indebtedness to Bank
have been paid in full, including principal, interest, costs and
expenses.
|
4.
|
Borrower
confirms and acknowledges to Bank that (i) all of the representations,
warranties and covenants contained in the Loan Agreement as of
the date of this First Amendment are true and correct in all material
respects and (ii) there now exists no event of default under the Loan
Agreement or any event or omission that with the giving of notice or the
passage of time would constitute an event of default under the Loan
Agreement.
|
5.
|
Except
as expressly set forth in this First Amendment, all terms and conditions
of the Loan Agreement and all other instruments, agreements and documents
executed in connection with the loan Agreement and the Notes shall remain
unmodified and in full force and
effect.
|
Principal
|
|
Loan
Date
|
|
Maturity
|
|
Loan
No
|
|
Call / Coll
|
|
Account
|
|
Officer
|
|
Initials
|
$2,500,000.00
|
|
02-13-2009
|
|
02-13-2010
|
|
8126863
|
|
20
|
|
|
TDM
|
|
Borrower:
|
|
DIGITAL
ALLY, INC. (TIN: 20-0064269)
7311
WEST 130TH STREET,
SUITE
170
OVERLAND
PARK, KS 66213
|
|
Lender:
|
|
Enterprise
Bank & Trust
E
Jackson / Independence
12695
Metcalf Avenue
P.O.
Box 25250
Shawnee
Mission, KS 66225
|
Principal
Amount: $2,500,000.00
|
|
Initial
Rate: 5.500%
|
|
Date
of Note: February 13, 2009
|
DIGITAL ALLY,
INC
.
|
|
By:
|
|
STANTON E. ROSS, Chairman and CEO of DIGITAL
ALLY,
INC.
|
Principal
|
|
Loan
Date
|
|
Maturity
|
|
Loan
No
|
|
Call / Coll
|
|
Account
|
|
Officer
|
|
Initials
|
$2,500,000.00
|
|
02-13-2009
|
|
02-13-2010
|
|
8126863
|
|
20
|
|
|
TDM
|
|
Borrower:
|
|
DIGITAL
ALLY, INC. (TIN: 20-0064269)
7311
WEST 130TH STREET,
SUITE
170
OVERLAND
PARK, KS 66213
|
|
Lender:
|
|
Enterprise
Bank & Trust
E
Jackson / Independence
12695
Metcalf Avenue
P.O.
Box 25250
Shawnee
Mission, KS 66225
|
[
]ƒ
|
Personal,
Family, or Household Purposes or Personal
Investment.
|
[
]ƒ
|
Business
(including Real Estate Investment).
|
Other
Disbursements:
$2,500,000.00 to borrower upon request
|
$2,500,00.00
_________
|
$2,500,000.00
|
Prepaid
Finance Charges Paid in Cash:
|
$0.00
|
Other
Charges Paid in Cash:
|
$
150.00
|
$150.00 Loan Fee to Enterprise Bank &
Trust
|
|
|
__________
|
Total
Charges Paid in Cash:
|
$150.00
|
DIGITAL ALLY,
INC
.
|
|
By:
|
|
STANTON E. ROSS, Chairman and CEO of
DIGITAL ALLY, INC.
|
Signature
and Title
|
Date
|
/s/
Stanton E. Ross
Stanton
E. Ross, Director and Chief Executive Officer
|
March
9, 2009
|
/s/
Leroy C. Richie
Leroy
C. Richie, Director
|
March
9, 2009
|
/s/
Edward Juchniewicz
Edward
Juchniewicz, Director
|
March
9, 2009
|
/s/
Elliot M. Kaplan
Elliot
M. Kaplan, Director
|
March
9, 2009
|
/s/
Daniel F. Hutchins
Daniel
Hutchins, Director
|
March
9, 2009
|
/s/
Thomas J. Heckman
Thomas
J. Heckman, Chief Financial Officer, Secretary and
Treasurer
|
March
9,
2009
|
1.
|
I
have reviewed this report on Form 10-K for the year ended
December 31, 2008 of Digital Ally,
Inc.
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report.
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report.
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such
evaluation;
|
|
(c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of registrant’s board
of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal
controls over financial reporting.
|
/s/
Stanton E. Ross
|
Stanton
E. Ross
|
Chief
Executive Officer
|
1.
|
I
have reviewed this report on Form 10-K for the year ended
December 31, 2008 of Digital Ally,
Inc.
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report.
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report.
|
4.
|
The
registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of registrant’s board
of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal
controls over financial reporting.
|
/s/
Thomas J. Heckman
|
THOMAS J.
HECKMAN
|
Chief
Financial Officer
|
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934;
and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/
Stanton E. Ross
|
Stanton
E. Ross
|
Chief
Executive Officer
|
March
9, 2009
|
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934;
and
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/
Thomas J. Heckman
|
THOMAS
J. HECKMAN
|
Chief
Financial Officer
|
March
9, 2009
|
Page (s)
|
||||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|||
Financial
Statements:
|
||||
Balance
Sheets - December 31, 2008 and 2007
|
F-3
|
|||
Statements
of Income for the Years Ended December 31, 2008 and
2007
|
F-4
|
|||
Statements
of Stockholders’ Equity for the Years Ended December 31, 2008 and
2007
|
F-5
|
|||
Statements
of Cash Flows for the Years Ended December 31, 2008 and
2007
|
F-6
|
|||
Notes
to Financial Statements
|
F-7
to F-20
|
|
March 9,
2009
Kansas
City, Missouri
|
2008
|
2007
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,205,947 | $ | 4,255,039 | ||||
Accounts
receivable-trade, less allowance for doubtful accounts
of
$90,000 - 2008 and $28,224 – 2007
|
6,242,306 | 523,011 | ||||||
Accounts
receivable-other
|
414,176 | 211,687 | ||||||
Inventories
|
8,359,961 | 2,964,098 | ||||||
Prepaid
income taxes
|
85,943 | — | ||||||
Prepaid
expenses
|
217,916 | 232,901 | ||||||
Deferred
taxes
|
1,345,000 | 795,000 | ||||||
Total
current assets
|
17,871,249 | 8,981,736 | ||||||
Furniture,
fixtures and equipment
|
2,471,205 | 1,180,318 | ||||||
Less
accumulated depreciation and amortization
|
738,554 | 301,632 | ||||||
1,732,651 | 878,686 | |||||||
Deferred
taxes
|
975,000 | 980,000 | ||||||
Intangible
assets, net
|
365,643 | — | ||||||
Other
assets
|
149,066 | 65,007 | ||||||
Total
assets
|
$ | 21,093,609 | $ | 10,905,429 | ||||
Liabilities
and Stockholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 2,791,565 | $ | 1,008,831 | ||||
Accrued
expenses
|
1,053,624 | 507,695 | ||||||
Income
taxes payable
|
— | 26,000 | ||||||
Customer
deposits
|
84,039 | 243,171 | ||||||
Total
current liabilities
|
3,929,228 | 1,785,697 | ||||||
Unearned
income
|
— | 3,864 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock, $0.001 par value; 75,000,000 shares authorized; Shares
issued
and outstanding: 15,926,077 – 2008 and 14,092,260 – 2007
|
15,926 | 14,092 | ||||||
Additional
paid in capital
|
18,428,292 | 12,110,890 | ||||||
Treasury
stock, at cost (210,360 shares)
|
(1,624,353 | ) | — | |||||
Retained
earnings (deficit)
|
344,516 | (3,009,114 | ) | |||||
Total
stockholders’ equity
|
17,164,381 | 9,115,868 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 21,093,609 | $ | 10,905,429 |
Years
Ended
|
||||||||
December 31,
2008
|
December 31,
2007
|
|||||||
Revenue
|
$ | 32,625,477 | $ | 19,391,082 | ||||
Cost
of sales
|
12,980,683 | 7,649,930 | ||||||
Gross
profit
|
19,644,794 | 11,741,152 | ||||||
Operating
expenses
|
14,544,759 | 8,875,915 | ||||||
Operating
income
|
5,100,035 | 2,865,237 | ||||||
Other
income (expense):
|
||||||||
Interest
income
|
78,595 | 34,609 | ||||||
Interest
expense
|
— | (28,006 | ) | |||||
Other,
net
|
— | (11,506 | ) | |||||
78,595 | (4,903 | ) | ||||||
Income
before income
tax
(provision) benefit
|
5,178,630 | 2,860,334 | ||||||
Income
tax (provision) benefit
|
(1,825,000 | ) | 1,663,000 | |||||
Net
income
|
$ | 3,353,630 | $ | 4,523,334 | ||||
Net
income per share information:
|
||||||||
Basic
|
$ | 0.22 | $ | 0.33 | ||||
Diluted
|
$ | 0.19 | $ | 0.28 | ||||
Weighted
average shares outstanding:
|
||||||||
Basic
|
15,319,257 | 13,742,070 | ||||||
Diluted
|
17,509,091 | 16,163,337 |
Common
Stock
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid
In
Capital
|
Treasury
stock
|
Retained
earnings
(deficit)
|
Total
|
||||||||||||||||||
Balance,
January 1, 2007
|
13,309,027 | $ | 13,309 | $ | 9,436,766 | $ | — | $ | (7,532,448 | ) | $ | 1,917,627 | ||||||||||||
Stock-based
compensation
|
— | — | 1,696,959 | — | — | 1,696,959 | ||||||||||||||||||
Excess
tax benefits related to stock-based compensation
|
— | — | 12,000 | — | — | 12,000 | ||||||||||||||||||
Stock
options exercised at $1.20 per share
|
75,000 | 75 | 89,925 | — | — | 90,000 | ||||||||||||||||||
Stock
options exercised at $2.50 per share
|
25,000 | 25 | 62,475 | — | — | 62,500 | ||||||||||||||||||
Stock
options exercised at $2.15 per share
|
2,500 | 2 | 5,373 | — | — | 5,375 | ||||||||||||||||||
Stock
options exercised at $1.60 per share
|
4,233 | 4 | 6,769 | — | — | 6,773 | ||||||||||||||||||
Stock
warrants exercised at $2.75 per share
|
40,000 | 40 | 109,960 | — | — | 110,000 | ||||||||||||||||||
Stock
warrants exercised at $1.20 per share
|
86,500 | 87 | 103,713 | — | — | 103,800 | ||||||||||||||||||
Shares
issued for consulting services at $1.75
per
share in lieu of cash compensation
|
50,000 | 50 | 87,450 | — | — | 87,500 | ||||||||||||||||||
Shares
issued for conversion of note payable
to
stock, at $1.00 per share
|
500,000 | 500 | 499,500 | — | — | 500,000 | ||||||||||||||||||
Net
income
|
— | — | — | 4,523,334 | 4,523,334 | |||||||||||||||||||
Balance,
December 31, 2007
|
14,092,260 | 14,092 | 12,110,890 | — | (3,009,114 | ) | 9,115,868 | |||||||||||||||||
Stock-based
compensation
|
— | — | 1,599,264 | — | — | 1,599,264 | ||||||||||||||||||
Excess
tax benefits related to stock-based compensation
|
— | — | 2,345,000 | — | — | 2,345,000 | ||||||||||||||||||
Stock
options exercised at $1.00 per share
|
800,834 | 801 | 800,033 | — | — | 800,834 | ||||||||||||||||||
Stock
warrants exercised at $1.20 per share
|
383,500 | 383 | 459,817 | — | — | 460,200 | ||||||||||||||||||
Stock
options exercised at $1.60 per share
|
165,794 | 166 | 265,105 | — | — | 265,271 | ||||||||||||||||||
Stock
options exercised at $2.15 per share
|
230,079 | 230 | 494,440 | — | — | 494,670 | ||||||||||||||||||
Stock
options exercised at $2.30 per share
|
50,000 | 50 | 114,950 | — | — | 115,000 | ||||||||||||||||||
Stock
options exercised at $2.50 per share
|
25,000 | 25 | 62,475 | — | — | 62,500 | ||||||||||||||||||
Stock
options exercised at $2.65 per share
|
40,000 | 40 | 105,960 | — | — | 106,000 | ||||||||||||||||||
Stock
warrants exercised at $2.75 per share
|
199,750 | 200 | 549,113 | — | — | 549,313 | ||||||||||||||||||
Stock
options exercised at $4.05 per share
|
15,000 | 15 | 60,735 | — | — | 60,750 | ||||||||||||||||||
Common
stock surrendered as consideration for exercise of stock
options
|
(76,140 | ) | (76 | ) | (539,490 | ) | — | — | (539,566 | ) | ||||||||||||||
Purchase
of 210,360 common shares for treasury
|
— | — | — | (1,624,353 | ) | — | (1,624,353 | ) | ||||||||||||||||
Net
income
|
— | — | — | — | 3,353,630 | 3,353,630 | ||||||||||||||||||
Balance,
December 31, 2008
|
15,926,077 | $ | 15,926 | $ | 18,428,292 | $ | (1,624,353 | ) | $ | 344 ,516 | $ | 17,164,381 |
Years
Ended
|
||||||||
December 31,
2008
|
December 31,
2007
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
income
|
$ | 3,353,630 | $ | 4,523,334 | ||||
Adjustments
to reconcile net income to net cash flows
provided
by (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
455,255 | 192,033 | ||||||
Stock
based compensation
|
1,599,264 | 1,696,959 | ||||||
Common
stock issued in lieu of cash compensation
|
— | 87,500 | ||||||
Reserve
for inventory obsolescence
|
332,793 | 196,328 | ||||||
Reserve
for bad debt allowance
|
61,776 | 28,224 | ||||||
Deferred
tax benefit
|
(545,000 | ) | (1,775,000 | ) | ||||
Change
in assets and liabilities:
|
||||||||
(Increase)
decrease in:
|
||||||||
Accounts
receivable - trade
|
(5,781,071 | ) | 426,591 | |||||
Accounts
receivable - other
|
(202,489 | ) | 14,029 | |||||
Inventories
|
(5,728,656 | ) | (1,634,204 | ) | ||||
Prepaid
income taxes
|
(85,943 | ) | — | |||||
Prepaid
expenses
|
14,985 | 189,378 | ||||||
Other
assets
|
(84,059 | ) | (5,702 | ) | ||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
1,782,734 | 356,929 | ||||||
Accrued
expenses
|
545,929 | 327,122 | ||||||
Income
taxes payable
|
(26,000 | ) | 26,000 | |||||
Customer
deposits
|
(159,132 | ) | 222,272 | |||||
Unearned
income
|
(3,864 | ) | (1,384 | ) | ||||
Net
cash provided by (used in) operating activities
|
(4,469,848 | ) | 4,870,409 | |||||
Cash
Flows from Investing Activities:
|
||||||||
Purchases
of furniture, fixtures and equipment
|
(1,290,887 | ) | (562,978 | ) | ||||
Additions
to intangible assets
|
(383,976 | ) | — | |||||
Net
cash (used in) investing activities
|
(1,674,863 | ) | (562,978 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||
Net
repayments on line of credit
|
— | (500,000 | ) | |||||
Proceeds
from exercise of stock options and warrants
|
2,374,972 | 378,448 | ||||||
Excess
tax benefits related to stock-based compensation
|
2,345,000 | 12,000 | ||||||
Purchase
of common shares for treasury
|
(1,624,353 | ) | — | |||||
Net
cash provided by (used in) financing activities
|
3,095,619 | (109,552 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
(3,049,092 | ) | 4,197,879 | |||||
Cash
and cash equivalents, beginning of period
|
4,255,039 | 57,160 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,205,947 | $ | 4,255,039 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
payments for interest
|
$ | — | $ | 28,006 | ||||
Cash
payments for income taxes
|
$ | 136,943 | $ | 74,000 | ||||
Supplemental
disclosures of non-cash investing and financing activities:
Common
stock issued for settlements of note payable
|
$ | — | $ | 500,000 | ||||
Common
stock surrendered as consideration for
exercise
of stock options
|
$ | 539,566 | $ | — |
·
|
Expected
term is determined using the contractual term and vesting period of the
award;
|
·
|
Expected
volatility of award grants made in the Company’s plan is measured using
the weighted average of historical daily changes in the market price of
the Company’s common stock over the expected term of the
award;
|
·
|
Expected
dividend rate is determined based on expected dividends to be
declared;
|
·
|
Risk-free
interest rate is equivalent to the implied yield on zero-coupon U.S.
Treasury bonds with a maturity equal to the expected term of the awards;
and
|
·
|
Forfeitures
are based on the history of cancellations of awards granted and
management’s analysis of potential
forfeitures.
|
2008
|
2007
|
|||||||
Sales
by geographic area:
|
||||||||
United
States of America
|
$ | 24,037,142 | $ | 13,640,040 | ||||
Foreign
|
8,588,335 | 5,751,042 | ||||||
Total
|
$ | 32,625,477 | $ | 19,391,082 |
2008
|
2007
|
|||||||
Raw
material and component parts
|
$ | 6,038,313 | $ | 2,919,979 | ||||
Work-in-process
|
52,500 | 25,762 | ||||||
Finished
goods
|
2,798,269 | 214,685 | ||||||
Reserve
for excess and obsolete inventory
|
(529,121 | ) | (196,328 | ) | ||||
Total
|
$ | 8,359,961 | $ | 2,964,098 |
Estimated
Useful Life
|
2008
|
2007
|
|||||||
Office
furniture, fixtures and equipment
|
3-10
years
|
$ | 1,409,787 | $ | 590,333 | ||||
Warehouse
equipment
|
3-5
years
|
814,737 | 496,361 | ||||||
Tradeshow
equipment
|
3-5
years
|
166,292 | 88,674 | ||||||
Leasehold
improvements
|
2-5
years
|
55,575 | — | ||||||
Website
development
|
3
years
|
11,178 | — | ||||||
Rental
equipment
|
3
years
|
13,636 | 4,950 | ||||||
Total
cost
|
2,471,205 | 1,180,318 | |||||||
Less:
accumulated depreciation and amortization
|
(738,554 | ) | (301,632 | ) | |||||
Net
furniture, fixtures and equipment
|
$ | 1,732,651 | $ | 878,686 |
|
Gross
value
|
Accumulated
amortization
|
Net
carrying
value
|
|||||||||
Amortized
intangible assets:
|
||||||||||||
Licenses
|
$ | 256,000 | $ | 18,333 | $ | 237,667 | ||||||
Unamortized
intangible assets:
|
||||||||||||
Patents
and trademarks pending
|
127,976 | — | 127,976 | |||||||||
Total
|
$ | 383,976 | $ | 18,333 | $ | 365,643 |
2008
|
2007
|
|||||||
Accrued
warranty expense
|
$ | 271,307 | $ | 213,428 | ||||
Accrued
sales commissions
|
197,777 | 145,858 | ||||||
Payroll
and related fringes
|
395,635 | — | ||||||
Other
|
188,905 | 148,409 | ||||||
Total
|
$ | 1,053,624 | $ | 507,695 |
2008
|
2007
|
|||||||
Beginning
balance
|
$ | 213,428 | $ | — | ||||
Provision
for warranty expense
|
575,554 | 359,892 | ||||||
Charges
applied to warranty reserve
|
(517,675 | ) | (146,464 | ) | ||||
Total
|
$ | 271,307 | $ | 213,428 |
2008
|
2007
|
|||||||
Current
taxes:
|
||||||||
Federal
|
$ | (2,180,000 | ) | $ | (112,000 | ) | ||
State
|
(190,000 | ) | — | |||||
Total
current taxes
|
(2,370,000 | ) | (112,000 | ) | ||||
Deferred
tax (provision) benefit
|
545,000 | 1,775,000 | ||||||
Income
tax (provision) benefit
|
$ | (1,825,000 | ) | $ | 1,663,000 |
2008
|
2007
|
|||||||
U.S.
Statutory tax
rate
|
34.0 | % | 34.0 | % | ||||
State
taxes, net of Federal
benefit
|
4.0 | % | 4.0 | % | ||||
Research
and development tax
credits
|
(3.2 | %) | (2.4 | %) | ||||
Incentive
stock option
compensation
|
1.7 | % | 2.6 | % | ||||
Other,
net
|
(1.3 | %) | (1.0 | %) | ||||
Change
in valuation
allowance
|
— | (95.3 | %) | |||||
Income
tax provision
(benefit)
|
35.2 | % | (58.1 | %) |
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Stock-based
compensation
|
$ | 1,262,000 | $ | 952,000 | ||||
Start-up
costs
|
165,000 | 165,000 | ||||||
Inventory
reserves
|
196,000 | 73,000 | ||||||
Uniform
capitalization of inventory costs
|
31,000 | 18,000 | ||||||
Allowance
for doubtful accounts receivable
|
33,000 | 10,000 | ||||||
Accrued
expenses
|
178,000 | 105,000 | ||||||
Net
operating loss
carryforward
|
362,000 | 247,000 | ||||||
Research
and development tax credit carryforward
|
413,000 | 281,000 | ||||||
Alternative
minimum tax credit carryforward
|
90,000 | 100,000 | ||||||
State
jobs credit
carryforward
|
42,000 | — | ||||||
Other
|
— | 5,000 | ||||||
Total
deferred tax
assets
|
2,772,000 | 1,956,000 | ||||||
Valuation
allowance
|
(165,000 | ) | (165,000 | ) | ||||
Net
deferred tax
assets
|
2,607,000 | 1,791,000 | ||||||
Deferred
tax liabilities:
|
||||||||
Equipment
depreciation
|
(287,000 | ) | (16,000 | ) | ||||
Net
deferred tax assets
(liability)
|
$ | 2,320,000 | $ | 1,775,000 | ||||
Net
deferred tax asset (liability) reported as:
|
||||||||
Current
|
$ | 1,345,000 | $ | 795,000 | ||||
Non-current
|
$ | 975,000 | $ | 980,000 |
Year
ending December 31:
|
||||
2009
|
$ | 397,332 | ||
2010
|
265,561 | |||
2011
|
169,086 | |||
2012
|
126,815 | |||
2013
|
— | |||
$ | 958,794 |
License
Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production
software license agreement
|
April,
2005
|
April,
2009
|
Automatically
renews for one year periods unless terminated by either
party.
|
Production
license agreement
|
October,
2008
|
October,
2011
|
Automatically
renews for one year periods unless terminated by either
party.
|
Software
sublicense agreement
|
October,
2007
|
October,
2010
|
Automatically
renews for one year periods unless terminated by either
party.
|
Technology
license agreement
|
July,
2007
|
July,
2010
|
Automatically
renews for one year periods unless terminated by either
party.
|
Limited
license agreement
|
August,
2008
|
Perpetual
|
May
be terminated by either party.
|
Limited
license agreement
|
January,
2009
|
Perpetual
|
May
be terminated by either party.
|
Years
ended December 31,
|
||||
2008
|
2007
|
2006
|
2005
|
|
Expected
term of the options in years
|
2-6
years
|
3
years
|
3
years
|
3-10
years
|
Expected
volatility of Company stock
|
50% - 55%
|
42.17%
- 61.49%
|
49.58%
- 66.11%
|
39.41%
|
Expected
dividends
|
None
|
None
|
None
|
None
|
Risk-free
interest rate
|
2.37%-3.06%
|
4.07%
- 4.92%
|
4.57%
- 4.66%
|
2.78%
- 4.19%
|
Expected
forfeiture rate
|
5.00%
|
0.0%
- 5.00%
|
0%
|
0%
|
For
the Year Ended
December 31,
2008
|
||||||||
Options
|
Shares
|
Weighted
Average
Exercise Price
|
||||||
Outstanding
at beginning of period
|
5,728,767 | $ | 1.63 | |||||
Granted
|
1,003,000 | 6.67 | ||||||
Exercised
|
(1,250,567 | ) | 1.45 | |||||
Surrendered/cancelled
(cashless exercise)
|
(76,140 | ) | 1.17 | |||||
Forfeited
|
(35,433 | ) | 1.70 | |||||
Outstanding
at end of period
|
5,369,627 | $ | 2.62 | |||||
Exercisable
at end of the period
|
4,348,674 | $ | 1.70 | |||||
Weighted-average
fair value for options granted
during
the period at fair value
|
1,003,000 | $ | 3.86 |
Outstanding
options
|
Exercisable
options
|
|||||||||||||
Exercise
price range
|
Number
|
Weighted average
remaining
contractual
life
|
Number
|
Weighted average
remaining
contractual
life
|
||||||||||
$1.00
to $1.99
|
2,829,706 |
7.2
years
|
2,829,706 |
7.2
years
|
||||||||||
$2.00
to $2.99
|
1,269,921 |
2.8 years
|
1,269,921 |
2.8
years
|
||||||||||
$3.00
to $3.99
|
58,000 |
4.9
years
|
19,338 |
4.9
years
|
||||||||||
$4.00
to $4.99
|
267,000 |
8.8
years
|
201,375 |
8.8
years
|
||||||||||
$5.00
to $5.99
|
— |
—
|
— |
—
|
||||||||||
$6.00
to $6.99
|
905,000 |
9.0
years
|
5,000 |
9.0
years
|
||||||||||
$7.00
to $7.99
|
— |
—
|
— |
—
|
||||||||||
$8.00
to $8.99
|
30,000 |
7.7
years
|
10,000 |
4.3
years
|
|
|||||||||
$9.00
to $9.99
|
10,000 |
4.6
years
|
13,334 |
7.0
years
|
||||||||||
5,369,627 |
6.5
years
|
4,348,674 |
6.0
years
|
For
the Year Ended
December 31,
2008
|
||||||||
Warrants
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||
Outstanding
at beginning of year
|
583,250 | $ | 1.73 | |||||
Granted
|
— | — | ||||||
Exercised
|
(583,250 | ) | 1.73 | |||||
Forfeited
|
— | — | ||||||
Outstanding
at end of the period
|
— | $ | — | |||||
Exercisable
at end of the period
|
— | $ | — | |||||
Weighted
average fair value of warrant grants during the period
|
— | $ | — |
2008
|
2007
|
|||||||
Numerator
for basic and diluted income per share – Net income
|
$ | 3,353,630 | $ | 4,523,334 | ||||
Denominator
for basic income per share – weighted average shares
outstanding
|
15,319,257 | 13,742,070 | ||||||
Dilutive
effect of shares issuable under stock options and
warrants outstanding
|
2,189,834 | 2,421,267 | ||||||
Denominator
for diluted income per share – adjusted weighted average shares
outstanding
|
17,509,091 | 16,163,337 | ||||||
Net
income per share:
|
||||||||
Basic
|
$ | 0.22 | $ | 0.33 | ||||
Diluted
|
$ | 0.19 | $ | 0.28 |