x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Nevada
|
20-0064269
|
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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Class
|
Outstanding at July24, 2009
|
|
Common Stock, $0.001 par value
|
15,794,649
|
Page(s)
|
|
Certifications
|
2009
|
2008
|
|||||||
Assets
|
(Unaudited)
|
|||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 324,367 | $ | 1,205,947 | ||||
Accounts receivable-trade, less allowance for doubtful accounts
of $110,000 - 2009 and $90,000 – 2008
|
6,360,384 | 6,242,306 | ||||||
Accounts receivable-other
|
540,330 | 414,176 | ||||||
Inventories
|
8,172,087 | 8,359,961 | ||||||
Prepaid income taxes
|
97,443 | 85,943 | ||||||
Prepaid expenses
|
176,082 | 217,916 | ||||||
Deferred taxes
|
2,020,000 | 1,345,000 | ||||||
Total current assets
|
17,690,693 | 17,871,249 | ||||||
Furniture, fixtures and equipment
|
2,759,024 | 2,471,205 | ||||||
Less accumulated depreciation and amortization
|
1,155,090 | 738,554 | ||||||
1,603,934 | 1,732,651 | |||||||
Deferred taxes
|
950,000 | 975,000 | ||||||
Intangible assets, net
|
362,063 | 365,643 | ||||||
Other assets
|
99,893 | 149,066 | ||||||
Total assets
|
$ | 20,706,583 | $ | 21,093,609 | ||||
Liabilities and Stockholders’ Equity
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 3,184,354 | $ | 2,791,565 | ||||
Accrued expenses
|
1,205,685 | 1,053,624 | ||||||
Customer deposits
|
64,119 | 84,039 | ||||||
Total current liabilities
|
4,454,158 | 3,929,228 | ||||||
Commitments and contingencies
|
||||||||
Stockholders’ equity:
|
||||||||
Common stock, $0.001 par value; 75,000,000 shares authorized; Shares
issued: 16,035,759 – 2009 and 15,926,077 – 2008
|
16,036 | 15,926 | ||||||
Additional paid in capital
|
19,044,485 | 18,428,292 | ||||||
Treasury stock, at cost (shares: 248,610 – 2009 and 210,360 - 2008)
|
(1,687,465 | ) | (1,624,353 | ) | ||||
Retained earnings (deficit)
|
(1,120,631 | ) | 344,516 | |||||
Total stockholders’ equity
|
16,252,425 | 17,164,381 | ||||||
Total liabilities and stockholders’ equity
|
$ | 20,706,583 | $ | 21,093,609 |
Three months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Product revenue
|
$ | 6,661,182 | $ | 8,846,247 | $ | 10,704,386 | $ | 17,385,899 | ||||||||
Other revenue
|
356,014 | 41,556 | 701,994 | 103,827 | ||||||||||||
Total revenue
|
7,017,196 | 8,887,803 | 11,406,380 | 17,489,726 | ||||||||||||
Cost of revenue
|
3,506,591 | 3,458,271 | 6,036,235 | 6,739,300 | ||||||||||||
Gross profit
|
3,510,605 | 5,429,532 | 5,370,145 | 10,750,426 | ||||||||||||
Selling, general and administrative expenses:
|
||||||||||||||||
Research and development expense
|
792,149 | 659,691 | 2,067,473 | 1,091,734 | ||||||||||||
Selling, advertising and promotional expense
|
772,178 | 851,220 | 1,173,900 | 1,596,461 | ||||||||||||
Stock-based compensation expense
|
349,480 | 400,909 | 705,299 | 574,311 | ||||||||||||
Charges related to purchase and
cancellation
of employee stock
options
|
358,104 | - | 358,104 | - | ||||||||||||
General and administrative expense
|
1,524,337 | 1,238,782 | 3,318,638 | 2,713,150 | ||||||||||||
Total selling, general and administrative expenses
|
3,796,248 | 3,150,602 | 7,623,414 | 5,975,656 | ||||||||||||
Operating income (loss)
|
(285,643 | ) | 2,278,930 | (2,253,269 | ) | 4,774,770 | ||||||||||
Interest income
|
8,989 | 22,350 | 18,122 | 49,297 | ||||||||||||
Income (loss) before income tax benefit (provision)
|
(276,654 | ) | 2,301,280 | (2,235,137 | ) | 4,824,067 | ||||||||||
Income tax benefit (provision)
|
112,000 | (889,000 | ) | 770,000 | (1,735,000 | ) | ||||||||||
Net income (loss)
|
$ | (164,654 | ) | $ | 1,412,280 | $ | (1,465,147 | ) | $ | 3,089,067 | ||||||
Net income (loss) per share information:
|
||||||||||||||||
Basic
|
$ | (0.01 | ) | $ | 0.09 | $ | (0.09 | ) | $ | 0.21 | ||||||
Diluted
|
$ | (0.01 | ) | $ | 0.08 | $ | (0.09 | ) | $ | 0.18 | ||||||
Weighted average shares outstanding:
|
||||||||||||||||
Basic
|
15,730,657 | 15,329,259 | 15,723,402 | 14,901,660 | ||||||||||||
Diluted
|
15,730,657 | 17,694,285 | 15,723,402 | 17,173,787 |
Common Stock
|
||||||||||||||||||||||||
Shares
|
Amount
|
Additional
Paid In
Capital
|
Treasury
stock
|
Retained
earnings
(deficit)
|
Total
|
|||||||||||||||||||
Balance, January 1, 2009
|
15,926,077 | $ | 15,926 | $ | 18,428,292 | $ | (1,624,353 | ) | $ | 344,516 | $ | 17,164,381 | ||||||||||||
Stock-based compensation
|
— | — | 1,063,403 | — | — | 1,063,403 | ||||||||||||||||||
Excess (deficiency) in tax benefits related
to stock-based
compensation
|
— | — | (130,000 | ) | — | — | (130,000 | ) | ||||||||||||||||
Restricted common stock grant
|
25,000 | 25 | 58,725 | — | — | 58,750 | ||||||||||||||||||
Deferral of restricted stock grant compensation
related to
vesting in future periods
|
— | — | (58,750 | ) | — | — | (58,750 | ) | ||||||||||||||||
Stock options exercised at $1.00 per share
|
100,000 | 100 | 99,900 | — | — | 100,000 | ||||||||||||||||||
Stock options exercised at $1.60 per share
|
136,401 | 136 | 218,106 | — | — | 218,242 | ||||||||||||||||||
Common stock surrendered as consideration
for cashless
exercise of stock options
|
(151,719 | ) | (151 | ) | (315,191 | ) | — | — | (315,342 | ) | ||||||||||||||
Purchase of 38,250 common shares for treasury
|
— | — | — | (63,112 | ) | — | (63,112 | ) | ||||||||||||||||
Purchase and cancellation of employee stock
options
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— | — | (320,000 | ) | — | — | (320,000 | ) | ||||||||||||||||
Net (loss)
|
— | — | — | — | (1,465,147 | ) | (1,465,147 | ) | ||||||||||||||||
Balance, June 30, 2009
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16,035,759 | $ | 16,036 | $ | 19,044,485 | $ | (1,687,465 | ) | $ | (1,120,631 | ) | $ | 16,252,425 |
Six Months Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Cash Flows From Operating Activities:
|
||||||||
Net income (loss)
|
$ | (1,465,147 | ) | $ | 3,089,067 | |||
Adjustments to reconcile net income (loss) to net cash flows
(used in) operating activities:
|
||||||||
Depreciation and amortization
|
434,571 | 133,097 | ||||||
Stock based compensation
|
1,063,403 | 574,311 | ||||||
Reserve for inventory obsolescence
|
167,728 | 87,335 | ||||||
Reserve for bad debt allowance
|
20,000 | 1,776 | ||||||
Deferred tax (benefit) provision
|
(650,000 | ) | (95,000 | ) | ||||
Change in assets and liabilities:
|
||||||||
(Increase) decrease in:
|
||||||||
Accounts receivable - trade
|
(138,078 | ) | (3,580,862 | ) | ||||
Accounts receivable - other
|
(126,154 | ) | (122,825 | ) | ||||
Inventories
|
20,146 | (1,565,828 | ) | |||||
Prepaid income taxes
|
(11,500 | ) | — | |||||
Prepaid expenses
|
41,834 | 29,831 | ||||||
Other assets
|
49,173 | 35,749 | ||||||
Increase (decrease) in:
|
||||||||
Accounts payable
|
392,789 | 308,239 | ||||||
Accrued expenses
|
152,061 | 489,217 | ||||||
Income taxes payable
|
— | (76,000 | ) | |||||
Customer deposits
|
(19,920 | ) | (226,166 | ) | ||||
Unearned income
|
— | (3,864 | ) | |||||
Net cash (used in) operating activities
|
(69,094 | ) | (921,923 | ) | ||||
Cash Flows from Investing Activities:
|
||||||||
Purchases of furniture, fixtures and equipment
|
(287,818 | ) | (394,743 | ) | ||||
Additions to intangible assets
|
(14,456 | ) | (82,689 | ) | ||||
Net cash (used in) investing activities
|
(302,274 | ) | (477,432 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Proceeds from exercise of stock options and warrants
|
2,900 | 1,953,510 | ||||||
Excess (deficiency) in tax benefits related to stock-based compensation
|
(130,000 | ) | 1,805,000 | |||||
Purchase of common shares for treasury
|
(63,112 | ) | — | |||||
Purchase of employee stock options
|
(320,000 | ) | — | |||||
Net cash provided by (used in) financing activities
|
(510,212 | ) | 3,758,510 | |||||
Increase (decrease) in cash and cash equivalents
|
(881,580 | ) | 2,359,155 | |||||
Cash and cash equivalents, beginning of period
|
1,205,947 | 4,255,039 | ||||||
Cash and cash equivalents, end of period
|
$ | 324,367 | $ | 6,614,194 | ||||
Supplemental disclosures of cash flow information:
|
||||||||
Cash payments for interest
|
$ | — | $ | — | ||||
Cash payments for income taxes
|
$ | 21,500 | $ | 101,000 | ||||
Supplemental disclosures of non-cash investing and financing activities:
|
||||||||
Restricted common stock grant
|
$ | 58,750 | $ | — | ||||
Common stock surrendered as consideration for exercise of stock options
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$ | 315,342 | $ | 378,110 |
·
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Sales to domestic customers are generally made direct to the end customer (typically a law enforcement agency) through commissioned third-party sales agents. Revenue is recorded when the product is shipped to the end customer consistent with the provisions of Staff Accounting Bulletin (“SAB”) #101 as amended by SAB # 104.
|
·
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Sales to international customers are generally made through independent distributors who purchase the product from us at a wholesale price and sell to the end user (typically law enforcement agencies) at a retail price. The international distributor retains the margin as their compensation. The international distributor maintains
product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the international distributor consistent with the provisions of SAB #101 as amended by SAB #104.
|
|
•
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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
|
|
•
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Forfeitures are based on the history of cancellations of awards granted and management’s analysis of potential forfeitures.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Sales by geographic area:
|
||||||||||||||||
United States of America
|
$ | 6,842,426 | $ | 5,168,868 | $ | 11,081,134 | $ | 12,731,794 | ||||||||
Foreign
|
174,770 | 3,718,935 | 325,246 | 4,757,932 | ||||||||||||
$ | 7,017,196 | $ | 8,887,803 | $ | 11,406,380 | $ | 17,489,726 |
June 30,
2009
|
December 31,
2008
|
|||||||
Raw material and component parts
|
$ | 5,353,423 | $ | 6,038,313 | ||||
Work-in-process
|
1,138,992 | 52,500 | ||||||
Finished goods
|
2,376,521 | 2,798,269 | ||||||
Reserve for excess and obsolete inventory
|
(696,849 | ) | (529,121 | ) | ||||
$ | 8,172,087 | $ | 8,359,961 |
June 30,
2009
|
December 31,
2008
|
|||||||
Accrued warranty expense
|
$ | 291,955 | $ | 271,307 | ||||
Accrued sales commissions
|
207,589 | 197,777 | ||||||
Accrued payroll and related fringes
|
268,630 | 208,633 | ||||||
Employee separation agreement
|
286,353 | — | ||||||
Other
|
151,158 | 375,907 | ||||||
$ | 1,205,685 | $ | 1,053,624 |
Beginning balance
|
$ | 271,307 | ||
Provision for warranty expense
|
85,991 | |||
Charges applied to warranty reserve
|
(65,343 | ) | ||
Ending balance
|
$ | 291,955 |
2009
|
2008
|
|||||||
Current taxes:
|
||||||||
Federal
|
$ | 131,500 | $ | (1,640,000 | ) | |||
State
|
(11,500 | ) | (190,000 | ) | ||||
Total current taxes
|
120,000 | (1,830,000 | ) | |||||
Deferred tax (provision) benefit
|
650,000 | 95,000 | ||||||
Income tax (provision) benefit
|
$ | 770,000 | $ | (1,735,000 | ) |
2009
|
2008
|
|||||||
U.S. Statutory tax rate
|
34.0 | % | (34.0 | )% | ||||
State taxes, net of Federal benefit
|
3.0 | % | (4.0 | )% | ||||
Research and development tax credits
|
2.7 | % | 3.8 | % | ||||
Incentive stock option compensation
|
(4.0 | )% | (2.6 | )% | ||||
Other, net
|
(1.2 | )% | 0.8 | % | ||||
Income tax (provision) benefit
|
34.5 | % | (36.0 | )% |
Year ending December 31:
|
||||
2009 (July 1, 2009 through December 31, 2009)
|
$ | 198,670 | ||
2010
|
265,565 | |||
2011
|
169,086 | |||
2012
|
126,815 | |||
2013 and thereafter
|
— | |||
$ | 760,136 |
License Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production software license agreement
|
April, 2005
|
April, 2010
|
Automatically renews for one year periods unless terminated by either party.
|
Production license agreement
|
October, 2008
|
October, 2011
|
Terminated in April 2009.
|
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
|
Terminated by Digital Ally, Inc. in April 2009.
|
Six months ended
|
Years ended December 31,
|
||||
June 30, 2009
|
2008
|
2007
|
2006
|
2005
|
|
Expected term of the options in years
|
2-5 years
|
2-6 years
|
3 years
|
3 years
|
3-10 years
|
Expected volatility of Company stock
|
78% - 82%
|
50% - 55%
|
42.17% - 61.49%
|
49.58% - 66.11%
|
39.41%
|
Expected dividends
|
None
|
None
|
None
|
None
|
None
|
Risk-free interest rate
|
0.84% - 2.52%
|
2.37%-3.06%
|
4.07% - 4.92%
|
4.57% - 4.66%
|
2.78% - 4.19%
|
Expected forfeiture rate
|
5.00%
|
5.00%
|
0.0% - 5.00%
|
0%
|
0%
|
Six Months Ended
June 30, 2009
|
||||||||
Options
|
Shares
|
Weighted
Average
Exercise Price
|
||||||
Outstanding at January 1, 2009
|
5,369,627 | $ | 2.62 | |||||
Granted
|
520,000 | 1.76 | ||||||
Exercised
|
(84,682 | ) | 1.31 | |||||
Surrendered/cancelled (cashless exercise)
|
(151,719 | ) | 1.37 | |||||
Forfeited
|
(998,500 | ) | 2.20 | |||||
Outstanding at end of period
|
4,654,726 | $ | 2.68 | |||||
Exercisable at end of the period
|
3,455,358 | $ | 1.99 | |||||
Weighted-average fair value for options granted
during the period at fair value
|
520,000 | $ | 0.95 |
Outstanding options
|
Exercisable options
|
||||||||
Exercise price range
|
Number
|
Weighted average
remaining
contractual life
|
Number
|
Weighted average
remaining
contractual life
|
|||||
$1.00 to $1.99
|
2,393,305
|
7.3 years
|
1,982,638
|
6.8 years
|
|||||
$2.00 to $2.99
|
1,141,421
|
2.8 years
|
1,058,921
|
2.3 years
|
|||||
$3.00 to $3.99
|
58,000
|
4.3 years
|
38,674
|
4.4 years
|
|||||
$4.00 to $4.99
|
267,000
|
8.3 years
|
245,125
|
8.3 years
|
|||||
$5.00 to $5.99
|
—
|
—
|
—
|
—
|
|||||
$6.00 to $6.99
|
755,000
|
8.5 years
|
5,000
|
8.5 years
|
|||||
$7.00 to $7.99
|
—
|
—
|
—
|
—
|
|||||
$8.00 to $8.99
|
30,000
|
7.2 years
|
88,333
|
7.8 years
|
|||||
$9.00 to $9.99
|
10,000
|
4.1 years
|
36,667
|
5.6 years
|
|||||
4,654,726
|
6.4 years
|
3,455,358
|
5.5 years
|
Restricted
stock
|
Weighted
average
grant date
fair value
|
|||||||
Nonvested balance, January 1, 2009
|
— | $ | — | |||||
Granted
|
25,000 | 2.35 | ||||||
Vested
|
— | — | ||||||
Forfeited
|
— | — | ||||||
Nonvested balance, June 30, 2009
|
25,000 | $ | 2.35 |
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator for basic and diluted income per share –
Net income (loss)
|
$ | (164,654 | ) | $ | 1,412,280 | $ | (1,465,147 | ) | $ | 3,089,067 | ||||||
Denominator for basic income (loss) per share –
weighted average shares outstanding
|
15,730,657 | 15,329,259 | 15,723,402 | 14,901,660 | ||||||||||||
Dilutive effect of shares issuable under stock options
and warrants outstanding
|
— | 2,365,026 | — | 2,272,127 | ||||||||||||
Denominator for diluted income (loss) per share –
adjusted weighted average shares outstanding
|
15,730,657 | 17,694,285 | 15,723,402 | 17,173,787 | ||||||||||||
Net income (loss) per share:
|
||||||||||||||||
Basic
|
$ | (0.01 | ) | $ | 0.09 | $ | (0.09 | ) | $ | 0.21 | ||||||
Diluted
|
$ | (0.01 | ) | $ | 0.08 | $ | (0.09 | ) | $ | 0.18 |
·
|
We experienced a decrease in revenues during the fourth quarter 2008 and first quarter 2009 due in part to the challenging economy, which has negatively impacted state, county and municipal budgets. We expect that the current economic downturn will continue to depress certain state and local tax bases, which will continue
to make the remainder of 2009 a challenging business environment. Our second quarter 2009 revenues have shown significant improvement and we expect our sales for the balance of 2009 will improve as these conditions alleviate.
|
·
|
We believe that delays in the introduction of our DVM-750 resulted in significant lost revenues in the first half of 2009 and this contributed to our decreased revenues and operating losses. We were not able to compete for several large contracts that required the specifications of the DVM-750. In addition, we bought substantial quantities
of component parts in the fourth quarter 2008 and first quarter 2009 in anticipation of commencing commercial production of the DVM-750 beginning in the fourth quarter 2008, which increased our inventory balances. Based upon our marketing efforts and the level of customer response we believe that demand for this new product will be very strong. Commercial deliveries of the DVM-750 commenced in the second quarter 2009, which were a prime component of our improved sales for the second quarter 2009 over
the first quarter 2009. We expect that our current order backlog for the DVM-750 and continued acceptance of this new product will help improve our revenues for the balance of 2009.
|
·
|
We anticipated the assembly line changeover to the new DVM-500 Plus and DVM-750 products to occur during the fourth quarter 2008. We built significant quantities of the legacy DVM-500 model in October and November 2008 to handle anticipated product demand during the conversion period. As a result we held approximately
1,150 DVM-500 units in finished goods inventory at December 31, 2008. The number of these units has been reduced to less than 400 units currently though sales activities in 2009 (average of 120 to 170 units sold per month). The remaining legacy DVM-500 units are expected to be sold in the second half of 2009. We have not found it necessary to offer any significant discounts to sell the DVM-500 units because their retail price point is below both the DVM-500 Plus and the DVM-750. In
addition, we need to maintain a minimal quantity of these units for warranty and service purposes.
|
·
|
We believe that current and potential customers may be delaying orders due to a number of factors, including budget reductions and anticipation of receiving the federal government’s stimulus funds in order to preserve their currently available funding and budgets. In light of the historically high levels of federal
funding, estimated at over $4 billion,
|
|
allocated to Law Enforcement under the American Recovery and Reinvestment Act, the Omnibus Appropriations Act of 2009, and other programs law enforcement agencies will have access to federal funding which has not been available to them in the past. We believe that such funding will have a positive impact on our revenues
in the future, but cannot predict the amount of the funds that will be used for products such as ours or the timing of the release of such funds. We anticipate a reduction in our inventory balances for the remainder of 2009 as our sales increase and as we continue to maintain stricter inventory control. To that end we reduced our inventories of the legacy DVM-500 systems in excess of 550 units during the second quarter 2009.and presently have fewer than 325 units remaining in inventory.
|
·
|
Our international revenues decreased substantially during the fourth quarter 2008 and first quarter 2009. Sales to certain countries that were strong revenue sources for us on an historical basis have been negatively impacted by political and social unrest, economic recession and a weakening of their currency exchange rates
versus the US dollar. We have focused on our international business by hiring an international sales manager in January 2009 and by appointing international distributers in new countries. We expect international sales to improve during the remainder of 2009, based on an easing of economic, political and social conditions affecting certain of our key international customers and as initial sales to new countries occur. In addition, we believe that availability of the DVM-750 will
help to improve our international revenues.
|
Three Months
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
100 | % | 100 | % | ||||
Cost of revenue
|
50 | % | 39 | % | ||||
Gross profit
|
50 | % | 61 | % | ||||
Selling, general and administrative expenses:
|
||||||||
Research and development expense
|
11 | % | 7 | % | ||||
Selling, advertising and promotional expense
|
11 | % | 10 | % | ||||
Stock-based compensation expense
|
5 | % | 4 | % | ||||
Charge related to purchase and cancellation of employee stock option
|
5 | % | - | |||||
General and administrative expense
|
22 | % | 14 | % | ||||
Total selling, general and administrative expenses
|
54 | % | 35 | % | ||||
Operating income (loss)
|
(4 | %) | 26 | % | ||||
Interest income (expense)
|
— | % | — | % | ||||
Income (loss) before income tax provision
|
(4 | %) | 26 | % | ||||
Income tax (provision) benefit
|
2 | % | 10 | % | ||||
Net income (loss)
|
(2 | %) | 16 | % | ||||
Net income (loss) per share information:
|
||||||||
Basic
|
$ | (0.01 | ) | $ | 0.09 | |||
Diluted
|
$ | (0.01 | ) | $ | 0.08 |
·
|
We have experienced a decrease in revenues resulting from the challenging economy which has negatively impacted state, county and municipal budgets. Our average order size decreased from approximately $12,700 during the three months ended June 30, 2008 to $9,600 during the three months ended June 30, 2009. In
addition, we shipped five individual orders in excess of $100,000 during the three months ended June 30, 2009 compared to seven individual orders in excess of $100,000 during the three months ended June 30, 2008.
|
·
|
We believe that delays in the introduction of our DVM-750 product resulted in significant lost revenues during the three months ended June 30, 2009. We were not able to compete for several large contracts that required the specifications of the DVM 750. In addition, we believe that customers may have delayed orders so that
they could purchase the DVM-750 rather than its predecessor, the DVM-500 model. Based upon our marketing efforts and the response we believe that demand for this new product will be strong. We commenced commercial deliveries of the DVM-750 during May 2009 and it represented over 40% of our total revenues for the second quarter 2009. We expect the DVM-750 to become our leading product in terms of revenues generated in the third quarter 2009 and for the balance of 2009.
|
·
|
We believe that current and potential customers may have delayed their orders due to a number of factors, including the budget reductions and anticipation of receiving the federal government’s stimulus funds in order to preserve their currently available funding and budgets.
|
·
|
Our international revenues decreased substantially to $174,470 during the three months ended June 30, 2009 as compared to $3,718,935 during the three months ended June 30, 2008. Sales to certain countries that were strong revenue sources for us on an historical basis have been negatively impacted by political and social
unrest, economic recession and a weakening of their currency exchange rate versus the US dollar. We have focused on our
|
|
international business by hiring an international sales manager in January 2009 and by appointing international distribution agents in six new countries since January 1, 2009, which brings our total to 30 agents representing our products in various countries throughout the world. We have experienced an increase in inquiries
and bid activity from international customers in 2009.
|
Three Months Ended
|
||||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Research and development expense
|
$ | 792,149 | $ | 659,691 | ||||
Selling, advertising and promotional expense
|
772,178 | 851,220 | ||||||
Stock-based compensation expense
|
349,480 | 400,909 | ||||||
Charge related to purchase and cancelation of employee stock options
|
358,104 | - | ||||||
General and administrative expense
|
1,524,337 | 1,238,782 | ||||||
Total
|
$ | 3,796,248 | $ | 3,150,602 |
Six Months
Ended June 30,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
100 | % | 100 | % | ||||
Cost of revenue
|
53 | % | 39 | % | ||||
Gross profit
|
47 | % | 61 | % | ||||
Selling, general and administrative expenses:
|
||||||||
Research and development expense
|
18 | % | 6 | % | ||||
Selling, advertising and promotional expense
|
10 | % | 9 | % | ||||
Stock-based compensation expense
|
6 | % | 3 | % | ||||
Charge related to purchase and cancellation of employee stock options
|
3 | % | - | |||||
General and administrative expenses
|
30 | % | 16 | % | ||||
Total selling, general and administrative expenses
|
67 | % | 34 | % | ||||
Operating income (loss)
|
(20 | %) | 27 | % | ||||
Interest income (expense)
|
— | % | — | % | ||||
Income (loss) before income tax provision
|
(20 | %) | 27 | % | ||||
Income tax (provision) benefit
|
7 | % | (10 | )% | ||||
Net income (loss)
|
(13 | %) | 18 | % | ||||
Net income (loss) per share information:
|
||||||||
Basic
|
$ | (0.09 | ) | $ | 0.21 | |||
Diluted
|
$ | (0.09 | ) | $ | 0.18 |
·
|
We have experienced a decrease in overall revenues resulting from the challenging economy which has negatively impacted state, county and municipal budgets.
|
·
|
We believe that delays in the introduction of our DVM-750 product resulted in significant lost revenues during the six months ended June 30, 2009. We were not able to compete for several large contracts that required the specifications of the DVM 750. In addition, we believe that customers may have delayed orders so that
they could purchase the DVM-750 rather than its predecessor, the DVM-500 model.
|
·
|
We believe that current and potential customers may have delayed their orders due to a number of factors, including budget reductions and in anticipation of receiving the federal government’s stimulus funds in order to preserve their currently available funding and budgets.
|
·
|
Our international revenues decreased substantially to $325,246 during the six months ended June 30, 2009 as compared to $4,757,932 during the six months ended June 30, 2008. Sales to certain countries that were strong revenue sources for us on an historical basis have been negatively impacted by political and social unrest,
economic recession and a weakening of their currency exchange rate versus the US dollar. We have focused on our international business by hiring an international sales manager in January 2009 and by appointing international distribution agents in six new countries since January 1, 2009, which brings our total to 30 agents representing our products in various countries throughout the world. We have experienced an increase in inquiries and bid activity from international customers in 2009.
|
Six Months Ended
|
||||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Research and development expense
|
$ | 2,067,473 | $ | 1,091,734 | ||||
Selling, advertising and promotional expense
|
1,173,900 | 1,596,461 | ||||||
Stock-based compensation expense
|
705,299 | 574,311 | ||||||
Charge related to purchase and cancellation of employee stock options
|
358,104 | - | ||||||
Professional fees and expense
|
613,667 | 475,929 | ||||||
General and administrative expense
|
1,412,471 | 1,018,041 | ||||||
Other
|
1,292,500 | 1,219,180 | ||||||
Total
|
$ | 7,623,414 | $ | 5,975,656 |
·
|
Operating
activities
:
|
$69,094
of net
cash used in
operating activities, generated primarily from our net loss and a substantial increase in accounts receivable and non-cash deferred tax benefits partially offset by cash provided
by an increase in accounts payable and accrued expenses and non-cash charges, such as depreciation and amortization, reserves for inventory obsolescence and stock based compensation expense.
|
·
|
Investing
activities
:
|
$302,274
of net
cash used
in
investing activities, primarily to acquire equipment to expand our research, development and production capabilities and the costs to acquire
patents on our proprietary technology utilized in our products.
|
·
|
Financing
activities
:
|
$510,212
of net
cash used in
financing activities, representing the purchase of common shares for treasury, the repurchase of outstanding stock options and the related deficiency in tax benefit offset by the proceeds from
stock option the purchase of common shares for treasury.
|
Year ending December 31:
|
||||
2009 (July 1, 2009 through December 31, 2009)
|
$ | 198,670 | ||
2010
|
265,565 | |||
2011
|
169,086 | |||
2012
|
126,815 | |||
2013 and thereafter
|
— | |||
$ | 760,136 |
License Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production software license agreement
|
April, 2005
|
April, 2010
|
Automatically renews for one year periods unless terminated by either party.
|
Production license agreement
|
October, 2008
|
October, 2011
|
Terminated in April 2009.
|
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
|
Terminated by Digital Ally, Inc. in April 2009.
|
•
|
Revenue Recognition / Allowance for Doubtful Accounts;
|
|||
•
|
Allowance for excess and obsolete Inventory;
|
|||
•
|
Warranty reserves;
|
|||
•
|
Stock-based Compensation Expense;
|
|||
• | Accounting for Income Taxes |
June 30,
2009
|
December 31,
2008
|
|||||||
Raw material and component parts
|
$ | 5,353,423 | $ | 6,038,313 | ||||
Work-in-process
|
1,138,992 | 52,500 | ||||||
Finished goods
|
2,376,521 | 2,798,269 | ||||||
Subtotal
|
8,868,936 | 8,889,082 | ||||||
Reserve for excess and obsolete inventory
|
(696,849 | ) | (529,121 | ) | ||||
Total
|
$ | 8,172,087 | $ | 8,359,961 |
|
(Not Applicable)
|
(c) Issuer
Purchases of Equity
Securities
Period
|
Total Number of
Shares Purchased
[1]
|
Average
Price Paid
per Share
[1]
|
(c)Total Number of
Shares Purchased as
Part of Publicly
Announced Plans of
Programs [1]
|
(d)Maximum
number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
[1]
|
||||
January 1 to 31, 2009
|
----
|
----
|
----
|
$8,375,647
|
||||
February 1 to 28, 2009
|
----
|
----
|
----
|
$8,375,647
|
||||
March 1 to 31, 2009
|
38
,250
|
$1.65
|
38,250
|
$8,312,535
|
||||
April 1 to 30, 2009
|
----
|
----
|
----
|
$8,312,535
|
||||
May 1 to 31, 2009
|
----
|
----
|
----
|
$8,312,535
|
||||
June 1 to 30, 2009
|
----
|
----
|
----
|
$8,312,535 [2]
|
|
[1] During September 2008, the Board of Directors approved the Stock Repurchase Program that authorized the repurchase of up to $10 million of the Company’s common stock in the open market, or in privately negotiated transactions, through July 1, 2010. The repurchases, if and when made, will be subject to market conditions, applicable rules of the Securities and Exchange Commission and
other factors. Purchases may be commenced, suspended or discontinued at any time.
|
|
[2] The Stock Repurchase Program authorizes the repurchase of up to $10 million of common stock. A total of 248,610 shares have been repurchased under this program as of June 30, 2009, at a total cost of $1,687,465 ($6.79 per share average). As a result, $8,312,535 is the maximum remaining dollar amount of common shares that may be purchased under the Program. The
number of shares yet to be purchased is variable based upon the purchase price of the shares at the time.
|
|
[3] We purchased vested and unvested employee stock options to acquire 950,000 shares of our common stock in April 2009. The purchase was part of a Separation Agreement reached with our former Executive Vice President of Engineering who resigned to pursue other opportunities. This repurchase was not considered to be part of our Stock Repurchase Program and therefore is not included
in the above table.
|
|
Votes For
|
|
Votes Withheld
|
|
Abstain
|
|
Election of five directors to hold office until the next annual meeting of our
stockholders or until their successors are elected and qualified:
|
|
|
|
|||
Stanton E. Ross
|
|
13,096,919
|
|
30,000
|
|
812,149
|
Leroy C. Richie
|
|
9,993,708
|
|
—
|
|
751,619
|
Daniel F. Hutchins
|
|
10,003,708
|
|
—
|
|
903,060
|
Edward Juchniewicz
|
|
10,003,708
|
|
—
|
|
787,876
|
Elliot M. Kaplan
|
|
9,993,708
|
|
30,000
|
|
783,604
|
Approval of the 2009 Stock Option and Restricted Stock Plan of Digital Ally,
Inc.:
|
|
2,960,443
|
|
2,256,479
|
|
4,575
|
Ratification of the appointment of McGladrey & Pullen LLP as the independent
registered accounting firm of Digital Ally, Inc. for the year ending December 31,
2008:
|
|
13,497,213
|
|
74,692
|
|
367,166
|
|
(Not Applicable)
|
(a) Exhibits
|
|
|
10.19 Letter Amendment to Loan Agreement dated June 30, 2009.
|
|
31.1 Certificate of Stanton E. Ross pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
|
|
31.2 Certificate of Thomas J. Heckman pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
|
|
32.1 Certificate of Stanton E. Ross pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
|
|
32.2 Certificate of Thomas J. Heckman pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
|
DIGITAL ALLY, INC.,
a Nevada corporation
|
||
|
/s/ |
Stanton E. Ross
|
Name: |
Stanton E. Ross
|
|
|
Title:
|
President and Chief Executive Officer
|
/s/ |
Thomas J. Heckman
|
|
|
Name:
|
Thomas J. Heckman
|
|
Title:
|
Chief Financial Officer, Secretary, Treasurer and Principal Accounting Officer
|
Exhibit
|
Description
|
|
10.19
|
Letter Amendment to Loan Agreement dated June 30, 2009
|
|
31.1
|
Certificate of Stanton E. Ross pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
|
|
31.2
|
Certificate of Thomas J. Heckman pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
|
|
32.1
|
Certificate of Stanton E. Ross pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
|
|
32.2
|
Certificate of Thomas J. Heckman pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
|
Re:
|
First Amendment to Loan Agreement dated February 13, 2009 (“Loan Agreement” pertaining to Loan #8126863 in the stated principal amount of $2,500,000) referencing and amending a certain Loan Agreement dated February 13, 2008 between Enterprise Bank & Trust (“Lender”) and Digital Ally, Inc (“Borrower”).
|
Very truly yours,
ENTERPRISE BANK & TRUST
By: _____________________
Taylor Miller
Senior Vice President
|
AGREED TO:
DIGITAL ALLY, INC
By: _____________________
Stanton E. Ross
Chairman and CEO
|
1.
|
I have reviewed this report on Form 10-Q for the three months ended June 30, 2009 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)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
|
(c)
|
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
|
(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.
|
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-Q for the three months ended June 30, 2009 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)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
|
(c)
|
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
|
(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
|
July 30, 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
|
July 30, 2009
|