Nevada
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20-0064269
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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8000 W. 110th, Suite 200, Overland Park, KS
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66210 | |
(Address of principal executive offices)
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(Zip Code) |
Common Stock, $0.001 par value | NASDAQ | |
(Title of class) | (Name of each exchange on which registered) |
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | þ |
PART
I
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Page | ||
3
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9
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17
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17
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17
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17
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PART II
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18
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21
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21
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39
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39
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39
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39
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40
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PART III
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41
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41
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Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 41 | |
41
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41
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PART IV
|
·
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An in-car digital audio/video system that is integrated into a rear view mirror. Products using this system are marketed under the DVM-500, DVM-500 Plus and DVM-750 series.
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·
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An all-weather mobile digital audio/video system, our DVM-500 Ultra that is designed for motorcycle, ATV and boat uses.
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·
|
A miniature, body-worn digital audio/video camera marketed as the FirstVU system.
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·
|
A hand-held speed detection system based on LIDAR (Light Detection and Ranging). This product is marketed as our Laser Ally system.
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·
|
A hand-held thermal imaging camera used for improved night vision. This product is marketed as our Thermal Ally system.
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·
|
A digital audio / video system that is integrated into a large law-enforcement style flashlight. This product is marketed as our DVF-500 system.
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·
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wide angle zoom color camera;
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·
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standards-based video and audio compression and recording;
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·
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system is concealed in the rear view mirror, replacing factory rear view mirror;
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·
|
monitor in rear-view mirror is invisible when not activated;
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·
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eliminates need for analog tapes to store and catalogue;
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·
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easily installs in any vehicle;
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·
|
archives to computers (wirelessly) and to DVDs, CD-ROMs, or file servers;
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·
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900 MHz audio transceiver with automatic activation;
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·
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marks exact location of incident with integrated GPS;
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·
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playback using Windows Media Player;
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·
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optional wireless download of stored video evidence;
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·
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proprietary software protects the chain of custody; and
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·
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records to rugged and durable solid state memory.
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·
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virtually the same size and shape as a traditional flashlight;
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·
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easy to use, requiring one button to start and stop recording;
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·
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on-board flash memory card;
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·
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extra-wide field of view for digital video and audio recording;
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·
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each frame of video can be date and time stamped;
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·
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LED flashlight bulb is an improvement over conventional bulbs; and
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·
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proprietary chain of custody software to protect delivery of data back to the police station.
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License Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production software license agreement
|
April, 2005
|
April, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Software sublicense agreement
|
October, 2007
|
October, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Technology license agreement
|
July, 2007
|
July, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Limited license agreement
|
August, 2008
|
Perpetual
|
May be terminated by either party.
|
·
|
attendance at industry trade shows and conventions;
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·
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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;
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·
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direct sales, with a force of industry-specific sales individuals who identify, call upon and build on-going relationships with key purchasers and targeted industries;
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·
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support of our direct sales with passive sales systems, including inside sales and e-commerce;
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·
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print advertising in journals with specialized industry focus;
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·
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direct mail campaigns targeted to potential customers;
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·
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web advertising, including supportive search engines and website and registration with appropriate sourcing entities;
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·
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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
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·
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brand identification through trade names associated with us and our products.
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·
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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;
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·
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actual or anticipated fluctuations in our operating results;
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·
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the potential absence of securities analysts covering us and distributing research and recommendations about us;
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·
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we expect our actual operating results to fluctuate widely as we increase our sales and production capabilities and other operations;
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·
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we may have a low trading volume for a number of reasons, including that a large amount of our stock is closely held;
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·
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overall stock market fluctuations;
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·
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economic conditions generally and in the law enforcement and security industries in particular;
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·
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announcements concerning our business or those of our competitors or customers;
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·
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our ability to raise capital when we require it, and to raise such capital on favorable terms;
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·
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we have $1.5 million borrowings outstanding as of December 31, 2010 under our line-of-credit facility, which provides us limited or no availability for future borrowings;
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·
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our line-of-credit matures in June 2011 and we believe it is unlikely that our current bank will be willing to extend or renew the facility under terms that are mutually agreeable;
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·
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changes in financial estimates by securities analysts or our failure to perform as anticipated by the analysts;
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·
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announcements of technological innovations;
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·
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conditions or trends in the industry;
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·
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litigation;
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·
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changes in market valuations of other similar companies;
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·
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announcements by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, strategic partnerships or joint ventures;
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·
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future sales of common stock;
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·
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actions initiated by the SEC or other regulatory bodies;
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·
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existence or lack of patents or proprietary rights;
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·
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departure of key personnel or failure to hire key personnel; and
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·
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general market conditions.
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High Close
|
Low Close
|
|||||||
Year Ended December 31, 2010
|
||||||||
1st Quarter
|
$ | 2.89 | $ | 1.79 | ||||
2nd Quarter
|
$ | 2.12 | $ | 1.74 | ||||
3rd Quarter
|
$ | 2.10 | $ | 1.64 | ||||
4th Quarter
|
$ | 2.24 | $ | 1.51 | ||||
Year Ended December 31, 2009
|
||||||||
1st Quarter
|
$ | 3.86 | $ | 1.54 | ||||
2nd Quarter
|
$ | 2.52 | $ | 1.60 | ||||
3rd Quarter
|
$ | 3.10 | $ | 2.34 | ||||
4th Quarter
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$ | 2.47 | $ | 1.50 |
Period
|
(a) Total Number of Shares Purchased
[1]
|
(b) Average Price Paid per Share [1]
|
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs [1]
|
(d)Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or
Programs [1]
|
||||||||||||
October 1 to 31, 2010
|
— | — | — | $ | 7,842,774 | |||||||||||
November 1 to 30, 2010
|
— | — | — | $ | 7,842,774 | |||||||||||
December 1 to 31, 2010
|
— | — | — | $ | 7,842,774[2 | ] |
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…
|
3,136,087 | $ | 2.86 | 490,200 | ||||||||
Equity compensation plans not approved by stockholders..
|
865,639 | $ | 2.72 | 294,133 | ||||||||
Total
|
4,001,726 | $ | 2.83 | 784,333 |
For the three months ended:
|
||||||||||||||||||||||||||||||||
December 31, 2010
|
September 30, 2010
|
June 30,
2010
|
March 31, 2010
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December 31, 2009
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September 30, 2009
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June 30,
2009
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March 31, 2009
|
|||||||||||||||||||||||||
Total revenue
|
$ | 6,357,967 | $ | 7,023,171 | $ | 5,519,980 | $ | 6,309,887 | $ | 9,245,190 | $ | 5,714,683 | $ | 7,017,196 | $ | 4,389,184 | ||||||||||||||||
Gross profit
|
2,629,094 | 3,284,645 | 2,771,684 | 3,441,826 | 4,727,911 | 3,334,989 | 3,510,605 | 1,859,540 | ||||||||||||||||||||||||
Gross profit margin percentage
|
41.4 | % | 46.8 | % | 50.2 | % | 54.5 | % | 51.1 | % | 58.3 | % | 50.0 | % | 42.4 | % | ||||||||||||||||
Total selling, general and administrative expenses
|
4,104,834 | 3,876,646 | 3,867,341 | 4,072,241 | 4,386,744 | 3,212,553 | 3,796,248 | 3,827,165 | ||||||||||||||||||||||||
Operating income (loss)
|
(1,475,740 | ) | (592,001 | ) | (1,095,657 | ) | (630,415 | ) | 341,167 | 122,436 | (285,643 | ) | (1,967,625 | ) | ||||||||||||||||||
Operating margin percentage
|
(23.2 | %) | (8.4 | %) | (19.9 | %) | (9.9 | %) | 3.7 | % | 2.1 | % | (4.1 | %) | (44.8 | %) | ||||||||||||||||
Net income (loss)
|
$ | (4,988,733 | ) | $ | (438,961 | ) | $ | (760,664 | ) | $ | (356,167 | ) | $ | 269,428 | $ | 81,402 | $ | (164,654 | ) | $ | (1,300,494 | ) |
·
|
We incurred a non-cash charge of $4,330,000 in the fourth quarter 2010 related to an increase in the valuation reserve on deferred tax assets, which resulted in a net loss of $4,988,733 for the fourth quarter 2010 and was the primary reason for our 2010 annual net loss of $6,544,525. The economic recession and its effect on state and local governmental budgets in particular impacted our operating results in the first half of 2010, causing us to incur operating losses. Law enforcement agencies are our primary customer and are typically funded through state and local tax roles. The economy showed some improvement in the second half of 2010, but the impact on state and local budgets was and is still uncertain at best. Despite this improvement and our ongoing cost reduction and containment efforts, we incurred additional losses in the third and fourth quarters of 2010 that placed us in a three-year cumulative loss position for tax purposes at December 31, 2010. Although we expect that general economic and business conditions will continue to improve in 2011, we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh the negative evidence of our cumulative losses under current accounting guidance. Therefore, we determined that our valuation allowance on deferred tax assets should be increased by $4,330,000 in the fourth quarter 2010 to $4,495,000 million to fully reserve our deferred tax assets at December 31, 2010. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine 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. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders' equity.
|
·
|
We experienced a decrease in revenues during 2010 due in part to the challenging economy, which has negatively impacted state, county and municipal budgets. We expect that the current economic climate will continue to depress certain state and local tax bases, and continue to make 2011 a challenging business environment. Our objective is to improve our revenues, operating income and net income in 2011 over 2010 levels.
|
·
|
We believe that delays in the introduction of our DVM-750 resulted in significant lost revenues in 2009 and contributed to our lower than expected revenues and operating losses in 2010, along with the impact of the current economic recession. Large orders generally have long sales cycles and because of the delays incurred we were not able to compete for several large contracts in 2009 that required the specifications of the DVM-750, which adversely impacted our revenues in 2010. We believe that lower sales in 2010 are due in part to our inability to respond to bidding opportunities for the DVM-750 during 2009. Commercial deliveries of the DVM-750 commenced in the second quarter 2009; however, we experienced some negative customer reactions because of the delays in availability of the DVM-750 and in particular delays in the availability of some of its advanced features. We are hopeful that continued acceptance of the DVM-750 will help to improve our revenues in 2011 over 2010, despite the current weak economic recovery.
|
·
|
Our gross profit on sales eroded to 46.8% in the third quarter 2010 from 50.2% in the second quarter 2010 and 54.5% in the first quarter 2010. The gross margin erosion is primarily the result of higher costs on DVM systems sold with the wireless download module upgrade and the introduction of new products, in particular the DVM-750, and the phase-out of our legacy DVM-500 product. In addition, while international revenues improved during the third quarter 2010 over the first two quarters, such sales are generally at lower gross margins than domestic sales. We incurred production inefficiencies, engineering changes and rework that negatively affected our gross margin from the DVM-750 product compared to the legacy DVM-500 product series. Further in 2010, we discontinued the production of the DVM-500 legacy system, which was a mature product with comparatively higher margins. We expect the pressure on gross margins to continue in 2011 as we launch new products. To address this problem, we evaluated our supply chain to reduce costs for our raw materials and component parts. We are implementing a specific plan in 2011 to improve gross margins through better outsourcing of our component parts in the future including foreign sources and reducing our production overhead costs through headcount and other cost reductions. We are also experiencing increased price competition and pressure from certain of our competitors that has led to pricing discounts on larger contract opportunities. We believe this pricing pressure will continue as our competitors attempt to regain market share and revive sales.
|
·
|
We believe that current and potential customers may be delaying or reducing the size of orders due to a number of factors, including budget reductions in order to preserve their currently available funding and budgets. In light of the historically high levels of federal funding allocated to law enforcement under the American Recovery and Reinvestment Act, the Omnibus Appropriations Act of 2009, and other programs
,
we are hopeful that law enforcement agencies may continue to have access to federal funding which has not been available to them in the past. However, many of these funding programs require matching funds from the local agencies that continues to be difficult given the budget restrictions. While such funding could have a positive impact on our revenues in the future, we 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.
|
·
|
Our international revenues were substantially less than expectation during 2010, with total international revenues of $1,782,650 (7% of total revenues) compared to $3,971,297 (15% of total revenues) for 2009. During October 2009, we received an order from Turkey for DVM-750 units valued in excess of $3.3 million. This order represented our largest single international or domestic order for 2009 and was shipped during the fourth quarter 2009. Sales to certain countries that were strong revenue sources for us historically have been negatively impacted by political and social unrest, the economic recession and a weakening of their currency exchange rates versus the U.S. dollar. We have focused on our international business by hiring an international sales manager in January 2009, hiring a European-based sales manager in November 2009, and appointing international distributors in eight new countries during 2010. We currently have 44 international distributors representing our products worldwide. We expect that the availability of the DVM-750 will help to improve our international revenues. We have built in capability to install a variety of language packs into our DVM-750 system, which currently includes English, Spanish, Turkish and Arabic, with additional languages to become available during the balance of 2011. We believe this language flexibility will be a positive in our efforts to improve future international sales.
|
·
|
During the fourth quarter 2010, we commenced an initiative to reduce selling general and administrative costs (SG&A) and improve gross margins to a point where we can achieve consistent profitability in 2011 at a level of revenue that approximates our 2010 domestic revenue of about $24 million annually in DVM system sales to U.S. law enforcement agencies. In that regard, we undertook headcount reductions and other cost reduction and containment measures during late 2010 and early 2011 that yielded annualized cost reductions approximating $4.0 million, including compensation reductions of approximately $2.6 million annually and SG&A cost reductions approximating $1.4 million annually. In addition, we are reorganizing our production and manufacturing operations by placing a greater emphasis upon contract manufacturers. Uncertainties regarding the size and timing of large international orders make it difficult for us to maintain efficient production and staffing levels if all orders are processed through our manufacturing facility in Grain Valley, Missouri. By outsourcing more of our production requirements to contract manufacturers, we believe that we can benefit from greater volume purchasing and production efficiencies, while at the same time reducing our fixed and semi-fixed overhead costs. It is, of course, important that selected contract manufacturers be able to ramp up production quickly in order to meet the varying demands of our international customers.
|
·
|
Our recent operating losses and increases in inventory levels caused deterioration in our cash levels and liquidity in 2010 and 2009. Our liquidity decreased during 2010, as our inventory balances increased and we repurchased approximately $470,000 of our common shares under our stock repurchase program. We had borrowed $1,500,000 under our line of credit as of December 31, 2010, which leaves limited or no available future borrowings under our credit facility as of December 31, 2010. At such date, we have approximately $10.8 million in working capital primarily in the form of inventory and accounts receivable. We are focusing on reducing inventory and accounts receivable levels to generate additional liquidity and improve our cash position during 2011.
|
Minimum order commitment amount (in dollars)
|
||||||||||||
Commitment time period
|
Original
Commitment
|
Purchases
|
Remaining
Commitment
|
|||||||||
August 2010 through February 2012
|
$ | 1,763, 000 | $ | 250,317 | $ | 1,512,683 | ||||||
March 2012 through February 2013
|
1,763,000 | — | 1,763,000 | |||||||||
March 2012 through February 2014
|
1,763,000 | — | 1,763,000 | |||||||||
|
||||||||||||
|
$ | 5,289,000 | $ | 250,317 | $ | 5,038,683 | ||||||
|
Year Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue
|
100 | % | 100 | % | ||||
Cost of revenue
|
52 | % | 49 | % | ||||
Gross profit
|
48 | % | 51 | % | ||||
Selling, general and administrative expenses:
|
||||||||
Research and development expense
|
14 | % | 14 | % | ||||
Selling, advertising and promotional expense
|
11 | % | 13 | % | ||||
Stock-based compensation expense
|
7 | % | 5 | % | ||||
Charges related to purchase and cancellation of employee stock options
|
— | % | 1 | % | ||||
Vendor settlements and credits
|
— | % | (1 | %) | ||||
General and administrative expense
|
31 | % | 26 | % | ||||
|
||||||||
Total selling, general and administrative expenses
|
63 | % | 58 | % | ||||
|
||||||||
Operating loss
|
(15 | %) | (7 | %) | ||||
Interest income (expense)
|
— | % | — | % | ||||
|
||||||||
Loss before income tax (provision) benefit
|
(15 | %) | (7 | %) | ||||
Income tax (provision) benefit
|
(11 | %) | 3 | % | ||||
|
||||||||
Net loss
|
(26 | %) | (4 | %) | ||||
|
||||||||
Net loss per share information:
|
||||||||
Basic
|
$ | (0.40 | ) | $ | (0.07 | ) | ||
Diluted
|
$ | (0.40 | ) | $ | (0.07 | ) |
Product
|
Description
|
Retail price
|
DVM-500
|
An in-car digital audio/video system that is integrated into a rear view mirror. We sold our remaining inventory of this product as of December 31, 2010 and replaced it with the DVM-500 Plus model.
|
$3,995
|
DVM-500 Plus
|
An in-car digital audio/video system that is integrated into a rear view mirror.
|
$4,295
|
DVM-500 Ultra
|
An all-weather mobile digital audio/video system that is designed for motorcycle, ATV and boat users.
|
$4,495
|
DVM-750
|
An in-car digital audio/video system that is integrated into a rear view mirror.
|
$4,995
|
DVF-500
|
A digital audio/video system that is integrated into a law-enforcement style flashlight.
|
$1,295
|
FirstVU
|
A body-worn digital audio/video camera system.
|
$ 995
|
Laser Ally
|
A hand-held mobile speed detection and measurement device that uses light beams rather than sound waves to measure the speed of vehicles.
|
$2,995
|
Thermal Ally
|
A hand-held thermal imaging camera that improves night vision or other low-light situations.
|
$3,995
|
·
|
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.
|
·
|
Sales to international customers are generally made through independent distributors who purchase products 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 its compensation. The international distributor maintains product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when products are shipped to the international distributor consistent with the terms of the distribution agreement. Occasionally, we contract directly with the foreign customer for the sale of product and pay commissions to the distributor responsible for the sale.
|
●
|
We experienced a decrease in revenues due to the challenging economy that negatively impacted state, county and municipal budgets. We believe that current and potential customers may have delayed or reduced the size of their orders due to a number of factors, including their local budget reductions and anticipation of receiving the federal government’s stimulus funds in order to preserve their currently available funding and budgets. Our average order size decreased from approximately $7,300 in fiscal 2009 to $5,600 during fiscal 2010. We shipped 25 individual orders in excess of $100,000 each for an aggregate of $5.9 million in revenue in 2010 compared to 24 orders individually in excess of $100,000 for total revenue aggregate of approximately $7.4 million in 2009. We believe that this reflects reduced law enforcement budgets where the customers are covering only the minimum required needs rather than full fleet deployments. In addition, the new products we introduced in 2010 (FirstVU, Laser Ally and Thermal Ally), all of which have lower average selling prices than our digital video mirror lines. We are hopeful that 2011 will see an easing of such budgetary constraints and that a normal purchasing pattern will resume, although we can make no assurances in this regard.
|
●
|
Our international revenues decreased substantially to $1,782,650, representing 7% of total revenues during fiscal 2010 compared to $3,971,297, representing 15% of total revenues during fiscal 2009. Sales to certain countries that were strong revenue sources for us on an historical basis were negatively impacted by political and social unrest, economic recession and a weakening of their currency exchange rate versus the U.S. dollar. We have focused on improving our international business by hiring an international sales manager in January 2009, hiring a salesman to cover Europe and the Middle-East territories and appointing international distribution agents in eight new countries since January 1, 2010, which brings our total to 44 agents representing our products in countries throughout the world. We experienced an increase in inquiries and bid activity from international customers in 2010; however, international sale cycles generally take longer than domestic business. During October 2009, we were awarded a $3 million plus contract for our DVM-750 product from a customer in Turkey that shipped in the fourth quarter 2009. We are reevaluating our international sales structure in light of our initiative to reduce SG&A expense and may make some adjustments in this area during 2011.
|
Year Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Research and development expense
|
$ | 3,437,959 | $ | 3,603,696 | ||||
Selling, advertising and promotional expense
|
2,853,054 | 3,411,693 | ||||||
Stock-based compensation expense
|
1,755,720 | 1,399,879 | ||||||
Charge related to purchase and cancellation of employee stock options
|
— | 358,104 | ||||||
Vendor settlements and credits
|
— | (278,173 | ) | |||||
Professional fees and expense
|
1,132,513 | 1,118,771 | ||||||
Executive, sales and administrative staff payroll
|
3,881,263 | 3,016,035 | ||||||
Other
|
2,860,553 | 2,592,706 | ||||||
Total
|
$ | 15,921,062 | $ | 15,222,711 |
·
|
Operating
activities
:
|
$176,424
of net
cash used in
operating activities, primarily to fund an increase in inventory levels, a reduction in accrued expenses offset by collections of accounts receivables and an increase in accounts payable. Non-cash charges to income, such as the deferred tax provision, depreciation and amortization and stock-based compensation helped offset the net cash used in operating activities. Our cash flow from operating activities was also negatively affected by non-cash deferred tax benefits during the period.
|
|
·
|
Investing
activities
:
|
$383,790
of net
cash used
in
investing activities, primarily to acquire equipment to expand our research, development and production capabilities, furniture and fixtures related to our new corporate offices and the costs to acquire patents on our proprietary technology utilized in our new products.
|
|
·
|
Financing
activities
:
|
$1,000,539
of net
cash provided by
financing activities, representing borrowings under our letter of credit and the proceeds from the exercise of stock options offset by the purchase of treasury stock.
|
License Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production software license agreement
|
April, 2005
|
April, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Software sublicense agreement
|
October, 2007
|
October, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Technology license agreement
|
July, 2007
|
July, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Limited license agreement
|
August, 2008
|
Perpetual
|
May be terminated by either party.
|
Minimum order commitment amount (in dollars)
|
||||||||||||
Commitment time period
|
Original
Commitment
|
Purchases
|
Remaining
Commitment
|
|||||||||
August 2010 through February 2012
|
$ | 1,763,000 | $ | 250,317 | $ | 1,512,683 | ||||||
March 2012 through February 2013
|
1,763,000 | — | 1,763,000 | |||||||||
March 2012 through February 2014
|
1,763,000 | — | 1,763,000 | |||||||||
|
||||||||||||
|
$ | 5,289,000 | $ | 250,317 | $ | 5,038,683 | ||||||
|
·
|
Revenue Recognition/ Allowance for Doubtful Accounts;
|
·
|
Allowance for Excess and Obsolete Inventory;
|
·
|
Warranty Reserves;
|
●
|
Stock-based Compensation Expense; and
|
●
|
Accounting for Income Taxes
.
|
(i)
|
Persuasive evidence of an arrangement exists;
|
(ii)
|
Delivery has occurred;
|
(iii)
|
The price is fixed or determinable; and
|
(iv)
|
Collectability is reasonably assured.
|
December 31,
2010
|
December 31,
2009
|
|||||||
Raw material and component parts
|
$ | 4,272,304 | $ | 3,915,440 | ||||
Work-in-process
|
88,635 | 487,266 | ||||||
Finished goods
|
6,460,924 | 3,528,225 | ||||||
|
||||||||
Subtotal
|
10,821,863 | 7,930,931 | ||||||
Reserve for excess and obsolete inventory
|
(733,578 | ) | (560,426 | ) | ||||
|
||||||||
Total
|
$ | 10,088,285 | $ | 7,370,505 |
Year Ended
December 31, 2010
|
||
Expected term of the options in years
|
2-5 years
|
|
Expected volatility of Company stock
|
71% - 76%
|
|
Expected dividends
|
None
|
|
Risk-free interest rate
|
0.51% - 2.13%
|
|
Expected forfeiture rate
|
5.00%
|
·
|
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.
|
·
|
Information appearing under the heading “Election of Directors,”
|
·
|
Information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance,”
|
·
|
Information appearing under the heading “Corporate Governance” regarding identification of the Audit Committee and Audit Committee financial experts.
|
Exhibit
Number
|
Description
|
Incorporated by Reference to:
|
Filed
Herewith
|
|||
2.1
|
Plan of Merger among Vegas Petra, Inc., a Nevada corporation, and Digital Ally, Inc., a Nevada corporation, and its stockholders, dated November 30, 2004.
|
Exhibit 2.1 of the Company’s Form SB-2, filed October 16, 2006, No. 333-138025 (the “October 2006 Form SB-2).
|
||||
3.1
|
Amended and Restated Articles of Incorporation of Registrant, dated December 13, 2004.
|
Exhibit 3.1 of the October 2006 Form SB-2.
|
||||
3.2
|
Amended and Restated By-laws of Registrant.
|
Exhibit 3.2 of the October 2006 Form SB-2.
|
||||
3.3
|
Audit Committee Charter, dated September 22, 2005.
|
Exhibit 3.3 of the October 2006 Form SB-2.
|
||||
3.4
|
Compensation Committee Charter, dated September 22, 2005
|
Exhibit 3.4 of the October 2006 Form SB-2.
|
||||
3.5
|
Nominating Committee Charter dated December 27, 2007.
|
Exhibit 3.5 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
3.6
|
Corporate Governance Guidelines
|
Exhibit 99.1 of the Current Report on Form 8-K dated November 20, 2009.
|
||||
3.7
|
Nominating and Governance Charter, Amended and Restated
as of February 25, 2010.
|
Exhibit 3.7 of the Annual Report on Form 10K for the Year ending December 31, 2009.
|
||||
3.8
|
Strategic Planning Committee Charter, dated June 28, 2009.
|
Exhibit 3.8 of the Annual Report on Form 10K for the Year ending December 31, 2009.
|
||||
4.1
|
Form of Common Stock Certificate.
|
Exhibit 4.1 of the October 2006 Form SB-2.
|
||||
4.2
|
Form of Common Stock Purchase Warrant.
|
Exhibit 4.2 of the October 2006 Form SB-2.
|
||||
5.1
|
Opinion of Quarles & Brady LLP as to the legality of securities being registered (includes consent).
|
Exhibit 5.1 of the October 2006 Form SB-2.
|
||||
10.1
|
2005 Stock Option and Restricted Stock Plan.
|
Exhibit 10.1 of the October 2006 Form SB-2.
|
||||
10.2
|
2006 Stock Option and Restricted Stock Plan.
|
Exhibit 10.2 of the October 2006 Form SB-2.
|
||||
10.3
|
Form of Stock Option Agreement (ISO and Non-Qualified) 2005 Stock Option Plan.
|
Exhibit 10.3 of the October 2006 Form SB-2.
|
||||
10.4
|
Form of Stock Option Agreement (ISO and Non-Qualified) 2006 Stock Option Plan.
|
Exhibit 10.4 of the October 2006 Form SB-2.
|
||||
10.5
|
Promissory Note Extension between Registrant and Acme Resources, LLC, dated May 4, 2006, in the principal amount of $500,000.
|
Exhibit 10.5 of the October 2006 Form SB-2.
|
||||
10.6
|
Promissory Note between Registrant and Acme Resources, LLC, dated September 1, 2004, in the principal amount of $500,000.
|
Exhibit 10.6 of the Company’s Amendment No. 1 to Form SB-2, filed January 31, 2007, No. 333-138025 (“Amendment No. 1 to Form SB-2”)
|
||||
10.7
|
Promissory Note Extension between Registrant and Acme Resources, LLC, dated October 31, 2006.
|
Exhibit 10.7 of Amendment No. 1 to Form SB-2.
|
||||
10.8
|
Software License Agreement with Ingenient Technologies, Inc., dated March 15, 2004.*
|
Exhibit 10.8 of Amendment No. 1 to Form SB-2.
|
10.9
|
Software License Agreement with Ingenient Technologies, Inc., dated April 5, 2005.*
|
Exhibit 10.9 of Amendment No. 1 to Form SB-2.
|
||||
10.10
|
Stock Option Agreement with Daniels & Kaplan, P.C., dated September 25, 2006.
|
Exhibit 10.10 of Amendment No. 1 to Form SB-2.
|
||||
10.11
|
Memorandum of Understanding with Tri Square Communications (Hong Kong) Co., Ltd. dated November 29, 2005.
|
Exhibit 10.11 of Amendment No. 1 to Form SB-2.
|
||||
10.12
|
2007 Stock Option and Restricted Stock Plan.
|
Exhibit 10.3 of the Company’s Form S-8, filed October 23, 2007, No. 333-146874.
|
||||
10.13
|
Form of Stock Option Agreement (ISO and Non-Qualified) 2007 Stock Option Plan.
|
Exhibit 10.13 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
10.14
|
Amendment to 2007 Stock Option and Restricted Stock Plan.
|
Exhibit 10.14 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
10.15
|
2008 Stock Option and Restricted Stock Plan.
|
Exhibit 10.15 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
10.16
|
Form of Stock Option Agreement (ISO and Non-Qualified) 2008 Stock Option Plan.
|
Exhibit 10.16 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
10.17
|
Promissory Note with Enterprise Bank dated February 13, 2009.
|
Exhibit 10.17 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
10.18
|
First Amendment to Promissory Note with Enterprise Bank dated February 13, 2009.
|
Exhibit 10.18 of the Annual Report on Form 10K for the Year ending December 31, 2008.
|
||||
10.19
|
First Amendment to Promissory Note with Enterprise Bank dated June 30, 2009.
|
Exhibit 10.19 of the Quarterly Report on Form 10Q for the Quarter ending June 30, 2008.
|
||||
10.20
|
Modification and Renewal of Promissory Note with Enterprise Bank dated February 1, 2010.
|
Exhibit 10.20 of the Annual Report on Form 10K for the Year ending December 31, 2009.
|
||||
10.21
|
Forms of Restricted Stock Agreement for 2005, 2006, 2007 and 2008 Stock Option and Restricted Stock Plans.
|
Exhibit 10.21 of the Annual Report on Form 10K for the Year ending December 31, 2009.
|
||||
10.22
|
Loan Modification or Renewal Agreement of Promissory Note with Enterprise Bank dated March 2, 2011.
|
X
|
||||
14.1
|
Code of Ethics and Code of Conduct.
|
Exhibit 3.5 of the Annual Report on Form 10KSB for the Year ending December 31, 2007.
|
||||
21.1
|
Subsidiaries of Registrant
|
Exhibit 21.1 of the Annual Report on Form 10K for the Year ending December 31, 2009.
|
||||
23.1
|
Consent of McGladrey & Pullen LLP
|
X
|
||||
23.2
|
Consent of Quarles & Brady LLP (Included in 5.1 above)
|
Exhibit 5.1 of the October 2006 Form SB-2.
|
||||
23.3
|
Consent of Grant Thornton LLP
|
X
|
||||
24.1
|
Power of Attorney.
|
X
|
||||
31.1
|
Certificate of Stanton E. Ross, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||
31.2
|
Certificate of Thomas J. Heckman, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||
32.1
|
Certificate of Stanton E. Ross, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||
32.2
|
Certificate of Thomas J. Heckman, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||
99.1
|
Audited Financial Statements of Digital Ally, Inc. as of and for the years ended December 31, 2010 and 2009.
|
X
|
DIGITAL ALLY, INC.,
|
|||
a Nevada corporation | |||
By:
|
/s/ Stanton E . Ross | ||
Stanton E. Ross | |||
President and Chief Executive Officer | |||
Signature and Title
|
|
Date
|
/s/
Stanton E. Ross
|
|
March 30, 2011
|
Stanton E. Ross, Director and Chief Executive Officer
|
|
|
/s/
Leroy C. Richie
|
|
March 30, 2011
|
Leroy C. Richie, Director
|
|
|
/s/
Elliot M. Kaplan
|
|
March 30, 2011
|
Elliot M. Kaplan, Director
|
|
|
/s
/ Daniel F. Hutchins
|
|
March 30, 2011
|
Daniel F. Hutchins, Director
|
|
|
/s/ BERNARD A. BIANCHINO
|
|
March 30, 2011
|
Bernard A. Bianchino, Director
|
|
|
/s/ KENNETH L. MCCOY
|
|
March 30, 2011
|
Kenneth L. McCoy, Director and Vice President-Marketing
|
|
|
/s/
Thomas J. Heckman
|
|
March 30, 2011
|
Thomas J. Heckman, Chief Financial Officer, Secretary, Treasurer and Principal Accounting Officer
|
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | Page(s) | |||
F-2 - F-3 | ||||
Consolidated Financial Statements:
|
||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 - F-21 | ||||
December 31,
2010
|
December 31,
2009
|
|||||||
Assets
|
||||||||
Current assets:
|
|
|
||||||
Cash and cash equivalents
|
$ | 623,475 | $ | 183,150 | ||||
Accounts receivable-trade, less allowance for doubtful accounts
of $110,000 - 2010 and $110,000 – 2009
|
4,779,553 | 8,398,353 | ||||||
Accounts receivable-other
|
345,711 | 476,049 | ||||||
Inventories
|
10,088,285 | 7,370,505 | ||||||
Prepaid expenses
|
341,584 | 224,923 | ||||||
Deferred taxes, net
|
— | 1,695,000 | ||||||
|
||||||||
Total current assets
|
16,178,608 | 18,347,980 | ||||||
|
||||||||
Furniture, fixtures and equipment
|
3,352,372 | 3,010,977 | ||||||
Less accumulated depreciation and amortization
|
2,307,244 | 1,592,874 | ||||||
|
||||||||
|
1,045,128 | 1,418,103 | ||||||
|
||||||||
Deferred taxes, net
|
— | 1,160,000 | ||||||
Intangible assets, net
|
293,577 | 336,182 | ||||||
Other assets
|
91,133 | 135,674 | ||||||
|
||||||||
Total assets
|
$ | 17,608,446 | $ | 21,397,939 | ||||
Liabilities and Stockholders’ Equity
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 3,157,033 | $ | 2,000,541 | ||||
Line of credit
|
1,500,000 | — | ||||||
Accrued expenses
|
728,479 | 1,781,969 | ||||||
Income taxes payable
|
25,625 | 9,171 | ||||||
Customer deposits
|
2,642 | 39,924 | ||||||
|
||||||||
Total current liabilities
|
5,413,779 | 3,831,605 | ||||||
|
||||||||
Commitments and contingencies
|
||||||||
Stockholders’ equity:
|
||||||||
Common stock, $0.001 par value; 75,000,000 shares authorized; shares
issued: 16,652,218 – 2010 and 16,169,739 – 2009
|
16,652 | 16,170 | ||||||
Additional paid in capital
|
21,649,567 | 20,007,430 | ||||||
Treasury stock, at cost (shares: 508,145 – 2010 and 248,610 - 2009)
|
(2,157,226 | ) | (1,687,465 | ) | ||||
Accumulated deficit
|
(7,314,326 | ) | (769,801 | ) | ||||
|
||||||||
Total stockholders’ equity
|
12,194,667 | 17,566,334 | ||||||
|
||||||||
Total liabilities and stockholders’ equity
|
$ | 17,608,446 | $ | 21,397,939 |
2010
|
2009
|
|||||||
Product revenue
|
$ | 24,581,907 | $ | 25,318,294 | ||||
Other revenue
|
629,098 | 1,047,959 | ||||||
|
||||||||
Total revenue
|
25,211,005 | 26,366,253 | ||||||
Cost of revenue
|
13,083,756 | 12,933,209 | ||||||
|
||||||||
Gross profit
|
12,127,249 | 13,433,044 | ||||||
|
||||||||
Selling, general and administrative expenses:
|
||||||||
Research and development expense
|
3,437,959 | 3,603,696 | ||||||
Selling, advertising and promotional expense
|
2,853,054 | 3,411,693 | ||||||
Stock-based compensation expense
|
1,755,720 | 1,399,879 | ||||||
Charges related to purchase and cancellation of employee stock options
|
— | 358,104 | ||||||
Vendor settlements and credits
|
— | (278,173 | ) | |||||
General and administrative expense
|
7,874,329 | 6,727,512 | ||||||
|
||||||||
Total selling, general and administrative expenses
|
15,921,062 | 15,222,711 | ||||||
|
||||||||
Operating loss
|
(3,793,813 | ) | (1,789,667 | ) | ||||
|
||||||||
Interest income
|
24,153 | 35,350 | ||||||
Interest expense
|
(24,865 | ) | — | |||||
|
||||||||
Loss before income tax (provision) benefit
|
(3,794,525 | ) | (1,754,317 | ) | ||||
Income tax (provision) benefit
|
(2,750,000 | ) | 640,000 | |||||
|
||||||||
Net loss
|
$ | (6,544,525 | ) | $ | (1,114,317 | ) | ||
|
||||||||
Net loss per share information:
|
||||||||
Basic
|
$ | (0.40 | ) | $ | (0.07 | ) | ||
Diluted
|
$ | (0.40 | ) | $ | (0.07 | ) | ||
Weighted average shares outstanding:
|
||||||||
Basic
|
16,315,026 | 15,797,991 | ||||||
Diluted
|
16,315,026 | 15,797,991 |
Common Stock
|
Additional
Paid In
Capital
|
Accumulated deficit
|
||||||||||||||||||||||
Shares
|
Amount
|
Treasury stock
|
Total
|
|||||||||||||||||||||
Balance, January 1, 2009
|
15,926,077 | $ | 15,926 | $ | 18,428,292 | $ | (1,624,353 | ) | $ | 344,516 | $ | 17,164,381 | ||||||||||||
Stock-based compensation
|
— | — | 1,757,983 | — | — | 1,757,983 | ||||||||||||||||||
Deficiency in tax benefits related to stock-based compensation
|
— | — | (120,000 | ) | — | — | (120,000 | ) | ||||||||||||||||
Restricted common stock grant
|
25,000 | 25 | (25 | ) | — | — | — | |||||||||||||||||
Stock options exercised at:
|
||||||||||||||||||||||||
$1.00 per share
|
100,000 | 100 | 99,900 | — | — | 100,000 | ||||||||||||||||||
$1.60 per share
|
142,901 | 143 | 228,499 | — | — | 228,642 | ||||||||||||||||||
$1.95 per share
|
125,000 | 125 | 243,625 | — | — | 243,750 | ||||||||||||||||||
$2.15 per share
|
5,000 | 5 | 10,745 | — | — | 10,750 | ||||||||||||||||||
Common stock surrendered as consideration for cashless exercise of stock options
|
(154,239 | ) | (154 | ) | (321,589 | ) | — | — | (321,743 | ) | ||||||||||||||
Purchase of 38,250 common shares for treasury
|
— | — | — | (63,112 | ) | — | (63,112 | ) | ||||||||||||||||
Purchase and cancellation of employee stock options
|
— | — | (320,000 | ) | — | — | (320,000 | ) | ||||||||||||||||
Net loss
|
— | — | — | — | (1,114,317 | ) | (1,114,317 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Balance, December 31, 2009
|
16,169,739 | 16,170 | 20,007,430 | (1,687,465 | ) | (769,801 | ) | 17,566,334 | ||||||||||||||||
Stock-based compensation
|
— | — | 1,755,720 | — | — | 1,755,720 | ||||||||||||||||||
Deficiency in tax benefits related to stock-based compensation
|
— | — | (125,000 | ) | — | — | (125,000 | ) | ||||||||||||||||
Stock options exercised at:
|
||||||||||||||||||||||||
$1.00 per share
|
230,000 | 230 | 229,770 | — | — | 230,000 | ||||||||||||||||||
$1.60 per share
|
250,000 | 250 | 399,750 | — | — | 400,000 | ||||||||||||||||||
$1.78 per share
|
500 | — | 890 | — | — | 890 | ||||||||||||||||||
$2.15 per share
|
100,000 | 100 | 214,900 | — | — | 215,000 | ||||||||||||||||||
Common stock surrendered as consideration for cashless exercise of stock options
|
(348,890 | ) | (349 | ) | (833,642 | ) | — | — | (833,991 | ) | ||||||||||||||
Restricted common stock grant
|
250,869 | 251 | (251 | ) | — | — | — | |||||||||||||||||
Purchase of 259,535 common shares for treasury
|
— | — | — | (469,761 | ) | — | (469,761 | ) | ||||||||||||||||
Net loss
|
— | — | — | — | (6,544,525 | ) | (6,544,525 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Balance, December 31, 2010
|
16,652,218 | $ | 16,652 | $ | 21,649,567 | $ | (2,157,226 | ) | $ | (7,314,326 | ) | $ | 12,194,667 |
2010
|
2009
|
|||||||
Cash Flows From Operating Activities:
|
||||||||
Net loss
|
$ | (6,544,525 | ) | $ | (1,114,317 | ) | ||
Adjustments to reconcile net loss to net cash flows
used in operating activities:
|
||||||||
Depreciation and amortization
|
799,370 | 914,856 | ||||||
Stock based compensation
|
1,755,720 | 1,757,983 | ||||||
Provision for inventory obsolescence
|
173,152 | 31,304 | ||||||
Provision for bad debts
|
— | 34,066 | ||||||
Deferred tax provision (benefit)
|
2,855,000 | (535,000 | ) | |||||
Change in assets and liabilities:
|
||||||||
(Increase) decrease in:
|
||||||||
Accounts receivable - trade
|
3,618,800 | (2,190,113 | ) | |||||
Accounts receivable - other
|
130,338 | (61,873 | ) | |||||
Inventories
|
(2,890,932 | ) | 958,152 | |||||
Prepaid income taxes
|
— | 85,943 | ||||||
Prepaid expenses
|
(116,661 | ) | (7,007 | ) | ||||
Other assets
|
44,541 | 13,392 | ||||||
Increase (decrease) in:
|
||||||||
Accounts payable
|
1,156,492 | (791,024 | ) | |||||
Accrued expenses
|
(1,136,891 | ) | 728,345 | |||||
Income taxes payable
|
16,454 | 9,171 | ||||||
Customer deposits
|
(37,282 | ) | (44,115 | ) | ||||
|
||||||||
Net cash used in operating activities
|
(176,424 | ) | (210,237 | ) | ||||
|
||||||||
Cash Flows from Investing Activities:
|
||||||||
Purchases of furniture, fixtures and equipment
|
(341,395 | ) | (539,772 | ) | ||||
Additions to intangible assets
|
(42,395 | ) | (31,075 | ) | ||||
|
||||||||
Net cash used in investing activities
|
(383,790 | ) | (570,847 | ) | ||||
|
||||||||
Cash Flows from Financing Activities:
|
||||||||
Net borrowings of line-of-credit
|
1,500,000 | — | ||||||
Proceeds from exercise of stock options and warrants
|
95,300 | 261,399 | ||||||
Deficiency in tax benefits related to stock-based compensation
|
(125,000 | ) | (120,000 | ) | ||||
Purchase of common shares for treasury
|
(469,761 | ) | (63,112 | ) | ||||
Purchase of employee stock options
|
— | (320,000 | ) | |||||
|
||||||||
Net cash provided by (used in) financing activities
|
1,000,539 | (241,713 | ) | |||||
|
||||||||
Net increase (decrease) in cash and cash equivalents
|
440,325 | (1,022,797 | ) | |||||
Cash and cash equivalents, beginning of period
|
183,150 | 1,205,947 | ||||||
Cash and cash equivalents, end of period
|
$ | 623,475 | $ | 183,150 | ||||
|
||||||||
Supplemental disclosures of cash flow information:
|
||||||||
Cash payments for interest
|
$ | 24,865 | $ | — | ||||
|
||||||||
Cash payments for income taxes
|
$ | 15,783 | $ | 21,811 | ||||
|
||||||||
Supplemental disclosures of non-cash investing and financing activities:
|
||||||||
Restricted common stock grant
|
$ | 58,750 | $ | 58,750 | ||||
|
||||||||
Common stock surrendered as consideration for exercise of stock options
|
$ | 833,991 | $ | 321,743 |
·
|
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.
|
·
|
Sales to international customers are generally made through independent distributors who purchase products from
the Company
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 terms of the distribution agreement. Occasionally, the Company contracts directly with the foreign customer for the sale of products and we pay commissions to the distributor responsible for the sale.
|
|
•
|
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 period equal to 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.
|
Year Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Sales by geographic area:
|
||||||||
United States of America
|
$ | 23,428,355 | $ | 22,394,326 | ||||
Foreign
|
1,782,650 | 3,971,297 | ||||||
$ | 25,211,005 | $ | 26,366,253 |
December 31,
2010
|
December 31,
2009
|
|||||||
Beginning balance
|
$ | 110,000 | $ | 90,000 | ||||
Provision for bad debts
|
— | 34,066 | ||||||
Charge-offs to allowance, net of recoveries
|
— | (14,066 | ) | |||||
|
||||||||
Ending balance
|
$ | 110,000 | $ | 110,000 |
December 31,
2010
|
December 31,
2009
|
|||||||
Raw material and component parts
|
$ | 4,272,304 | $ | 3,915,440 | ||||
Work-in-process
|
88,635 | 487,266 | ||||||
Finished goods
|
6,460,924 | 3,528,225 | ||||||
|
||||||||
Subtotal
|
10,821,863 | 7,930,931 | ||||||
Reserve for excess and obsolete inventory
|
(733,578 | ) | (560,426 | ) | ||||
|
||||||||
Total
|
$ | 10,088,285 | $ | 7,370,505 |
Estimated
Useful Life
|
2010
|
2009
|
|||||||
Office furniture, fixtures and equipment
|
3-10 years
|
$ | 1,662,397 | $ | 1,594,568 | ||||
Warehouse and production equipment
|
3-5 years
|
1,356,773 | 1,129,821 | ||||||
Tradeshow equipment
|
3-5 years
|
178,437 | 168,450 | ||||||
Leasehold improvements
|
2-5 years
|
80,167 | 74,460 | ||||||
Website development
|
3 years
|
11,178 | 11,178 | ||||||
Rental equipment
|
3 years
|
63,420 | 32,500 | ||||||
Total cost
|
3,352,372 | 3,010,977 | |||||||
Less: accumulated depreciation and amortization
|
(2,307,244 | ) | (1,592,874 | ) | |||||
Net furniture, fixtures and equipment
|
$ | 1,045,128 | $ | 1,418,103 |
December 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
Gross
value
|
Accumulated amortization
|
Net carrying value
|
Gross
value
|
Accumulated amortization
|
Net carrying value
|
|||||||||||||||||||
Amortized intangible assets:
|
||||||||||||||||||||||||
Licenses
|
$ | 255,000 | $ | 163,869 | $ | 91,131 | $ | 255,000 | $ | 78,869 | $ | 176,131 | ||||||||||||
Unamortized intangible assets:
|
||||||||||||||||||||||||
Patents and trademarks pending
|
202,446 | — | 202,446 | 160,051 | — | 160,051 | ||||||||||||||||||
Total
|
$ | 457,446 | $ | 163,869 | $ | 293,577 | $ | 415,051 | $ | 78,869 | $ | 336,182 |
December 31,
2010
|
December 31,
2009
|
|||||||
Accrued warranty expense
|
$ | 228,233 | $ | 277,137 | ||||
Accrued sales commissions
|
51,596 | 933,402 | ||||||
Accrued payroll and related fringes
|
360,713 | 343,371 | ||||||
Employee separation agreement
|
— | 182,661 | ||||||
Other
|
87,937 | 45,398 | ||||||
|
||||||||
$ | 728,479 | $ | 1,781,969 | |||||
|
Beginning balance
|
$ | 277,137 | ||
Provision for warranty expense
|
135,906 | |||
Charges applied to warranty reserve
|
(184,810 | ) | ||
|
||||
Ending balance
|
$ | 228,233 |
2010
|
2009
|
|||||||
Current taxes:
|
||||||||
Federal
|
$ | — | $ | — | ||||
State
|
(20,000 | ) | (15,000 | ) | ||||
Total current taxes
|
(20,000 | ) | (15,000 | ) | ||||
Deferred tax (provision) benefit
|
(2,730,000 | ) | 655,000 | |||||
Income tax (provision) benefit
|
$ | (2,750,000 | ) | $ | 640,000 | |||
Total income tax (provision) benefit allocation:
|
||||||||
Loss from operations
|
$ | (2,750,000 | ) | $ | 640,000 | |||
Stockholders’ equity, for compensation expense for
financial reporting purposes in excess of amounts
recognized for tax reporting purposes
|
(125,000 | ) | ( 105,000 | ) | ||||
$ | (2,855,000 | ) | $ | 535,000 |
2010
|
2009
|
|||||||
U.S. Statutory tax rate
|
34.0 | % | 34.0 | % | ||||
State taxes, net of Federal benefit
|
3.4 | % | 2.7 | % | ||||
State tax credits
|
5.1 | % | 2.3 | % | ||||
Federal Research and development tax credits
|
5.8 | % | 10.3 | % | ||||
Stock based compensation
|
(2.4 | )% | (9.7 | )% | ||||
Change in valuation reserve on deferred tax assets
|
(114.1 | )% | — | % | ||||
Other, net
|
(4.3 | )% | (3.1 | )% | ||||
Income tax (provision) benefit
|
(72.5 | )% | 36.5 | % |
2010
|
2009
|
|||||||
Deferred tax assets:
|
||||||||
Stock-based compensation
|
$ | 1,555,000 | $ | 1,422,000 | ||||
Start-up costs
|
165,000 | 165,000 | ||||||
Inventory reserves
|
270,000 | 211,000 | ||||||
Uniform capitalization of inventory costs
|
20,000 | 18,000 | ||||||
Allowance for doubtful accounts receivable
|
40,000 | 42,000 | ||||||
Other reserves
|
140,000 | 105,000 | ||||||
Accrued expenses
|
135,000 | 138,000 | ||||||
Net operating loss carryforward
|
1,185,000 | 356,000 | ||||||
Research and development tax credit carryforward
|
815,000 | 595,000 | ||||||
Alternative minimum tax credit carryforward
|
90,000 | 92,000 | ||||||
State jobs credit carryforward
|
100,000 | 65,000 | ||||||
State research and development credit carryforward
|
145,000 | 65,000 | ||||||
Other
|
5,000 | 5,000 | ||||||
Total deferred tax assets
|
4,665,000 | 3,214,000 | ||||||
Valuation reserve
|
(4,495,000 | ) | (165,000 | ) | ||||
Net deferred tax assets
|
170,000 | 3,049,000 | ||||||
Deferred tax liabilities:
|
||||||||
Domestic international sales company
|
(100,000 | ) | — | |||||
Equipment depreciation
|
(70,000 | ) | (194,000 | ) | ||||
|
||||||||
Net deferred tax assets (liability)
|
$ | — | $ | 2,855,000 | ||||
Net deferred tax asset (liability) are classified in our consolidated balance sheets as follows:
|
||||||||
Current
|
$ | — | $ | 1,695,000 | ||||
Non-current
|
$ | — | $ | 1,160,000 |
License Type
|
Effective
Date
|
Expiration
Date
|
Terms
|
Production software license agreement
|
April, 2005
|
April, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Software sublicense agreement
|
October, 2007
|
October, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Technology license agreement
|
July, 2007
|
July, 2011
|
Automatically renews for one year periods unless terminated by either party.
|
Limited license agreement
|
August, 2008
|
Perpetual
|
May be terminated by either party.
|
Minimum order commitment amount (in dollars)
|
||||||||||||
Commitment time period
|
Original Commitment
|
Purchases
|
Remaining Commitment
|
|||||||||
August 2010 through February 2012
|
$ | 1,763,000 | $ | 250,317 | $ | 1,512,683 | ||||||
March 2012 through February 2013
|
1,763,000 | — | 1,763,000 | |||||||||
March 2012 through February 2014
|
1,763,000 | — | 1,763,000 | |||||||||
|
$ | 5,289,000 | $ | 250,317 | $ | 5,038,683 |
Year Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Expected term of the options in years
|
2-5 years
|
2-5 years
|
||||||
Expected volatility of Company stock
|
71% - 76% | 76% - 86% | ||||||
Expected dividends
|
None
|
None
|
||||||
Risk-free interest rate
|
0.51% - 2.13% | 0.84% - 2.66% | ||||||
Forfeiture rate
|
5% | 5% |
Options
|
Shares
|
Weighted
Average
Exercise Price
|
||||||
Outstanding at January 1, 2010
|
4,668,726 | $ | 2.71 | |||||
Granted
|
117,500 | 1.97 | ||||||
Exercised
|
(232,110 | ) | 1.08 | |||||
Exercised and surrendered/cancelled (cashless exercise)
|
(348,390 | ) | 1.71 | |||||
Forfeited
|
(204,000 | ) | 3.36 | |||||
|
||||||||
Outstanding at December 31, 2010
|
4,001,726 | $ | 2.83 | |||||
|
||||||||
Exercisable at December 31, 2010
|
2,826,726 | $ | 2.32 | |||||
|
||||||||
Weighted-average fair value for options granted
during the period at fair value
|
117,500 | $ | 1.03 |
Outstanding options
|
Exercisable options
|
|||||||||||||||||
Exercise price range
|
Number of options
|
Weighted average
remaining contractual life
|
Number of options
|
Weighted average
remaining contractual life
|
||||||||||||||
$1.00 to $1.99 | 1,883,805 |
6.2 years
|
1,442,305 |
5.4 years
|
||||||||||||||
$2.00 to $2.99 | 927,421 |
1.6 years
|
834,921 |
0.8 years
|
||||||||||||||
$3.00 to $3.99 | 193,000 |
7.4 years
|
41,500 |
5.2 years
|
||||||||||||||
$4.00 to $4.99 | 252,500 |
6.8 years
|
252,500 |
7.8 years
|
||||||||||||||
$5.00 to $5.99 | — | — | — | — | ||||||||||||||
$6.00 to $6.99 | 705,000 |
7.0 years
|
215,500 |
7.0 years
|
||||||||||||||
$7.00 to $7.99 | — | — | — | — | ||||||||||||||
$8.00 to $8.99 | 30,000 |
5.7 years
|
30,000 |
5.7 years
|
||||||||||||||
$9.00 to $9.99 | 10,000 |
2.6 years
|
10,000 |
2.6 years
|
||||||||||||||
4,001,726 |
5.3 years
|
2,826,726 |
4.3 years
|
Restricted stock
|
Weighted average grant date fair value
|
|||||||
Nonvested balance, January 1, 2010
|
25,000 | $ | 2.35 | |||||
Granted
|
250,869 | 2.89 | ||||||
Vested
|
(69,975 | ) | 2.87 | |||||
Forfeited
|
— | — | ||||||
Nonvested balance, December 31, 2010
|
205,894 | $ | 2.83 |
Year Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Numerator for basic and diluted loss per share – Net loss
|
$ | (6,544,525 | ) | $ | (1,114,317 | ) | ||
Denominator for basic loss per share – weighted average shares outstanding
|
16,315,026 | 15,797,991 | ||||||
Dilutive effect of shares issuable under stock options and warrants outstanding
|
— | — | ||||||
Denominator for diluted loss per share – adjusted weighted average shares outstanding
|
16,315,026 | 15,797,991 | ||||||
Net loss per share:
|
||||||||
Basic
|
$ | (0.40 | ) | $ | (0.07 | ) | ||
Diluted
|
$ | (0.40 | ) | $ | (0.07 | ) |
ENTERPRISE BANK & TRUST | Digital Ally, Inc. | ||||
By: |
/s/ Mark McCaskill
|
By: |
/s/ Stanton E. Ross
|
||
Mark McCaskill
|
Stanton E. Ross
|
||||
Senior Vice President
|
Chairman and CEO
|
A.
|
Lender and Borrower have previously entered into the above referenced Loan Agreement together with a First Amendment thereto.
|
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:
|
|
Other Requirements. Tangible Net Worth
|
|
Borrower shall maintain a minimum Tangible Net Worth of not less than
|
|
$15,000,000.00. This covenant will be tested on a quarterly basis.
|
|
The following is hereby substituted for the above deletion:
|
|
Other Requirements. Tangible Net Worth
|
|
Borrower shall maintain a minimum Tangible Net Worth of not less than
|
|
$10,000,000.00. This covenant will be tested on a quarterly basis.
|
2.
|
The following is hereby deleted in
its entirety:
|
|
Borrowing
Base. The words "Borrowing Base" mean as determined by Lender from time to time, the lesser of (1) $2,500,000.00 or (2) the sum of (a) 75.000% of the aggregate amount of Eligible Accounts, plus (b) 50.000% of the aggregate amount of Eligible Inventory.
|
|
The following is hereby substituted for the above deletion:
|
|
Borrowing Base. The words “Borrowing Base” mean as determined by Lender from time to time, the lesser of (1) $1,711,348.00 or (2) the sum of
|
|
(a) 75.000% of the aggregate amount of Eligible Accounts, plus (b) 50.000% of the aggregate amount of Eligible Inventory.
|
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 Second 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 Second 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.
|
ENTERPRISE BANK & TRUST | Digital Ally, Inc. | ||||
By: |
/s/ Mark McCaskill
|
By: |
/s/ Stanton E. Ross
|
||
Mark McCaskill
|
Stanton E. Ross
|
||||
Senior Vice President
|
Chairman and CEO
|
Signature and Title
|
Date
|
||
/s/ Stanton E. Ross
|
March 30, 2011
|
||
Stanton E. Ross, Director and Chief Executive Officer
|
|||
/s/ Leroy C. Richie
|
March 30, 2011
|
||
Leroy C. Richie, Director
|
|||
/s/ Kenneth L. McCoy
|
March 30, 2011
|
||
Kenneth L. McCoy, Director and Vice President - Marketing
|
|||
/s/ Elliot M. Kaplan
|
March 30, 2011
|
||
Elliot M. Kaplan, Director
|
|||
/s/ Daniel F. Hutchins
|
March 30, 2011
|
||
Daniel Hutchins, Director
|
|||
/s/ Bernard A. Bianchino
|
March 30, 2011
|
||
Bernard A. Bianchino, Director
|
|||
/s/ Thomas J. Heckman
|
March 30, 2011 | ||
Thomas J. Heckman, Chief Financial Officer, Secretary and Treasurer
|
|
1.
|
I have reviewed this report on Form 10-K for the year ended December 31, 2010 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.
|
Date: March 30, 2011
|
By:
|
/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, 2010 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.
|
Date: March 30, 2011
|
By:
|
/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.
|
Date: March 30, 2011
|
By:
|
/s/ Stanton E. Ross
|
|
Stanton E. Ross
|
|||
Chief Executive 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.
|
Date: March 30, 2011
|
By:
|
/s/ Thomas J. Heckman
|
|
THOMAS J. HECKMAN
|
|||
Chief Financial Officer
|