Part
I
Overview
Digital
Ally produces digital video imaging and storage products for use in law enforcement, security and commercial applications. Our
current products are an in-car digital video/audio recorder contained in a rear-view mirror for use in law enforcement and commercial
fleets; a system that provides our law enforcement customers with audio/video surveillance from multiple vantage points and hands-free
automatic activation of body-worn cameras and in-car video systems; a miniature digital video recording system designed to be
worn on an individual’s body; and cloud storage solutions, including cloud-based fleet management and driver monitoring/training
applications. We have active research and development programs to adapt our technologies to other applications. We have the ability
to integrate electronic, radio, computer, mechanical, and multi-media technologies to create unique solutions to address needs
in a variety of other industries and markets, including mass transit, school bus, taxi cab and the military. We sell our products
to law enforcement agencies and other security organizations, and consumer and commercial fleet operators through direct sales
domestically and third-party distributors internationally. We have several new and derivative products in research and development
that we anticipate will begin commercial production during 2019.
Corporate
History
We
were incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. From that date until November 30, 2004, when we entered
into a Plan of Merger with Digital Ally, Inc., a Nevada corporation which was formerly known as Trophy Tech Corporation (the “Acquired
Company”), we had not conducted any operations and were a closely-held company. In conjunction with the merger, we were
renamed Digital Ally, Inc.
The
Acquired Company, which was incorporated on May 16, 2003, engaged in the design, development, marketing and sale of bow hunting-related
products. Its principal product was a digital video recording system for use in the bow hunting industry. It changed its business
plan in 2004 to adapt its digital video recording system for use in the law enforcement and security markets. We began shipments
of our in-car digital video rear view mirror in March 2006.
On
January 2, 2008, we commenced trading on the NASDAQ Capital Market under the symbol “DGLY.” We conduct our business
from 9705 Loiret Boulevard, Lenexa, Kansas 66219. Our telephone number is (913) 814-7774.
Products
We
produce and sell digital audio/video recording, storage and other products in law enforcement and commercial applications. These
product series have been used primarily in law enforcement and private security applications, both of which use the core competency
of our technology in digital video compression, recording and storage. In 2011, we introduced several derivative products as “event
recorders” that can be used in taxi cab, limousine, ambulance and other commercial fleet vehicle applications which served
to greatly diversify our addressable market. Our commercial products have also been utilized by off-airport parking service providers,
cruise lines, education and NASCAR races among a diverse group of other commercial applications. We also intend to produce and
sell other digital video products in the future that will continue to expand our reach beyond the traditional law enforcement,
private security and commercial fleet applications. We have developed and continue to develop both local server and cloud based
storage, archiving and search capabilities that provide customers with innovative, useful and secure methods to store and maintain
their audio/video data. These products incorporate our standards-based digital compression capability that allows the recording
of significant time periods on a chip and circuit board which can be designed into small forms and stored. The following describes
our product portfolio.
In-Car
Digital Video Mirror System for law enforcement –DVM-800 and DVM-800 Lite
In-car
video systems for patrol cars are now a necessity and have generally become standard. Current systems are primarily digital based
systems with cameras mounted on the windshield and the recording device generally in the trunk, headliner, dashboard, console
or under the seat of the vehicle. Most manufacturers have already developed and transitioned completely to digital video, and
some have offered full HD level recordings which is currently state-of-art for the industry.
Our
digital video rear view mirror unit is a self-contained video recorder, microphone and digital storage system that is integrated
into a rear-view mirror, with a monitor, GPS and 900 MHz audio transceiver. Our system is more compact and unobtrusive than certain
of our competitors because it requires no recording equipment to be located in other parts of the vehicle.
Our
in-car digital video rear view mirror has the following features:
|
●
|
wide
angle zoom color camera;
|
|
|
|
|
●
|
standards-based
video and audio compression and recording;
|
|
|
|
|
●
|
system
is concealed in the rear view mirror, replacing factory rear view mirror;
|
|
|
|
|
●
|
monitor
in rear-view mirror is invisible when not activated;
|
|
|
|
|
●
|
eliminates
need for analog tapes to store and catalogue;
|
|
|
|
|
●
|
easily
installs in any vehicle;
|
|
|
|
|
●
|
ability
to integrate with body-worn cameras including auto-activation of either system;
|
|
|
|
|
●
|
archives
audio/video data to the cloud, computers (wirelessly) and to compact flash memory, or file servers;
|
|
|
|
|
●
|
900
MHz audio transceiver with automatic activation;
|
|
|
|
|
●
|
marks
exact location of incident with integrated GPS;
|
|
|
|
|
●
|
playback
using Windows Media Player;
|
|
|
|
|
●
|
optional
wireless download of stored video evidence;
|
|
|
|
|
●
|
proprietary
software protects the chain of custody;
|
|
|
|
|
●
|
and
records to rugged and durable solid state memory.
|
The
Company has announced that it is developing a new in-car Digital Video platform under the name EVO-HD which it plans to launch
during 2019. The EVO-HD is a next generation system that offers a multiple HD in-car camera solution system with built-in patented
VuLink auto-activation technology. The EVO-HD is built on an entirely new and highly advanced technology platform that enables
many new and revolutionary features, including auto activation beyond the car and body camera. No other provider can offer built-in
patented VuLink auto-activation technology. The EVO-HD will provide law enforcement officers with an easier to use, faster and
more advanced system for capturing video evidence and uploading. Additional features include:
|
●
|
A
remote cloud trigger feature that allows dispatchers to remotely start recordings;
|
|
●
|
Simultaneous
audio/video play back;
|
|
●
|
Cloud
Connectivity via cell modem;
|
|
●
|
Near
real-time mapping and system health monitoring;
|
|
●
|
Body-camera
connectivity with built-in auto activation technology; and
|
|
●
|
128GB
internal storage, up to 2TB external SDD storage.
|
The
EVO-HD is designed and built on a new and highly advanced technology platform that will become the platform for a whole new family
of in-car video solution products for the law enforcement. The innovative EVO-HD technology will replace the current in-car mirror-based
systems with a miniaturized system that can be custom-mounted in the vehicle while offering numerous hardware configurations to
meet the varied needs and requirements of its law enforcement customers. The EVO-HD can support up to four HD cameras, with two
cameras having pre-event and evidence capture assurance (ECA) capabilities to allow agencies to review entire shifts. An internal
cell modem will allow for connectivity to the VuVault cloud, powered by Amazon Web Services (“AWS”), and real time
metadata when in the field.
In-Car
Digital Video “Event Recorder” System –DVM-250 Plus for Commercial Fleets
Digital
Ally provides commercial fleets and commercial fleet managers with the digital video tools they need to increase driver safety,
track assets in real-time and minimize the company’s liability risk all while enabling fleet managers to operate the fleet
at an optimal level. We market a product designed to address these commercial fleet markets with our DVM-250 Plus event recorders
that provide all types of commercial fleets with features and capabilities which are fully-customizable, consistent with their
specific application and inherent risks. The DVM-250 Plus is a rear-view mirror based digital audio and video recording system
with many, but not all of, the features of our DVM-800 law enforcement mirror systems at a lower price point. The DVM-250 Plus
is designed to capture “events,” such as wrecks and erratic driving or other abnormal occurrences, for evidentiary
or training purposes. These markets may find our units attractive from both a feature and cost perspective compared to other providers.
Our marketing efforts indicate that commercial fleets are adopting this technology, in particular the ambulance and taxi-cab markets.
Digital
Ally offers a suite of data management web-based tools to assist fleet managers in the organization, archival, and management
of videos and telematics information. Within the suite, there are powerful mapping and reporting tools that help optimize efficiency,
serve as excellent training tools for teams on safety and ultimately generate a significant return on investment for the organization.
The
EVO-HD described above will also become the platform for a whole new family of in-car video solution products for the commercial
markets. The innovative EVO-HD technology will replace the current in-car mirror-based systems with a miniaturized system that
can be custom-mounted in the vehicle while offering numerous hardware configurations to meet the varied needs and requirements
of its commercial customers. In its commercial market application, the EVO-HD can support up to four HD cameras, with two cameras
having pre-event and evidence capture assurance (ECA) capabilities to allow customers to review entire shifts. An internal cell
modem will allow for connectivity to the FleetVU Manager cloud-based system for commercial fleet tracking and monitoring, powered
by Amazon Web Services (“AWS”), and real time metadata when in the field.
Miniature
Body-Worn Digital Video System – FirstVU HD for law enforcement and private security
This
system is also a derivative of our in-car video systems, but is much smaller and lighter and more rugged and water-resistant to
handle a hostile outdoor environment. These systems can be used in many applications in addition to law enforcement and private
security and are designed specifically to be clipped to an individual’s pocket or other outer clothing. The unit is self-contained
and requires no external battery or storage devices. Current systems offered by competitors are digital based, but generally require
a battery pack and/or storage device to be connected to the camera by wire or other means. We believe that our FirstVU HD product
is more desirable for potential users than our competitors’ offerings because of its video quality, small size, shape and
lightweight characteristics
.
Our FirstVU HD integrates with our in-car video systems through our patented VuLink system
allowing for automatic activation of both systems.
Auto-activation
and Interconnectivity between in-car video systems and FirstVU HD body worn camera products – VuLink for law enforcement
applications
Recognizing
a critical limitation in law enforcement camera technology, we pioneered the development of our VuLink ecosystem that provides
intuitive auto-activation functionality as well as coordination between multiple recording devices. The United States Patent and
Trademark Office (the “USPTO”) has recognized these pioneering efforts by granting us multiple patents with claims
covering numerous features, such as automatically activating an officer’s cameras when the light bar is activated or a data-recording
device such as a smart weapon is activated. Additionally, the awarded patent claims cover automatic coordination between multiple
recording devices. Prior to this work, officers were forced to manually activate each device while responding to emergency scenarios,
a requirement that both decreased the usefulness of the existing camera systems and diverted officers’ attention during
critical moments. Our FirstVU HD integrates with our in-car video systems through our patented VuLink system allowing for automatic
activation of both systems.
This
feature is becoming a standard feature required by many law agencies. Unfortunately, certain competitors have chosen to infringe
our patent and develop products that provide the same or similar features as our VuLink system. We have filed lawsuits against
two competitors Axon Enterprises, Inc. (“Axon,” formerly known as Taser International, Inc.) and Enforcement Video,
LLC dba WatchGuard Video (“WatchGuard”) that challenge their infringing products. We believe that the outcome of these
lawsuits will largely define the competitive landscape for the body-worn and in-car video market for the foreseeable future. We
expect that our VuLink product and its related patents will be recognized as the revolutionary and pioneering invention by the
courts.
VuVault.net
and FleetVU Manager
VuVault.net
is a cost-effective, fully expandable, law enforcement cloud storage solution powered by Amazon Web Services that provides CJIS
compliant redundant and security-enhanced storage of all uploaded videos.
FleetVU
Manager is our web-based software for commercial fleet tracking and monitoring that features and manages video captured by our
Video Event Data Recorders of incidents requiring attention, such as accidents. This software solution features our cloud-based
web portal that utilizes many of the features of our VUVault.NET law-enforcement cloud-based storage solution.
Other
Products
During
the last year, we focused our research and development efforts to meet the varying needs of our customers, enhance our existing
products and commence development of new products and product categories. Our research and development efforts are intended to
maintain and enhance our competitiveness in the market niche we have carved out, as well as positioning us to compete in diverse
markets outside of law enforcement.
Market
and Industry Overview
Historically,
our primary market has been domestic and international law enforcement agencies. In 2012, we expanded our scope by pursuing the
commercial fleet vehicle and mass transit markets. In the future, given sufficient capital and market opportunity, we may further
expand or focus on private security, homeland security, mass transit, healthcare, general retail, educational, general consumer
and other commercial markets. In that regard, we have several installations involving private security on cruise ships and similar
markets. Our view is there are many potential private uses of our product offerings. We have made inroads into certain commercial
fleet and the ambulance service provider market, confirming that our DVM-250 Plus product and FleetVU Manager can become a significant
revenue producer for us.
Law
Enforcement
We
believe that law enforcement already recognizes a valuable use of our various digital audio/video products for the recording of
roadside sobriety tests. Without some form of video or audio recording, court proceedings usually consist of the police officer’s
word against that of the suspect. Records show that conviction rates increase substantially where there is video evidence to back
up officer testimony. Video evidence also helps to protect police departments against frivolous lawsuits.
The
largest source of police video evidence today is in-car video. Unfortunately, some police cars still do not have in-car video,
and in those that do, the camera usually points forward rather than to the side of the road where the sobriety test takes place.
The in-car video is typically of little use for domestic violence investigations, burglary or theft investigations, disorderly
conduct calls or physical assaults. In all of these cases, the FirstVU HD may provide recorded evidence of the suspect’s
actions and reactions to police intervention.
Additionally,
motorcycle patrolmen rarely have video systems. Our FirstVU body camera is well suited as a mobile application of our digital
video recording system that can be used by motorcycle police and water patrol.
Crime
scene investigations, including detailed photography, are typically a large part of the budgets of metropolitan police forces.
The FirstVU may record a significant portion of such evidence at a much lower cost for gathering, analyzing and storing data and
evidence.
Commercial
and Other Markets
There
are numerous potential applications for our digital audio/video camera products. We believe that other potential markets for our
digital video systems, including the derivatives currently being developed, include private investigators, SWAT team members,
over-the-road trucking fleets, airport security, municipal fire departments, and the U.S. military. Other potential commercial
markets for our digital video systems include sporting venues and arenas.
Schools
We
believe our products and offerings may be of benefit in kindergarten through twelve grade school systems. We are assessing our
entry into this potential market through several pilot tests. Preliminary results of our exploration of this market have been
mixed, but we believe it may represent a new addressable market for our mobile audio/video recording products in the future. Recent
tragic events at schools have heightened the need for providing a “safer” environment in general for schools.
Private
Security Companies
There
are thousands of private security agencies in the United States employing a large number of guards. Police forces use video systems
for proof of correct conduct by officers, but private security services usually have no such tool. We believe that the FirstVU
HD is an excellent management tool for these companies to monitor conduct and timing of security rounds. In addition to the FirstVU
HD, the digital video security camera can provide fill-in security when guards have large areas to cover or in areas that do not
have to be monitored around the clock.
Homeland
Security Market
In
addition to the government, U.S. corporations are spending heavily for protection against the potential of terrorist attacks.
Public and private-sector outlays for antiterrorism measures and for protection against other forms of violence are significant.
These are potential markets for our products.
Manufacturing
We
have entered into contracts with manufacturers for the assembly of the printed circuit boards used in our products. Dedicated
circuit board manufacturers are well-suited to the assembly of circuit boards with the complexity found in our products. Dedicated
board manufacturers can spread the extensive capital equipment costs of circuit board assembly among multiple projects and customers.
Such manufacturers also have the volume to enable the frequent upgrade to state-of-the-art equipment. We have identified multiple
suppliers who meet our quality, cost, and performance criteria. We also use more than one source for circuit board assembly to
ensure a reliable supply over time. We use contract manufacturers to manufacture our component subassemblies and may eventually
use them to perform final assembly and testing. Due to the complexity of our products, we believe that it is important to maintain
a core of knowledgeable production personnel for consistent quality and to limit the dissemination of sensitive intellectual property
and will continue this practice. In addition, such technicians are valuable in our service and repair business to support our
growing installed customer base.
We
also contract with two manufacturers that have manufacturing facilities in the Philippines and South Korea to produce our DVM-250
Plus, DVM-800 and DVM-800 HD products. The contracts are general in nature addressing confidentiality and other matters, have
no minimum purchase requirements and require the acceptance of specific purchase orders to support any product supply acquisitions.
We are using additional contract manufacturers based in the United States for these product lines to further mitigate any supply
disruption risk and ensure competitive pricing. We typically perform final assembly, testing and quality control functions for
these products in our Lenexa, Kansas facility.
Sales
and Marketing
We
have an employee-based, direct sales force for domestic selling efforts that enables us to control and monitor its daily activities
and independent distributors for international sales. Our sales force is organized in seven territories. The direct territory
sales team is supported by a team of five inside sales representatives, and a tele-sales specialist and a pre-sales solution design
team. We also have a bid specialist to coordinate large bid opportunities. We believe our employee-based model encourages our
sales personnel in lower performing territories to improve their efforts and, consequently, their sales results. Our executive
team also supports sales agents with significant customer opportunities by providing pricing strategies and customer presentation
assistance. Our technical support personnel may also provide sales agents with customer presentations and product specifications
in order to facilitate sales activities.
We
use our direct sales force and international distributors to market our products. Our key promotional activities include:
|
●
|
attendance
at industry trade shows and conventions;
|
|
●
|
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;
|
|
●
|
support
of our direct sales with passive sales systems, including inside sales and e-commerce;
|
|
●
|
print
advertising in journals with specialized industry focus;
|
|
●
|
direct
mail campaigns targeted to potential customers;
|
|
●
|
web
advertising, including supportive search engines and website and registration with appropriate sourcing entities;
|
|
●
|
our
NASCAR relationship is supportive of developing new business opportunities by and between the sponsors at NASCAR sponsored
events in addition to the races;
|
|
●
|
public
relations, industry-specific venues, as well as general media, to create awareness of our brand and our products, including
membership in appropriate trade organizations; and
|
|
●
|
brand
identification through trade names associated with us and our products.
|
Competition
The
law enforcement and security surveillance markets are extremely competitive. Competitive factors in these industries include ease
of use, quality, portability, versatility, reliability, accuracy and cost. There are direct competitors with technology and products
in the law enforcement and surveillance markets for all our products and those we have in development. Many of these competitors
have significant advantages over us, including greater financial, technical, marketing and manufacturing resources, more extensive
distribution channels, larger customer bases and faster response times to adapt new or emerging technologies and changes in customer
requirements. Our primary competitors in the in-car video systems market include L-3 Mobile-Vision, Inc., Coban Technologies,
Inc., WatchGuard, Kustom Signals, Panasonic System Communications Company, International Police Technologies, Inc. and a number
of other competitors who sell, or may in the future sell, in-car video systems to law enforcement agencies. Our primary competitors
in the body-worn camera market include Axon, Reveal Media, WatchGuard and VieVU, Inc., which was acquired by Axon in 2018. We
face similar and intense competitive factors for our event recorders in the mass transit markets as we do in the law enforcement
and security surveillance markets. We will also compete with any company making surveillance devices for commercial use. There
can be no assurance that we will be able to compete successfully in these markets. Further, there can be no assurance that new
and existing companies will not enter the law enforcement and security surveillance markets in the future.
The
commercial fleet security and surveillance markets likewise are also very competitive. There are direct competitors for our DVM-250
Plus “event recorders,” which several may have greater financial, technical marketing, and manufacturing resources
than we do. Our primary competitors in the commercial fleet sector include Lytx, Inc. (previously DriveCam, Inc.) and SmartDrive
Systems.
Intellectual
Property
Our
ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States
and abroad. We have filed for patent protection in the United States and certain other countries to cover certain design aspects
of our products.
Some
of our patent applications are still under review by the USPTO and, therefore, we have not yet been issued all the patents that
we applied for in the United States. We were issued several patents in recent years, including a patent on our VuLink product
that provides automatic triggering of our body-worn camera and our in-car video systems. No assurance can be given which, or any,
of the patents relating to our existing technology will be issued from the United States or any foreign patent offices. Additionally,
no assurance can be given that we will receive any patents in the future based on our continued development of our technology,
or that our patent protection within and/or outside of the United States will be sufficient to deter others, legally or otherwise,
from developing or marketing competitive products utilizing our technologies.
We
have entered into supply and distribution agreements with several companies that produce certain of our products, including our
DVM-800 and DVM-800 HD products. These supply and distribution agreements contain certain confidentiality provisions that protect
our proprietary technology, as well as that of the third party manufacturers.
In
addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to
achieve and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality
and invention agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be
honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance
can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how.
Axon,
a competitor in our body-camera market, requested that the USPTO commence an
ex parte
reexamination (“IPR”)
of our U.S. Patent No. 8,781,292 (The “’292 Patent”). The USPTO granted this request and has completed its reexamination.
The USPTO has confirmed the validity of our ’292 Patent which relates to our auto-activation technology for law enforcement
body cameras. We have filed suit in the U.S. District Court for the District of Kansas against Axon, alleging willful patent infringement
against Axon’s body camera product line. On February 2, 2016, we received notification that the USPTO has issued another
patent relating to our auto-activation technology for law enforcement cameras. U.S. Patent No. 9,253,452 (the “’452
Patent”) generally covers the automatic activation and coordination of multiple recording devices in response to a triggering
event, such as a law enforcement officer activating the light bar on the vehicle. We have added Axon’s willful infringement
of the ’452 Patent to our existing lawsuit. In December 2016 and January 2017, Axon filed two petitions for
Inter Partes
Review (“IPR”) against the ’452 Patent. The United States Patent and Trademark Office (“USPTO”)
rejected both of Axon’s petitions. Axon is now statutorily precluded from filing any more IPR petitions against the ’452
Patent. The District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR. However,
on November 17, 2017, the Federal District Court of Kansas rejected Axon’s request to maintain the stay. With this significant
ruling, the parties will now proceed towards trial. Since litigation has resumed, the Court has issued a claim construction order
(also called a
Markman
Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit
the scope of the claims. Following the
Markman
Order, the Court set all remaining deadlines in the case. Fact discovery
closed on October 8, 2018, and a Final Pretrial Conference took place on January 16, 2019. The parties filed motions for summary
judgment on January 31, 2019. The parties are awaiting a ruling from the Court on the summary judgment motions. The Court will
set a trial date once summary judgment matters are resolved.
Despite
the USPTO’s recognition of the validity of the ’292 Patent and ’452 Patent, AXON continues to offer for sale,
sell, and market its Axon technology in disregard of our federally protected patent rights. As a result, we are aggressively challenging
Axon’s infringing conduct in our lawsuit against it, seeking both monetary damages and a permanent injunction preventing
Axon from continuing to sell its Axon Signal technology.
On
May 27, 2016 we filed suit against WatchGuard, alleging patent infringement of our ’292 Patent, the ’452 Patent and
our patent No. 9,325,950 (the “’950 Patent”) based on WatchGuard’s VISTA Wifi and 4RE In-Car product lines.
We intend to aggressively challenge WatchGuard’s infringing conduct in our lawsuit against it, seeking both monetary damages
and a permanent injunction preventing WatchGuard from continuing to sell its auto-activation technology embodied within its body-worn
and in-car video systems.
The
USPTO has granted multiple patents to the Company with claims covering numerous features, such as automatically activating all
deployed cameras in response to the activation of just one camera. Additionally, its patent claims cover automatic coordination
as well as digital synchronization between multiple recording devices. Digital Ally also has patent coverage directed to the coordination
between a multi-camera system and an officer’s smartphone, which allows an officer to more readily assess an event on the
scene while an event is taking place or immediately after it has occurred.
The
Company’s lawsuit alleges that WatchGuard incorporated this patented technology into its VISTA Wifi and 4RE In-Car product
lines without its permission. Specifically, Digital Ally is accusing WatchGuard of infringing three patents: the ’292 and
’452 Patents and “’950 Patent.” The Company is aggressively challenging WatchGuard’s infringing
conduct, seeking both monetary damages, as well as seeking a permanent injunction preventing WatchGuard from continuing to sell
its VISTA Wifi and 4RE In-Car product lines using Digital Ally’s own technology to compete against it. On May 8, 2017, WatchGuard
filed a petition seeking IPR of the ’950 Patent. The Company will vigorously oppose that petition. On December 4, 2017 The
Patent Trial and Appeal Board (“PTAB”) rejected the request of WatchGuard to institute an “IPR” on the
’950 Patent. The ’292 Patent previously was subject to the IPR process with the USPTO, but in June 2018 the PTO found
the ’292 Patent valid and rejected Axon’s arguments. WatchGuard had previously agreed to be bound by Axon’s
IPRs and, as such, WatchGuard is now statutorily barred from any further IPR’s challenges with respect to the ’950,
’452, and ’292 Patents. Since the defeat of Axon’s ’292 Patent IPR, the Court has lifted the stay and
set a schedule moving the case towards trial. Discovery is ongoing and will close on May 2, 2019. The parties will then proceed
with expert reports and summary judgment. No trial date has been set.
We
believe the outcome of these infringement lawsuits, and in particular the Axon lawsuit will have meaningful effects upon the entire
body-worn camera market within the United States over the foreseeable future. The auto-activation technology protected by our
’292, ’452 and ’950 Patents is quickly becoming standard within the industry, therefore if we are successful
in challenging Axon and WatchGuard’s infringing conduct, we believe it will have a substantial and positive impact upon
our future revenue streams, although we can offer no assurances in this regard.
Employees
We
had 95 full-time employees as of December 31, 2018. Our employees are not covered by any collective bargaining agreement and we
have never experienced a work stoppage. We believe that our relations with our employees are good.
Not
applicable.
Item
1B.
|
Unresolved
Staff Comments.
|
None.
We
entered into a non-cancellable, long-term facility lease commencing in November 2012. Our facility contains approximately 33,776
square feet and is located at 9705 Loiret Boulevard, Lenexa, Kansas 66219. The lease will terminate on April 1, 2020. The monthly
rent ranges from $35,634 to $38,533 over the term.
Item
3.
|
Legal
Proceedings.
|
The
Company is subject to various legal proceedings arising from normal business operations. Although there can be no assurances,
based on the information currently available, management believes that it is probable that the ultimate outcome of each of the
actions will not have a material adverse effect on the consolidated financial statement of the Company. However, an adverse outcome
in certain of the actions could have a material adverse effect on the financial results of the Company in the period in which
it is recorded.
Axon
The
Company owns U.S. Patent No. 9,253,452 (the ” ’452 Patent”), which generally covers the automatic activation
and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating
the light bar on the vehicle.
The
Company filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against
Axon, alleging willful patent infringement against Axon’s body camera product line and Signal auto-activation product. The
Company is seeking both monetary damages and a permanent injunction against Axon for infringement of the ’452 Patent.
In
addition to the infringement claims, the Company brought claims alleging that Axon conspired to keep the Company out of the marketplace
by engaging in improper, unethical, and unfair competition. The amended lawsuit alleges Axon bribed officials and otherwise conspired
to secure no-bid contracts for its products in violation of both state law and federal antitrust law. The Company’s lawsuit
also seeks monetary and injunctive relief, including treble damages, for these alleged violations.
Axon
filed an answer, which denied the patent infringement allegations on April 1, 2016. In addition, Axon filed a motion to dismiss
all allegations in the complaint on March 4, 2016 for which the Company filed an amended complaint on March 18, 2016 to address
certain technical deficiencies in the pleadings. Digital amended its complaint and Axon renewed its motion to seek dismissal of
the allegations that it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation
of both state law and federal antitrust law on April 1, 2016. Formal discovery commenced on April 12, 2016 with respect to the
patent related claims. In January 2017, the Court granted Axon’s motion to dismiss the portion of the lawsuit regarding
claims that it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state
law and federal antitrust law. On May 2, 2018, the Federal Circuit affirmed the District Court’s ruling and on October 1,
2018 the Supreme Court denied Digital Ally’s petition for review.
In
December 2016 and January 2017, Axon filed two petitions for
Inter Partes
Review (“IPR”) against the ’452
Patent. The United States Patent and Trademark Office (“USPTO”) rejected both of Axon’s petitions. Axon is now
statutorily precluded from filing any more IPR petitions against the ’452 Patent.
The
District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR. However, on November
17, 2017, the Federal District Court of Kansas rejected Axon’s request to maintain the stay. With this significant ruling,
the parties will now proceed towards trial. Since litigation has resumed, the Court has issued a claim construction order (also
called a
Markman
Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope
of the claims. Following the
Markman
Order, the Court set all remaining deadlines in the case. Fact discovery closed on
October 8, 2018, and a Final Pretrial Conference took place on January 16, 2019. The parties filed motions for summary judgment
on January 31, 2019. The parties are awaiting a ruling from the Court on the summary judgment motions. The Court will set a trial
date once summary judgment matters are resolved.
WatchGuard
On
May 27, 2016 the Company filed suit against WatchGuard, (Case No. 2:16-cv-02349-JTM-JPO) alleging patent infringement based on
WatchGuard’s VISTA Wifi and 4RE In-Car product lines.
The
USPTO has granted multiple patents to the Company with claims covering numerous features, such as automatically activating all
deployed cameras in response to the activation of just one camera. Additionally, Digital Ally’s patent claims cover automatic
coordination as well as digital synchronization between multiple recording devices. It also has patent coverage directed to the
coordination between a multi-camera system and an officer’s smartphone, which allows an officer to more readily assess an
event on the scene while an event is taking place or immediately after it has occurred.
The
Company’s lawsuit alleges that WatchGuard incorporated this patented technology into its VISTA Wifi and 4RE In-Car product
lines without its permission. Specifically, Digital Ally is accusing WatchGuard of infringing three patents: the U.S Patent No.
8,781,292 (the ” ’292 Patent”) and ’452 Patents and U.S. Patent No. 9,325,950 the (” ’950
Patent”). The Company is aggressively challenging WatchGuard’s infringing conduct, seeking both monetary damages,
as well as seeking a permanent injunction preventing WatchGuard from continuing to sell its VISTA Wifi and 4RE In-Car product
lines using Digital Ally’s own technology to compete against it. On May 8, 2017, WatchGuard filed a petition seeking IPR
of the ’950 Patent. The Company opposed that petition and on December 4, 2017, The Patent Trial and Appeal Board (“PTAB”)
rejected the request of WatchGuard Video to institute an IPR on the ’950 Patent. The lawsuit also involves the ’292
Patent and the ’452 Patent, the ’452 Patent being the same patent asserted against Axon. The ’292 Patent previously
was subject to the IPR process with the USPTO, but in June 2018 the PTO rejected Axon’s arguments and did not invalidate
the ’292 Patent. WatchGuard had previously agreed to be bound by Axon’s IPRs and, as such, WatchGuard is now statutorily
barred from any further IPR’s challenges with respect to the ’950, ’452, and ’292 Patents. Since the defeat
of Axon’s ’292 Patent IPR, the Court has lifted the stay and set a schedule moving the case towards trial. Discovery
is ongoing and will close on May 2, 2019. The parties will then proceed with expert reports and summary judgment. No trial date
has been set.
PGA
Tour, Inc.
On
January 22, 2019 the PGA Tour, Inc. (the “PGA”) filed suit against the Company in the Federal District Court for the
District of Kansas (Case No. 2:19-cv-0033-CM-KGG) alleging breach of contract and breach of implied covenant of good faith and
fair dealing relative to the Web.com Tour Title Sponsor Agreement (the “Agreement”). The contract was executed on
April 16, 2015 by and between the parties. Under the Agreement, Digital Ally would be a title sponsor of and receive certain naming
and other rights and benefits associated with the Web.com Tour for 2015 through 2019 in exchange for Digital Ally’s payment
to TOUR of annual sponsorship fees.
The
PGA alleges that it has complied with its duties under the Agreement however, the Company has failed to pay the sponsorship fees
payable under the Agreement. The PGA alleges that it has not received $1,190,000 owed for the 2017, 2018 and 2019 tournaments
plus pre and post judgment interest and legal fees. The Company believes that the PGA was first to breach the contract terms
and as a result the Company is no longer obligated to make the payments.
The
Company has not yet filed a reply to the lawsuit and has had and is continuing to have discussions with the PGA involving potential
resolution to this matter. The Company believes it has valid legal defenses against this lawsuit involving alleged defaults and
misrepresentations by the PGA which preceded any of the payment defaults alleged in the lawsuit by the PGA. Should the parties
be unsuccessful in resolving the matter, the Company intends to vigorously defend itself in this litigation and has accrued
the potential cost to defend and or resolve this matter as of December 31, 2018.
General
From
time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to
not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After
carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded,
we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable.
When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the
amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and
disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the
specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of
any potential loss. We reevaluate and update accruals as matters progress over time.
While
the ultimate resolution is unknown we do not expect that these lawsuits will individually, or in the aggregate, have a material
adverse effect to our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently
uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution
of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage
and will not have a material adverse effect on our operating results, financial condition or cash flows.
Item
4.
|
Mine
Safety Disclosures.
|
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business:
Digital
Ally, Inc. and subsidiaries (collectively, “Digital Ally,” “Digital,” and the “Company”)
produces digital video imaging and storage products for use in law enforcement, security and commercial applications. Its products
are an in-car digital video/audio recorder contained in a rear-view mirror for use in law enforcement and commercial fleets; a
system that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free automatic
activation of body-worn cameras and in-car video systems; a miniature digital video system designed to be worn on an individual’s
body; and cloud storage solutions. The Company has active research and development programs to adapt its technologies to other
applications. It can integrate electronic, radio, computer, mechanical, and multi-media technologies to create unique solutions
to address needs in a variety of other industries and markets, including mass transit, school bus, taxicab and the military. The
Company sells its products to law enforcement agencies and other security organizations and consumer and commercial fleet operators
through direct sales domestically and third-party distributors internationally.
The
Company was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November
30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed
Digital Ally, Inc.
Accounting
Changes:
Effective
January 1, 2018, the Company adopted FASB ASC Topic 606,
Revenue from Contracts with Customers
, the Company changed certain
characteristics of the revenue recognition accounting policy as described below. ASC 606 was applied using the modified retrospective
approach, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at
January 1, 2018. Therefore, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic
605,
Revenue Recognition
, or ASC 605. The following table summarizes the impact of the adoption of ASC 606 on revenue,
operating expenses and operating profit for the year ended December 31, 2018 (in thousands):
|
|
As
Reported
|
|
|
Adjustments
|
|
|
Amounts
without the
Adoption
of ASC 606
|
|
Revenue
|
|
|
11,291
|
|
|
|
—
|
|
|
|
11,291
|
|
Operating
Expenses
|
|
|
14,118
|
|
|
|
28
|
|
|
|
14,090
|
|
Operating
Profit (Loss)
|
|
|
(10,156
|
)
|
|
|
(28
|
)
|
|
|
(10,128
|
)
|
The
impact of the adoption of ASC 606 as of January 1, 2018 for the Company was not material and the impact of the adoption of ASC
606 on the consolidated financial statements at December 31, 2018 and the consolidated statements of operations, equity (deficit)
and cash flows for the year ended December 31, 2018 was not material.
Upon
adoption of ASC 606, the Company changed its accounting policy for the capitalization of costs to obtain contracts. Prior to the
adoption of ASC 606, all commissions paid to the salesforce was recognized as commission expense including any commissions earned
for future revenues. Under ASC 606, the Company is required to capitalize commissions paid to the salesforce for future revenues
and recognize as commission expense as the respective revenues are earned. This change was the principal adjustment to the Company’s
reported revenue and operating expenses included in the above table.
Management’s
Liquidity Plan
The
Company incurred substantial operating losses in the year ended December 31, 2018 primarily due to reduced revenues and gross
margins caused by competitors’ willful infringement of its patents, specifically the auto-activation of body-worn and in-car
video systems, and by competitors’ introduction of newer products with more features than those of the Company and significant
price cutting of their products. The Company incurred net losses of approximately $15.1 million during the year ended December
31, 2018 and $12.3 million in the year ended December 31, 2017 and it had an accumulated deficit of $77.4 million as of
December 31, 2018. In recent years and including 2018, the Company has accessed the public and private capital markets to raise
funding through the issuance of debt and equity. In that regard, the Company raised funding in the form of subordinated debt,
secured debt and proceeds investment agreements totaling $16,500,000, and net proceeds of $7,324,900 from an underwritten public
offering of common stock during the year ended December 31, 2018. The Company issued common stock with detachable common stock
purchase warrants for $2,776,332 and raised funding from subordinated and secured debt totaling $1,608,500 during the year ended
December 31, 2017. During 2016, the Company raised $4.0 million of funding in the form of convertible debentures and common stock
purchase warrants. These debt and equity raises were utilized to fund its operations and management expects to continue this pattern
until it achieves positive cash flows from operations, although it can offer no assurance in this regard.
The
Company retired all interest-bearing debt outstanding during the year ended December 31, 2018. The only long-term obligations
outstanding as of December 31, 2018 are associated with the proceeds investment agreement that the Company entered into during
July 2018, as more fully described in Note 7.
The
Company was negotiating with Web.com golf tournament officials to terminate its sponsorship fee commitment of $500,000
annually for 2018 and 2019 tournaments; however, in January 2019, the PGA Tour, Inc. filed suit against the Company. The
PGA’s lawsuit alleges that it has not received $1,190,000 owed for the 2017, 2018 and 2019 tournaments plus pre and
post judgement interest and legal fees. The Company believes that the PGA was first to breach the contract terms and as a
result the Company is no longer obligated to make the payments. The lawsuit is in the early stages and the Company has not
yet filed its reply to the lawsuit.
The
Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital
to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no
assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing
when needed, and obtain it on terms acceptable or favorable to the Company.
The
Company has implemented an enhanced quality control program to detect and correct product issues before they result in significant
rework expenditures affecting the Company’s gross margins and has seen progress in that regard. In addition, the Company
undertook a number of cost reduction initiatives on 2017 and 2018, including a reduction of its workforce by approximately 40%,
restructuring its direct sales force and cutting other selling, general and administrative costs. The Company has increased its
addressable market to non-law enforcement customers and obtained new non-law enforcement contracts in 2018, which contracts include
recurring revenue during the period 2018 to 2020. The Company believes that its quality control, headcount reduction and cost
cutting initiatives, expansion to non-law enforcement sales channels and new product introduction will eventually restore positive
operating cash flows and profitability, although it can offer no assurances in this regard.
In
addition to the initiatives described above, the Board of Directors is conducting a review of a full range of strategic alternatives
to best position the Company for the future including, but not limited to, monetizing its patent portfolio and related patent
infringement litigation against Axon Enterprise, Inc. (“Axon” formerly Taser International, Inc.) and Enforcement
Video, LLC d/b/a WatchGuard Video (“WatchGuard”), the sale of all or certain assets, properties or groups of properties
or individual businesses or merger or combination with another company. The result of this review may also include the continued
implementation of the Company’s business plan. The Company retained Roth Capital Partners (“Roth”) in 2018 to
assist in this process. The capital raises/fundings completed on April 3, 2018, August 21, 2018, and September 28, 2018, as discussed
in Notes 7 and 14, were part of this strategic alternatives review. While such funding addressed the Company’s near-term
liquidity needs, it continues to consider strategic alternatives to address longer-term liquidity needs and operational issues.
There can be no assurance that any additional transactions or financings will result from this process.
Based
on the uncertainties described above, the Company believes its business plan does not alleviate the existence of substantial doubt
about its ability to continue as a going concern within one year from the date of the issuance of these consolidated condensed
interim financial statements.
The
following is a summary of the Company’s Significant Accounting Policies:
Basis
of Consolidation:
The
accompanying financial statements include the consolidated accounts of Digital Ally and its wholly-owned subsidiaries, Digital
Ally International, Inc. All intercompany balances and transactions have been eliminated during consolidation.
The
Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products.
Fair
Value of Financial Instruments:
The
carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated
notes payable approximate fair value because of the short-term nature of these items. The Company accounts for its derivative
liabilities, its secured convertible debentures and proceeds investment agreement on a fair value basis.
Revenue
Recognition:
The
Company applies the provisions of Accounting Standards Codification (ASC) 606-10,
Revenue from Contracts with Customers
,
and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control
to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle,
the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance
obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations
in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The
Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with
the customer. In situation where sales are to a distributor, the Company had concluded its contracts are with the distributor
as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of part of its consideration
for the contract, the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each
contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance
obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment
to determine the net consideration to which it expects to be entitled. As the Company’s standard payment terms are less
than one year, it has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant
financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling
price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable
input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of
the product is transferred to the customer (i.e. when the Company’s performance obligations is satisfied), which typically
occurs at shipment. Further in determining whether control has been transferred, the Company considers if there is a present right
to payment and legal title, along with risks and rewards of ownership having transferred to the customer. Customers do not have
a right to return the product other than for warranty reasons for which they would only receive repair services or replacement
product. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for product sales when
incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
The
Company sells its products and services to law enforcement and commercial customers in the following manner:
|
●
|
Sales
to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through
its sales force, which is composed of its employees. Revenue is recorded when the product is shipped to the end customer.
|
|
|
|
|
●
|
Sales
to international customers are made through independent distributors who purchase products from the Company at a wholesale
price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor
retains the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory,
customer receivables and all related risks and rewards of ownership. Accordingly, upon application of steps one through five
above, revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.
|
|
|
|
|
●
|
Repair
parts and services for domestic and international customers are generally handled by its inside customer service employees.
Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.
|
Sales
taxes collected on products sold are excluded from revenues and are reported as accrued expenses in the accompanying balance sheets
until payments are remitted.
Service
and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue
is recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services.
Revenue for extended warranty, cloud service or other software-based products is over the term of the contract warranty or service
period. A time-elapsed method is used to measure progress because the Company transfers control evenly over the contractual period.
Accordingly, the fixed consideration related to these revenues is generally recognized on a straight-line basis over the contract
term, as long as the other revenue recognition criteria have been met.
Contracts
with some of the Company’s customers contain multiple performance obligations that are distinct and accounted for separately.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”).
The Company determined SSP for all the performance obligations using observable inputs, such as standalone sales and historical
pricing. SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of service
being provided. SSP also reflects the amount the Company would charge for the performance obligation if it were sold separately
in a standalone sale. Multiple performance obligations consist of product, software, cloud subscriptions and extended warranties.
The
Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined
points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the
life of the multi-year contract to future deliverables using management’s best estimate of selling price.
Contract
liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are
reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts
consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized
as the respective performance obligations are satisfied. During the year ended December 31, 2018, we recognized revenue of
$1.7 million related to our contract liabilities at January 1, 2018. Total contract liabilities consist of the
following:
|
|
December
31, 2018
|
|
|
January
1, 2018
|
|
Contract
liabilities, current
|
|
$
|
1,748,789
|
|
|
$
|
1,409,683
|
|
Contract
liabilities, non-current
|
|
|
1,991,091
|
|
|
|
2,158,649
|
|
|
|
|
|
|
|
|
|
|
Total
contract liabilities
|
|
$
|
3,739,880
|
|
|
$
|
3,568,332
|
|
The
net expense (income) related to sales returns and allowances aggregated $132,477 and $(18,503) for the years ended December 31,
2018 and 2017, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an
accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting
these return rates. A customer paid under a sales transaction in March 2017 that had been accrued to be returned at December 31,
2016, which then caused the negative sales returns for the year ended December 31, 2017.
Revenues
for the years ended December 31, 2018 and 2017 were derived from the following sources:
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
DVM-800
|
|
$
|
5,090,804
|
|
|
$
|
6,935,408
|
|
Repair
and service
|
|
|
1,466,845
|
|
|
|
1,524,909
|
|
FirstVu
HD
|
|
|
1,386,737
|
|
|
|
1,674,207
|
|
DVM-250 Plus
|
|
|
757,676
|
|
|
|
1,371,637
|
|
Cloud
service revenue
|
|
|
693,653
|
|
|
|
279,129
|
|
DVM-750
|
|
|
403,390
|
|
|
|
570,434
|
|
VuLink
|
|
|
190,951
|
|
|
|
266,004
|
|
Laser
Ally
|
|
|
79,155
|
|
|
|
41,673
|
|
DVM-100 &
DVM-400
|
|
|
75,421
|
|
|
|
232,093
|
|
Accessories
and other revenues
|
|
|
1,146,777
|
|
|
|
1,682,106
|
|
|
|
$
|
11,291,409
|
|
|
$
|
14,577,600
|
|
Use
of Estimates:
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Cash
and cash equivalents:
Cash
and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or
less.
Cash
and cash equivalents that are restricted as to withdrawal or use under the terms of the secured convertible debentures are presented
as restricted cash separate from cash and cash equivalents on the accompanying balance sheet.
Accounts
Receivable:
Accounts
receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding
amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables
are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
A
trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30)
days beyond terms. No interest is charged on overdue trade receivables.
Inventories:
Inventories
consist of electronic parts, circuitry boards, camera parts and ancillary parts (collectively, “components”), work-in-process
and finished goods, and are carried at the lower of cost (First-in, First-out Method) or market value. The Company determines
the estimate for the reserve for slow moving or obsolete inventories by regularly evaluating individual inventory levels, projected
sales and current economic conditions.
Furniture,
fixtures and equipment:
Furniture,
fixtures and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary
maintenance and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over
the estimated useful life of the asset, which ranges from three to ten years. Amortization expense on capitalized leases is included
with depreciation expense.
Intangible
assets:
Intangible
assets include deferred patent costs and license agreements. Legal expenses incurred in preparation of patent application have
been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that
are not granted will be charged to expense at that time. The Company has entered into several sublicense agreements under which
it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements generally
require upfront payments to obtain the exclusive rights to such material. The Company capitalizes the upfront payments as intangible
assets and amortizes such costs over their estimated useful life on a straight-line method.
Secured
convertible debentures:
The
Company has elected to record its debentures at fair value. Accordingly, the debentures are marked-to-market at each reporting
date with the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations. All issuance costs related
to the debentures were expensed as incurred in the Consolidated Statement of Operations.
Proceeds
investment agreement:
The
Company has elected to record its proceeds investment agreement at its fair value. Accordingly, the proceeds investment agreement
will be marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement
of Operations. All issuance costs related to the proceeds investment agreement were expensed as incurred in the Consolidated Statement
of Operations.
Long-Lived
Assets:
Long-lived
assets such as furniture, fixtures and equipment and purchased intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances
require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows
expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or
asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying
value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models,
quoted market values and third-party appraisals, as considered necessary.
Warranties:
The
Company’s products carry explicit product warranties that extend up to two years from the date of shipment. The Company
records a provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts these
provisions to reflect actual experience. Accrued warranty costs are included in accrued expenses. Extended warranties are offered
on selected products and when a customer purchases an extended warranty the associated proceeds are treated as contract liabilities
and recognized over the term of the extended warranty.
Shipping
and Handling Costs:
Shipping
and handling costs for outbound sales orders totaled $66,053 and $64,745 for the years ended December 31, 2018 and 2017, respectively.
Such costs are included in general and administrative expenses in the Consolidated Statements of Operations.
Advertising
Costs:
Advertising
expense includes costs related to trade shows and conventions, promotional material and supplies, and media costs. Advertising
costs are expensed in the period in which they are incurred. The Company incurred total advertising expense of approximately $384,113
and $761,656 for the years ended December 31, 2018 and 2017, respectively. Such costs are included in selling, advertising and
promotional expenses in the Consolidated Statements of Operations.
Income
Taxes:
Deferred
taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
The
Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) No. 740 - Income Taxes that provides a framework for accounting for uncertainty in income taxes and provided
a comprehensive model to recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or
expected to be taken on a tax return. It initially recognizes tax positions in the financial statements when it is more likely
than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with
the tax authority assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based
on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits,
and it recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As it obtains additional information,
the Company may need to periodically adjust its recognized tax positions and tax benefits. These periodic adjustments may have
a material impact on its Consolidated Statements of Operations.
The
Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax
expense in the Consolidated Statements of Operations. There was no interest expense related to the underpayment of estimated taxes
during the years ended December 31, 2018 and 2017. There were no penalties in 2018 and 2017.
The
Company is subject to taxation in the United States and various states. As of December 31, 2018, the Company’s tax returns
filed for 2015, 2016, and 2017 and to be filed for 2018 are subject to examination by the relevant taxing authorities. With few
exceptions, as of December 31, 2018, the Company is no longer subject to Federal, state, or local examinations by tax authorities
for years before 2015.
Research
and Development Expenses:
The
Company expenses all research and development costs as incurred. Development costs of computer software to be sold, leased, or
otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established
and ending when a product is available for general release to customers. In most instances, the Company’s products are released
soon after technological feasibility has been established. Costs incurred subsequent to achievement of technological feasibility
were not significant, and software development costs were expensed as incurred during 2018 and 2017.
Common
Stock Purchase Warrants:
The
Company has common stock purchase warrants that are accounted for as liabilities under the caption of derivative liabilities on
the consolidated balance sheet and recorded at fair value due to the warrant agreements containing anti-dilution provisions. The
change in fair value is being recorded in Consolidated Statement of Operations.
The
Company has common stock purchase warrants that are accounted for as equity based on their relative fair value and are not subject
to re-measurement.
Stock-Based
Compensation:
The
Company grants stock-based compensation to its employees, board of directors and certain third-party contractors. Share-based
compensation arrangements may include the issuance of options to purchase common stock in the future or the issuance of restricted
stock, which generally are subject to vesting requirements. The Company records stock-based compensation expense for all stock-based
compensation granted based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis
over the requisite service period of the award.
The
Company estimates the grant-date fair value of stock-based compensation using the Black-Scholes valuation model. Assumptions used
to estimate compensation expense are determined as follows:
|
●
|
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 accounted for as they occur.
|
Segments
of Business:
The
Company has determined that its operations are comprised of one reportable segment: the sale of digital audio and video recording
and speed detection devices. For the year ended December 31, 2018 and 2017, sales by geographic area were as follows:
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Sales
by geographic area:
|
|
|
|
|
|
|
|
|
United
States of America
|
|
$
|
10,929,071
|
|
|
$
|
14,017,778
|
|
Foreign
|
|
|
362,338
|
|
|
|
559,822
|
|
|
|
$
|
11,291,409
|
|
|
$
|
14,577,600
|
|
Sales
to customers outside of the United States are denominated in U.S. dollars. All Company assets are physically located within the
United States.
Adoption
of New Accounting Pronouncement:
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
No. 2014-09,
“Revenue from Contracts with Customers”
(“ASU 2014-09”), which requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard was effective
for interim and annual periods beginning after December 15, 2017 and permitted the use of either the retrospective or cumulative
effect transition method. Additionally, this guidance required significantly expanded disclosures about revenue recognition.
The
Company adopted the new guidance on January 1, 2018 using the modified retrospective approach, which resulted in an adjustment
to accumulated deficit for the cumulative effect of applying this standard to contracts in process as of the adoption date. Under
this approach, the Company did not revise the prior financial statements presented, but provided additional disclosures of the
amount by which each financial statement line item is affected in the current reporting period during 2018 as a result of applying
the new revenue guidance. This included a qualitative explanation of the significant changes between the reported results under
the revenue standard and the previous guidance.
The
Company completed its assessment of the impact this guidance had on its consolidated financial statements and related disclosures
effective January 1, 2018. Based on that assessment, the most significant impact of this new guidance was to capitalize the costs
to obtain contracts, which resulted in an adjustments of $71,444 to decrease the opening balance of accumulated deficit upon adoption.
In
February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02,
Leases
(“Topic 842”).
The guidance requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in
a manner similar to today’s accounting. Lessees initially recognize a lease liability for the obligation to make lease payments
and a right-of-use asset for the right to use the underlying asset for the lease term. The lease liability is measured at the
present value of the lease payments over the lease term. The right-of-use asset is measured at the lease liability amount, adjusted
for lease prepayments, lease incentives received and the lessee’s initial direct costs. The standard is effective for public
business entities for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period,
which is the first quarter of 2019 for the Company. Early adoption is permitted.
The
Company currently anticipates the most significant impact will be from the recognition of ROU assets and lease
liabilities related to its office space operating leases. The Company estimates that it will record ROU assets and lease
liabilities of approximately $592,000 upon adoption of this standard. In preparation for the adoption of the new
standard, the Company is in process of finalizing its accounting policies and procedures and implementing internal controls
over financial reporting. The Company will adopt the new lease standard in the first quarter of 2019, using the optional
transitional method, and expects that the adoption of the new accounting standard will have a material impact on its
consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15,
Clarification on Classification of Certain Cash Receipts and Cash Payments on the
Statement of Cash Flows
, to create consistency in the classification of eight specific cash flow items. This standard is effective
for calendar-year SEC registrants beginning in 2018. The Company adopted ASU 2016-18 effective January 1, 2018 and retrospectively
updated the presentation of our consolidated statements of cash flows to include amounts of restricted cash with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period amounts.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows - Restricted Cash (Topic 230),
which amends the existing
guidance relating to the disclosure of restricted cash and restricted cash equivalents on the statement of cash flows. ASU 2016-18
is effective for the fiscal year beginning after December 15, 2017, and interim periods within that fiscal year, and early adoption
is permitted. The adoption of ASU 2016-18 had no effect on the Company’s Consolidated Statements of Cash Flows.
In
May 2017, the FASB issued ASU 2017-09,
Stock Compensation (Topic 718)-Scope of Modification Accounting
, to provide guidance
on determining which changes to terms and conditions of share-based payment awards require an entity to apply modification accounting
under Topic 718. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual
periods. The Company adopted this new standard on January 1, 2018 and such adoption had no effect on the Company’s consolidated
financial statements.
In
August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal –Use Software
(Subtopic 350-40):
in
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns
the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop internal-use software. The accounting for the service element of a hosting
arrangement that is a service contract is not affected by the amendments. ASU 2018-15 is effective for fiscal years beginning
after December 15, 2019, and interim periods within that fiscal year, and early adoption is permitted. The Company is in the process
of assessing the impact of the adoption of ASU 2018-15, but does not expect adoption will have a material impact on the Company’s
consolidated financial statements.
NOTE
2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. Sales to domestic
customers are typically made on credit and the Company generally does not require collateral while sales to international customers
require payment before shipment or backing by an irrevocable letter or credit. The Company performs ongoing credit evaluations
of its customers’ financial condition and maintains an allowance for estimated losses. Accounts are written off when deemed
uncollectible and accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts
totaled $70,000 as of December 31, 2018 and 2017.
The
Company uses primarily a network of unaffiliated distributors for international sales and employee-based direct sales force for
domestic sales. No international distributor individually exceeded 10% of total revenues and no customer receivable balance exceeded
10% of total accounts receivable for the years ended December 31, 2018 and 2017.
The
Company purchases finished circuit boards and other proprietary component parts from suppliers located in the United States and
on a limited basis from Asia. Although the Company obtains certain of these components from single source suppliers, it generally
owns all tooling and management has located alternative suppliers to reduce the risk in most cases to supplier problems that could
result in significant production delays. The Company has not historically experienced significant supply disruptions from any
of its principal vendors and does not anticipate future supply disruptions. The Company acquires most of its components on a purchase
order basis and does not have long-term contracts with its suppliers.
NOTE
3. ACCOUNTS RECEIVABLE – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The
allowance for doubtful accounts receivable was comprised of the following for the years ended December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Beginning
balance
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
Provision
for bad debts
|
|
|
—
|
|
|
|
—
|
|
Charge-offs
to allowance, net of recoveries
|
|
|
—
|
|
|
|
—
|
|
Ending
balance
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
NOTE
4. INVENTORIES
Inventories
consisted of the following at December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Raw
material and component parts
|
|
$
|
4,969,786
|
|
|
$
|
4,621,704
|
|
Work-in-process
|
|
|
351,451
|
|
|
|
155,087
|
|
Finished
goods
|
|
|
4,965,594
|
|
|
|
6,964,624
|
|
Subtotal
|
|
|
10,286,831
|
|
|
|
11,741,415
|
|
Reserve
for excess and obsolete inventory
|
|
|
(3,287,771
|
)
|
|
|
(2,990,702
|
)
|
Total
|
|
$
|
6,990,060
|
|
|
$
|
8,750,713
|
|
Finished
goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such
units totaled $115,456 and $680,805 as of December 31, 2018 and December 31, 2017, respectively.
NOTE
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture,
fixtures and equipment consisted of the following at December 31, 2017 and 2016:
|
|
Estimated
Useful Life
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Office
furniture, fixtures and equipment
|
|
3-10
years
|
|
$
|
802,681
|
|
|
$
|
881,306
|
|
Warehouse
and production equipment
|
|
3-5
years
|
|
|
526,932
|
|
|
|
515,368
|
|
Demonstration
and tradeshow equipment
|
|
2-5
years
|
|
|
426,582
|
|
|
|
426,582
|
|
Leasehold
improvements
|
|
2-5
years
|
|
|
160,198
|
|
|
|
160,198
|
|
Rental
equipment
|
|
1-3
years
|
|
|
124,553
|
|
|
|
93,592
|
|
Total
cost
|
|
|
|
|
2,040,946
|
|
|
|
2,077,046
|
|
Less:
accumulated depreciation and amortization
|
|
|
|
|
(1,793,405
|
)
|
|
|
(1,438,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
furniture, fixtures and equipment
|
|
|
|
$
|
247,541
|
|
|
$
|
638,169
|
|
Depreciation
and amortization of furniture, fixtures and equipment aggregated $385,104 and $558,447 for the years ended December 31, 2017 and
2016, respectively.
NOTE
6. INTANGIBLE ASSETS
Intangible
assets consisted of the following at December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Gross value
|
|
|
Accumulated
amortization
|
|
|
Net carrying
value
|
|
|
Gross value
|
|
|
Accumulated
amortization
|
|
|
Net carrying
value
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
73,893
|
|
|
$
|
31,228
|
|
|
$
|
42,665
|
|
|
$
|
73,892
|
|
|
$
|
20,672
|
|
|
$
|
53,220
|
|
Patents
and Trademarks
|
|
|
452,599
|
|
|
|
273,586
|
|
|
|
179,013
|
|
|
|
379,616
|
|
|
|
169,069
|
|
|
|
210,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526,492
|
|
|
|
304,814
|
|
|
|
221,678
|
|
|
|
453,508
|
|
|
|
189,741
|
|
|
|
263,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and trademarks pending
|
|
|
265,119
|
|
|
|
—
|
|
|
|
265,119
|
|
|
|
233,413
|
|
|
|
—
|
|
|
|
233,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
791,611
|
|
|
$
|
304,814
|
|
|
$
|
486,797
|
|
|
$
|
686,921
|
|
|
$
|
189,741
|
|
|
$
|
497,180
|
|
Patents
and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of
the final patent or trademark is denied, then the amount deferred will be immediately charged to expense.
Amortization
expense for the years ended December 31, 2018 and 2017 was $115,073 and $123,481, respectively. Estimated amortization for intangible
assets with definite lives for the next five years ending December 31 and thereafter is as follows:
Year
ending December 31:
|
|
|
|
2019
|
|
$
|
133,406
|
|
2020
|
|
|
43,405
|
|
2021
|
|
|
33,870
|
|
2022
|
|
|
10,556
|
|
2023
|
|
|
441
|
|
|
|
$
|
221,678
|
|
NOTE
7. DEBT OBLIGATIONS
Secured
convertible debentures and proceeds investment agreement is comprised of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
2016
Secured convertible debentures, at fair value
|
|
$
|
—
|
|
|
$
|
3,262,807
|
|
2018
Proceeds investment agreement, at fair value
|
|
|
9,142,000
|
|
|
|
—
|
|
Secured
convertible debentures and proceeds investment agreement, at fair value
|
|
$
|
9,142,000
|
|
|
$
|
3,262,807
|
|
2016
Secured Convertible Debentures
.
On
December 30, 2016, the Company completed a private placement (the “2016 Private Placement”) of $4.0 million in principal
amount of the secured convertible debentures (the “2016 Debentures”) and common stock warrants (the “2016 Warrants”)
to two institutional investors. The 2016 Debentures and 2016 Warrants were issued pursuant to a Securities Purchase Agreement
between the Company and the purchasers’ signatory thereto. The 2016 Private Placement resulted in gross proceeds of $4.0
million before placement agent fees and other expenses associated with the transaction totaling $281,570, which was expensed as
incurred.
The
Company elected to account for the 2016 Debentures on the fair value basis. Therefore, the Company determined the fair value of
the 2016 Debentures utilizing Monte Carlo simulation models which yielded an estimated fair value of $4.0 million for the Debentures
including their embedded derivatives as of the origination date. No value was allocated to the detachable 2016 Warrants as of
the origination date because of the relative fair value of the 2016 Debentures including their embedded derivative features approximated
the gross proceeds of the financing transaction. The Company made principal payments of $750,000 on August 24, 2017 on the 2016
Debentures.
The
Company paid the remaining balance of the 2016 Debentures on April 3, 2018 from proceeds of the 2018 secured convertible debentures
described below. The Company recorded debt extinguishment costs of $600,000 during the year ended December 31, 2018 related to
the repayment and extinguishment of the 2016 Debentures.
The
change in fair value of the 2016 Debentures was $(12,807) and $0 for the years ended December 31, 2018 and 2017, respectively.
2018
Secured Convertible Debentures
.
On
April 3, 2018, and May 11, 2018, the Company completed a private placement (the “2018 Private Placement”) of $6.875
million in principal amount of senior secured convertible promissory notes (the “2018 Debentures”) and warrants to
purchase 916,667 shares of common stock of the Company (the “2018 Warrants”) to institutional investors. The 2018
Debentures and 2018 Warrants were issued pursuant to a securities purchase agreement between the Company and the purchasers’
signatory thereto. Additionally, a portion of the 2018 Debentures and 2018 Warrants were issued to two institutional investors
pursuant to their respective participation rights under a securities purchase agreement, dated August 21, 2017. One of the institutional
investors that participated in the 2017 common stock issuance closed its tranche with the Company on May 11, 2018. The 2018 Private
Placement resulted in gross cash proceeds of $6.25 million ($6.875 million par value) before placement agent fees and other expenses
associated with the transaction. The proceeds were used primarily for full repayment of the 2016 Debentures described above, other
outstanding subordinated debt of the Company, working capital and general corporate purposes.
The
Company elected to account for the 2018 Debentures on the fair value basis. Therefore, the Company determined the fair value of
the 2018 Debentures and 2018 Warrants which yielded estimated fair values of the 2018 Debentures including their embedded derivatives
and the detachable 2018 Warrants as follows:
Secured
convertible debentures
|
|
$
|
4,565,749
|
|
Common
stock purchase warrants
|
|
|
1,684,251
|
|
|
|
|
|
|
Gross
cash proceeds
|
|
$
|
6,250,000
|
|
The
Company paid the remaining balances of the 2018 Debentures on August 21, 2018 from proceeds of the 2018 proceeds investment agreement
described below. The change in fair value of the 2018 Debentures was $2,309,251 and $0 for the years ended December 31, 2018 and
2017, respectively.
The
following represents activity in the 2018 Debentures during the year ended December 31, 2018:
Beginning
balance as of January 1, 2018
|
|
$
|
-
|
|
Origination
date at fair value of the Debentures
|
|
|
4,565,749
|
|
Conversions
exercised during the period
|
|
|
(275,000
|
)
|
Principal
payments made on Debentures
|
|
|
(6,600,000
|
)
|
Change
in the fair value during the period
|
|
|
2,309,251
|
|
Ending
balance as of December 31, 2018
|
|
$
|
-
|
|
2018
Proceeds Investment Agreement
.
On
July 31, 2018, the Company entered into a Proceeds Investment Agreement (the “PIA Agreement”) with Brickell Key Investments
LP (“BKI”), pursuant to which BKI funded an aggregate of $500,000 (the “First Tranche”) to be used (i)
to fund the Company’s litigation proceedings relating to the infringement of certain patent assets listed in the PIA Agreement
and (ii) to repay the Company’s existing debt obligations and for certain working capital purposes set forth in the PIA
Agreement. Pursuant to the PIA Agreement, BKI was granted an option to provide the Company with an additional $9.5 million, at
BKI’s sole discretion (the “Second Tranche”). On August 21, 2018, BKI exercised its option on the Second Tranche
for $9.5 million which completed the $10 million funding.
Pursuant
to the PIA Agreement and in consideration for the $10 million in funding, the Company agreed to assign to BKI (i) 100% of all
gross, pre-tax monetary recoveries paid by any defendant(s) to the Company or its affiliates agreed to in a settlement or awarded
in judgment in connection with the patent assets, plus any interest paid in connection therewith by such defendant(s) (the “Patent
Assets Proceeds”), up to the minimum return (as defined in the Agreement) and (ii) if BKI has not received its minimum return
by the earlier of a liquidity event (as defined in the Agreement) and July 31, 2020, then the Company agreed to assign to BKI
100% of the Patent Asset Proceeds until BKI has received an amount equal to the minimum return on $4.0 million.
Pursuant
to the PIA Agreement, the Company granted BKI (i) a senior security interest in the Patent Assets, the claims (as defined in the
Agreement) and the Patent Assets Proceeds until such time as the minimum return is paid, in which case, the security interest
on the patent assets, the claims and the Patent Assets Proceeds will be released, and (ii) a senior security interest in all other
assets of the Company until such time as the minimum return is paid on $4.0 million, in which case, the security interest on such
other assets will be released.
The
security interest is enforceable by BKI if the Company is in default under the PIA Agreement which would occur if (i) the Company
fails, after five (5) days’ written notice, to pay any due amount payable to BKI under the PIA Agreement, (ii) the Company
fails to comply with any provision of the PIA Agreement or any other agreement or document contemplated under the PIA Agreement,
(iii) the Company becomes insolvent or insolvency proceedings are commenced (and not subsequently discharged) with respect to
the Company, (iv) the Company’s creditors commence actions against the Company (which are not subsequently discharged) that
affect material assets of the Company, (v) the Company, without BKI’s consent, incurs indebtedness other than immaterial
ordinary course indebtedness up to $500,000, (vi) the Company fails, within five (5) business days following the closing of the
second tranche, to fully satisfy its obligations to certain holders of the Company’s senior secured convertible promissory
notes listed in the PIA Agreement and fails to obtain unconditional releases from such holders as to the Company’s obligations
to such holders and the security interests in the Company held by such holders or (vii) there is an uncured non-compliance of
the Company’s obligations or misrepresentations by the Company under the PIA Agreement.
Under
the PIA Agreement, the Company issued BKI a warrant to purchase up to 465,712 shares of the Company’s common stock, par
value $0.001 per share (the “PIA Warrant”), at an exercise price of $2.60 per share provided that the holder of the
PIA Warrant will be prohibited from exercising the PIA Warrant if, as a result of such exercise, such holder, together with its
affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately
after giving effect to such exercise. However, such holder may increase or decrease such percentage to any other percentage not
in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the
Company. The PIA Warrant is exercisable for five years from the date of issuance and is exercisable on a cashless exercise basis
if there is no effective registration statement. No contractual registration rights were given.
The
Company elected to account for the PIA on the fair value basis. Therefore, the Company determined the fair value of the PIA and
PIA Warrants which yielded estimated fair values of the PIA including their embedded derivatives and the detachable PIA Warrants
as follows:
Proceeds
investment agreement
|
|
$
|
9,067,513
|
|
Common
stock purchase warrants
|
|
|
932,487
|
|
|
|
|
|
|
Gross
cash proceeds
|
|
$
|
10,000,000
|
|
The
following represents activity in the PIA during the year ended December 31, 2018:
Beginning
balance as of January 1, 2018
|
|
$
|
-
|
|
Origination
date at fair value of the Debentures
|
|
|
9,067,513
|
|
|
|
|
|
|
Change
in the fair value during the period
|
|
|
74,487
|
|
Ending
balance as of December 31, 2018
|
|
$
|
9,142,000
|
|
Subordinated
and Secured Notes Payable
. Subordinated and secured notes payable is comprised of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Subordinated
and secured notes payable, at par
|
|
$
|
—
|
|
|
$
|
1,008,500
|
|
On
June 30, 2017, the Company, in two separate transactions, borrowed an aggregate of $700,000 under two unsecured notes payable
to private, third-party lenders. The loans were funded on June 30, 2017 and both were represented by promissory notes (the “June
Notes”) that bore interest at the rate of 8% per annum with principal and accrued interest payable on or before their maturity
date of September 30, 2017. The June Notes were unsecured and subordinated to all existing and future senior indebtedness, as
such term was defined in the June Notes. The Company granted the lenders warrants (the “Warrants”) exercisable to
purchase a total of 200,000 shares of its common stock at an exercise price of $3.65 per share until June 29, 2022. The Company
allocated $288,895 of the proceeds of the Notes to additional paid-in-capital, which represented the grant date relative fair
value of the Warrants issued to the lenders. The discount was amortized to interest expense ratably over the terms of the Note.
On September 30, 2017, the Company obtained an extension of the maturity date of one of the June Notes to December 31, 2017 and
then an extension to March 31, 2018. In connection with the initial extension, the Company issued warrants exercisable to purchase
100,000 shares of stock at $2.60 per share until November 15, 2022. On March 16, 2018, the Company issued warrants exercisable
to purchase 60,000 shares of stock at $3.25 per share until March 15, 2029 for the subsequent extension. The Company treated the
initial extension of this debt as an extinguishment for financial accounting purposes. Accordingly, the estimated fair value of
the warrants granted totaled $180,148, which was recorded as additional paid-in-capital and a loss on extinguishment of subordinated
notes payable. The Company allocated $32,370 of the proceeds of the Notes to additional paid-in-capital, which represented the
grant date relative fair value of the Warrants for the subsequent extension. The discount was amortized to interest expense ratably
over the terms of the Note. The Company paid the second June Note in full in August 2017.
On
September 29, 2017, the Company borrowed $300,000 under an unsecured note payable with a private, third party lender. Such note
bore interest at 8% per annum and was due and payable in full on November 30, 2017. The note was unsecured and subordinated to
all existing and future senior indebtedness, as such term was defined in the note. The Company issued warrants to the lender exercisable
to purchase 100,000 shares of common stock for $2.75 per share until September 30, 2022. The Company allocated $117,000 of the
proceeds of the note to additional paid-in-capital, which represented the grant date relative fair value of the warrants issued
to the lender. The discount was amortized to interest expense ratably over the terms of the note. On December 29, 2017 the Company
borrowed an additional $350,000 with the same private, third party lender and combined the existing note payable plus accrued
interest into a new note (the “Secured Note”) for $658,500 that was due and payable in full on March 1, 2018 and could
be prepaid without penalty. The Secured Note was secured by the Company’s intellectual property portfolio, as such term
is defined in the security agreement relating to the Secured Note. In connection with issuance of the Secured Note, the Company
issued warrants to the lender exercisable to purchase 120,000 shares of common stock for $3.25 per share until December 28, 2022.
The Company treated the issuance and extension of this debt as an extinguishment for financial accounting purposes. Accordingly,
the estimated fair value of the warrants granted totaled $244,379, which was recorded as additional paid-in-capital and a loss
on extinguishment of subordinated notes payable.
The
Company paid the remaining balances of the Secured Note and subordinated note with an aggregate principal balance of $1,008,500
on April 3, 2018.
On
March 7, 2018 the Company borrowed $250,000 under a secured note payable with a private, third party lender (the “March
Note”). The March Note bears interest at 12% per annum and contained an original maturity date of June 7, 2018. The Company
negotiated an extension of the maturity date to September 30, 2018. The March Note was secured by the inventory of the Company
and junior to senior liens held by the holders of the 2018 Debentures and subordinated to all existing and future senior indebtedness,
as such term was defined in the March Note. Such Note was convertible at any time after its date of issue at the option of the
holder into shares of the Company’s common stock at a conversion price of $3.25 per share. The conversion price and exercise
price were subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The Company issued warrants
to the lender exercisable to purchase 36,000 shares of common stock for $3.50 per share until March 7, 2019. The Company allocated
$15,287 of the proceeds of the note to additional paid-in-capital, which represented the grant date relative fair value of the
warrants issued to the lender. The discount was amortized to interest expense ratably over the terms of the note. The Company
made a principal payment of $100,000 on August 21, 2018 on the March Note. The holder converted the remaining principal and outstanding
interest of the March Note into 47,319 shares of the Company’s common stock on September 20, 2018.
The
discount amortized to interest expense totaled $47,657 and $-0- for the years ended December 31, 2018, and 2017, respectively.
NOTE
8. FAIR VALUE MEASUREMENT
In
accordance with ASC Topic 820 —
Fair Value Measurements and Disclosures
(“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
●
|
Level
1 — Quoted prices in active markets for identical assets and liabilities
|
|
|
●
|
Level
2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)
|
|
|
●
|
Level
3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)
|
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of December 31, 2018 and 2017.
|
|
December
31, 2018
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
convertible debentures
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Proceeds
investment agreement
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,142,000
|
|
|
$
|
9,142,000
|
|
Warrant
derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,142,000
|
|
|
$
|
9,142,000
|
|
|
|
December
31, 2017
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
convertible debentures
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,262,807
|
|
|
$
|
3,262,807
|
|
Warrant
derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
16,816
|
|
|
|
16,816
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,279,623
|
|
|
$
|
3,279,623
|
|
The
following table represents the change in Level 3 tier value measurements:
|
|
|
|
|
2016
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Secured
|
|
|
Secured
|
|
|
Proceeds
|
|
|
|
|
|
|
derivative
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Investment
|
|
|
|
|
|
|
liability
|
|
|
Debentures
|
|
|
Debentures
|
|
|
Agreement
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
$
|
16,816
|
|
|
$
|
3,262,807
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,279,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
payments made on debentures
|
|
|
—
|
|
|
|
(3,250,000
|
)
|
|
|
(6,600,000
|
)
|
|
|
—
|
|
|
|
(9,850,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
secured convertible debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
4,565,749
|
|
|
|
—
|
|
|
|
4,565,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
proceeds investment agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,067,513
|
|
|
|
9,067,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of secured convertible debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
(275,000
|
)
|
|
|
—
|
|
|
|
(275,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock purchase warrants exercised
|
|
|
(335,921
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(335,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of secured convertible debentures and proceeds investment agreement
|
|
|
—
|
|
|
|
(12,807)
|
|
|
|
2,309,251
|
|
|
|
74,487
|
|
|
|
2,370,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of warrant derivative
|
|
|
319,105
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
319,105
|
|
Balance,
December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,142,000
|
|
|
$
|
9,142,000
|
|
NOTE
9. ACCRUED EXPENSES
Accrued
expenses consisted of the following at December 31, 2018 and 2017:
|
|
December 31,
2018
|
|
|
December 31, 2017
|
|
Accrued
warranty expense
|
|
$
|
195,135
|
|
|
$
|
325,001
|
|
Accrued
litigation costs
|
|
|
1,119,445
|
|
|
|
—
|
|
Accrued
sales commissions
|
|
|
25,750
|
|
|
|
19,500
|
|
Accrued
payroll and related fringes
|
|
|
186,456
|
|
|
|
242,508
|
|
Accrued
insurance
|
|
|
71,053
|
|
|
|
53,888
|
|
Accrued
rent
|
|
|
81,160
|
|
|
|
134,684
|
|
Accrued
sales returns and allowances
|
|
|
13,674
|
|
|
|
17,936
|
|
Other
|
|
|
387,994
|
|
|
|
446,912
|
|
|
|
$
|
2,080,667
|
|
|
$
|
1,240,429
|
|
Accrued
warranty expense was comprised of the following for the years ended December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Beginning
balance
|
|
$
|
325,001
|
|
|
$
|
374,597
|
|
Provision
for warranty expense
|
|
|
181,826
|
|
|
|
287,611
|
|
Charges
applied to warranty reserve
|
|
|
(311,692
|
)
|
|
|
(337,207
|
)
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
195,135
|
|
|
$
|
325,001
|
|
NOTE
10. INCOME TAXES
The
components of income tax provision (benefit) for the years ended December 31, 2017 and 2016 are as follows:
|
|
2018
|
|
|
2017
|
|
Current
taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(90,000
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
current taxes
|
|
|
—
|
|
|
|
(90,000
|
)
|
Deferred
tax provision (benefit)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
$
|
—
|
|
|
$
|
(90,000
|
)
|
A
reconciliation of the income tax (provision) benefit at the statutory rate of 21% and 34% for the years ended December 31, 2018
and 2017 to the Company’s effective tax rate is as follows:
|
|
2018
|
|
|
2017
|
|
U.S.
Statutory tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
State
taxes, net of Federal benefit
|
|
|
5.1
|
%
|
|
|
4.8
|
%
|
Federal
Research and development tax credits
|
|
|
—
|
%
|
|
|
0.1
|
%
|
Stock
based compensation
|
|
|
(3.0
|
)%
|
|
|
(3.6
|
)%
|
Revaluation
of deferred tax assets based on changes in enacted tax laws
|
|
|
—
|
%
|
|
|
(64.8
|
)%
|
Change
in valuation reserve on deferred tax assets
|
|
|
(22.1
|
)%
|
|
|
30.0
|
%
|
Other,
net
|
|
|
(1.0
|
)%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
Income
tax (provision) benefit
|
|
|
—
|
%
|
|
|
0.7
|
%
|
Significant
components of the Company’s deferred tax assets (liabilities) as of December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
650,000
|
|
|
$
|
995,000
|
|
Start-up
costs
|
|
|
115,000
|
|
|
|
115,000
|
|
Inventory
reserves
|
|
|
860,000
|
|
|
|
780,000
|
|
Uniform
capitalization of inventory costs
|
|
|
90,000
|
|
|
|
80,000
|
|
Allowance
for doubtful accounts receivable
|
|
|
45,000
|
|
|
|
40,000
|
|
Equipment
depreciation
|
|
|
140,000
|
|
|
|
100,000
|
|
Deferred
revenue
|
|
|
975,000
|
|
|
|
920,000
|
|
Derivative
liabilities
|
|
|
225,000
|
|
|
|
90,000
|
|
Accrued
expenses
|
|
|
385,000
|
|
|
|
145,000
|
|
Net
operating loss carryforward
|
|
|
16,080,000
|
|
|
|
12,870,000
|
|
Research
and development tax credit carryforward
|
|
|
1,795,000
|
|
|
|
1,795,000
|
|
State
jobs credit carryforward
|
|
|
230,000
|
|
|
|
230,000
|
|
Charitable
contributions carryforward
|
|
|
50,000
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
21,640,000
|
|
|
|
18,205,000
|
|
Valuation
reserve
|
|
|
(21,500,000
|
)
|
|
|
(18,070,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
140,000
|
|
|
|
135,000
|
|
Domestic
international sales company
|
|
|
(140,000
|
)
|
|
|
(135,000
|
)
|
Total
deferred tax liabilities
|
|
|
(140,000
|
)
|
|
|
(135,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
valuation allowance on deferred tax assets totaled $21,500,000 and $18,070,000 as of December 31, 2018 and December 31,
2017, respectively. The Company records the benefit it will derive in future accounting periods from tax losses and credits and
deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,”
the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence,
it is more likely than not that some or all of the deferred tax assets will not be realized.
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”). The Act, which is also commonly referred
to as “U.S. tax reform,” significantly changes U.S. corporate income tax laws by, among other things, reducing the
U.S. corporate income tax rate to 21% starting in 2018. As a result, in the fourth quarter of 2017, the Company revalued the Company’s
net deferred tax assets based on the new lower corporate income tax rate. The result of this revaluation of the Company’s
deferred tax assets as of December 31, 2017 resulted in a reduction in net deferred tax assets of approximately $7,995,000 related
to the reduction the U.S. corporate income tax rate to 21% starting in 2018. The valuation allowance on deferred tax assets as
of December 31, 2017 was likewise reduced to retain the 100% valuation allowance as discussed further below.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years starting in 2018 will be claimable and refundable for that year. In tax years
beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company had generated an AMT credit
carryforward in years prior to 2017 totaling $90,000 which previously was fully reserved based on all available evidence, the
Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions
of the new Act, the Company considered it more likely than not that all of the AMT tax credit carryforward will be realized as
of December 31, 2017. Accordingly, the Company recognized an income benefit of $90,000 during the year ended December 31, 2017
which it has recognized as an income tax refund receivable as of December 31, 2017.
The
Company has incurred operating losses in 2018 and 2017 and it continues to be in a three-year cumulative loss position at December
31, 2018 and 2017. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for
future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC
740. Therefore, it determined to increase our valuation allowance by $3,430,000 to continue to fully reserve its deferred
tax assets at December 31, 2018. The Company expects to continue to maintain a full valuation allowance until it determines that
it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines
that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion
or all of the valuation allowance will be reversed. 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.
At
December 31, 2018, the Company had available approximately $61,600,000 of Federal net operating loss carryforwards available to
offset future taxable income generated. Such tax net operating loss carryforwards expire between 2026 and 2038. In addition, the
Company had research and development tax credit carryforwards totaling $1,795,000 available as of December 31, 2018, which expire
between 2023 and 2037.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss
carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates
prepared by the Company indicate that due to ownership changes which have occurred, approximately $765,000 of its net operating
loss and $175,000 of its research and development tax credit carryforwards are currently subject to an annual limitation of approximately
$1,151,000, but may be further limited by additional ownership changes which may occur in the future. As stated above, the net
operating loss and research and development credit carryforwards expire between 2023 and 2036, allowing the Company to potentially
utilize all of the limited net operating loss carry-forwards during the carryforward period.
As
discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process.
The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax
position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize
in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds
and therefore there are no gross interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately
result in payment or receipt of cash in the consolidated financial statements.
The
effective tax rate for the years ended December 31, 2018 and 2017 varied from the expected statutory rate due to the Company continuing
to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the
full valuation allowance on net deferred tax assets as of December 31, 2018 primarily because of the current year operating losses.
The
Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination
for 2014 and all prior tax years.
NOTE
11. COMMITMENTS AND CONTINGENCIES
Operating
Leases.
The Company had a non-cancelable long-term operating lease agreement for office and warehouse space that expires
during April 2020. The Company also entered into month-to-month leases for equipment. Rent expense for the years ended December
31, 2018 and 2017 was $397,724 and $397,724, respectively, related to these leases. Following are the minimum lease payments for
each year and in total.
Year
ending December 31:
|
|
|
|
2019
|
|
$
|
457,327
|
|
2020
|
|
|
154,131
|
|
|
|
$
|
611,458
|
|
License
agreements.
The Company has several license agreements under which it has been assigned the rights to certain licensed
materials used in its products. Certain of these agreements require the Company to pay ongoing royalties based on the number of
products shipped containing the licensed material on a quarterly basis. Royalty expense related to these agreements aggregated
$2,083 and $21,188 for the years ended December 31, 2018 and 2017, respectively.
Litigation.
The
Company is subject to various legal proceedings arising from normal business operations. Although there can be no assurances,
based on the information currently available, management believes that it is probable that the ultimate outcome of each of the
actions will not have a material adverse effect on the Consolidated Financial Statements of the Company. However, an adverse outcome
in certain of the actions could have a material adverse effect on the financial results of the Company in the period in which
it is recorded.
Axon
The
Company owns U.S. Patent No. 9,253,452 (the “ ‘452 Patent”), which generally covers the automatic activation
and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating
the light bar on the vehicle.
The
Company filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against
Axon, alleging willful patent infringement against Axon’s body camera product line and Signal auto-activation product. The
Company is seeking both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.
In
addition to the infringement claims, the Company brought claims alleging that Axon conspired to keep the Company out of the marketplace
by engaging in improper, unethical, and unfair competition. The amended lawsuit alleges Axon bribed officials and otherwise conspired
to secure no-bid contracts for its products in violation of both state law and federal antitrust law. The Company’s lawsuit
also seeks monetary and injunctive relief, including treble damages, for these alleged violations.
Axon
filed an answer, which denied the patent infringement allegations on April 1, 2016. In addition, Axon filed a motion to dismiss
all allegations in the complaint on March 4, 2016 for which the Company filed an amended complaint on March 18, 2016 to address
certain technical deficiencies in the pleadings. Digital amended its complaint and Axon renewed its motion to seek dismissal of
the allegations that it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation
of both state law and federal antitrust law on April 1, 2016. Formal discovery commenced on April 12, 2016 with respect to the
patent related claims. In January 2017, the Court granted Axon’s motion to dismiss the portion of the lawsuit regarding
claims that it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state
law and federal antitrust law. On May 2, 2018, the Federal Circuit affirmed the District Court’s ruling and on October 1,
2018 the Supreme Court denied Digital Ally’s petition for review.
In
December 2016 and January 2017, Axon filed two petitions for
Inter Partes
Review (“IPR”) against the ‘452
Patent. The United States Patent and Trademark Office (“USPTO”) rejected both of Axon’s petitions. Axon is now
statutorily precluded from filing any more IPR petitions against the ‘452 Patent.
The
District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR. However, on November
17, 2017, the Federal District Court of Kansas rejected Axon’s request to maintain the stay. With this significant ruling,
the parties will now proceed towards trial. Since litigation has resumed, the Court has issued a claim construction order (also
called a
Markman
Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope
of the claims. Following the
Markman
Order, the Court set all remaining deadlines in the case. Fact discovery closed on
October 8, 2018, and a Final Pretrial Conference took place on January 16, 2019. The parties filed motions for summary judgment
on January 31, 2019. The parties are awaiting a ruling from the Court on the summary judgment motions. The Court will set a trial
date once summary judgment matters are resolved.
WatchGuard
On
May 27, 2016 the Company filed suit against WatchGuard, (Case No. 2:16-cv-02349-JTM-JPO) alleging patent infringement based on
WatchGuard’s VISTA Wifi and 4RE In-Car product lines.
The
USPTO has granted multiple patents to the Company with claims covering numerous features, such as automatically activating all
deployed cameras in response to the activation of just one camera. Additionally, Digital Ally’s patent claims cover automatic
coordination as well as digital synchronization between multiple recording devices. It also has patent coverage directed to the
coordination between a multi-camera system and an officer’s smartphone, which allows an officer to more readily assess an
event on the scene while an event is taking place or immediately after it has occurred.
The
Company’s lawsuit alleges that WatchGuard incorporated this patented technology into its VISTA Wifi and 4RE In-Car product
lines without its permission. Specifically, Digital Ally is accusing WatchGuard of infringing three patents: the U.S Patent No.
8,781,292 (the “ ‘292 Patent”) and ‘452 Patents and U.S. Patent No. 9,325,950 the (“ ‘950
Patent”). The Company is aggressively challenging WatchGuard’s infringing conduct, seeking both monetary damages,
as well as seeking a permanent injunction preventing WatchGuard from continuing to sell its VISTA Wifi and 4RE In-Car product
lines using Digital Ally’s own technology to compete against it. On May 8, 2017, WatchGuard filed a petition seeking IPR
of the ‘950 Patent. The Company opposed that petition and on December 4, 2017, The Patent Trial and Appeal Board (“PTAB”)
rejected the request of WatchGuard Video to institute an IPR on the ‘950 Patent. The lawsuit also involves the ‘292
Patent and the ‘452 Patent, the ‘452 Patent being the same patent asserted against Axon. The ‘292 Patent previously
was subject to the IPR process with the USPTO, but in June 2018 the PTO rejected Axon’s arguments and did not invalidate
the ‘292 Patent. WatchGuard had previously agreed to be bound by Axon’s IPRs and, as such, WatchGuard is now statutorily
barred from any further IPR’s challenges with respect to the ‘950, ‘452, and ‘292 Patents. Since the defeat
of Axon’s ‘292 Patent IPR, the Court has lifted the stay and set a schedule moving the case towards trial. Discovery
is ongoing and will close on May 2, 2019. The parties will then proceed with expert reports and summary judgment. No trial date
has been set.
PGA
Tour, Inc.
On
January 22, 2019 the PGA Tour, Inc. (the “PGA”) filed suit against the Company in the Federal District Court for the
District of Kansas (Case No. 2:19-cv-0033-CM-KGG) alleging breach of contract and breach of implied covenant of good faith and
fair dealing relative to the Web.com Tour Title Sponsor Agreement (the “Agreement”). The contract was executed on
April 16, 2015 by and between the parties. Under the Agreement, Digital Ally would be a title sponsor of and receive certain naming
and other rights and benefits associated with the Web.com Tour for 2015 through 2019 in exchange for Digital Ally’s payment
to TOUR of annual sponsorship fees.
The
PGA alleges that it has complied with its duties under the Agreement however, the Company has failed to pay the sponsorship fees
payable under the Agreement. The PGA alleges that it has not received $1,190,000 owed for the 2017, 2018 and 2019 tournaments
plus pre and post judgment interest and legal fees. The Company believes that the PGA was first to breach the contract terms
and as a result the Company is no longer obligated to make the payments.
The
Company has not yet filed a reply to the lawsuit and has had and is continuing to have discussions with the PGA involving potential
resolution to this matter. The Company believes it has valid legal defenses against this lawsuit involving alleged defaults and
misrepresentations by the PGA which preceded any of the payment defaults alleged in the lawsuit by the PGA. Should the parties
be unsuccessful in resolving the matter, the Company intends to vigorously defend itself in this litigation and has accrued
the potential cost to defend and or resolve this matter as of December 31, 2018.
General
From
time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to
not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After
carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded,
we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable.
When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the
amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and
disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the
specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of
any potential loss. We reevaluate and update accruals as matters progress over time.
While
the ultimate resolution is unknown we do not expect that these lawsuits will individually, or in the aggregate, have a material
adverse effect to our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently
uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution
of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage
and will not have a material adverse effect on our operating results, financial condition or cash flows.
Sponsorship.
On April 16, 2015 the Company entered into a Title Sponsorship Agreement (the “Agreement”) under which it
became the title sponsor for a Web.com Tour golf tournament (the “Tournament”) held annually in the Kansas City Metropolitan
area. The Agreement provides the Company with naming rights and other benefits for the 2015 through 2019 annual Tournament in
exchange for the following sponsorship fee:
Year
|
|
Sponsorship
fee
|
|
2015
|
|
$
|
375,000
|
|
2016
|
|
$
|
475,000
|
|
2017
|
|
$
|
475,000
|
|
2018
|
|
$
|
500,000
|
|
2019
|
|
$
|
500,000
|
|
The
Company has the right to sell and retain the proceeds from the sale of additional sponsorships, including but not limited to a
presenting sponsorship, a concert sponsorship and founding partnerships for the Tournament. The Company recorded a net sponsorship
expense of $-0- and $266,280 for the years ended December 31, 2018 and 2017, respectively. The PGA has filed suit in the Federal
District Court for the District of Kansas (Case No. 2:19-cv-0033-CM-KGG) alleging breach of contract and breach of implied covenant
of good faith and fair dealing as previously described. The Company believes that the PGA was the first to breach the contract
terms and as a result the Company is no longer obligated to make the payments.
401
(k) Plan.
The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended,
requires it to provide 100% matching contributions for employees, who elect to contribute up to 3% of their compensation to the
plan and 50% matching contributions for employee’s elective deferrals on the next 2% of their contributions. The Company
made matching contributions totaling $112,622 and $178,835 for the years ended December 31, 2018 and 2017, respectively. Each
participant is 100% vested at all times in employee and employer matching contributions.
Consulting
and Distributor Agreements.
The Company entered into an agreement that required it to make monthly payments that will
be applied to future commissions and/or consulting fees to be earned by the provider. The agreement is with a limited liability
company (“LLC”) that is minority owned by a relative of the Company’s chief financial officer. Under the agreement,
dated January 15, 2016 and as amended on February 13, 2017, the LLC provides consulting services for developing a new distribution
channel outside of law enforcement for its body-worn camera and related cloud storage products to customers in the United States.
The Company advanced amounts to the LLC against commissions ranging from $5,000 to $6,000 per month plus necessary and reasonable
expenses for the period through June 30, 2017, which can be automatically extended based on the LLC achieving minimum sales quotas.
The agreement was renewed in January 2017 for a period of three years, subject to yearly minimum sales thresholds that would allow
the Company to terminate the contract if such minimums are not met. As of December 31, 2018, the Company had advanced a total
of $279,140 pursuant to this agreement and established an allowance reserve of $104,140 for a net advance of $175,000. The minimum
sales threshold has not been met and the Company has discontinued all advances, although the contract has not been formally terminated.
However, the exclusivity provisions of the agreement have been terminated.
On
June 1, 2018 the Company entered into an agreement with an individual that required it to make monthly payments that will be applied
to future commissions and/or consulting fees to be earned by the provider. Under the agreement, the individual provides consulting
services for developing new distribution channels both inside and outside of law enforcement for its in-car and body-worn camera
systems and related cloud storage products to customers within and outside the United States. The Company was required to advance
amounts to the individual as an advance against commissions of $7,000 per month plus necessary and reasonable expenses for the
period through August 31, 2018, which was extended to December 31, 2018 by mutual agreement of the parties at $6,000 per month.
The parties have mutually agreed to further extend the arrangement on a monthly basis at $5,000 per month. As of December 31,
2018, the Company had advanced a total of $53,332 pursuant to this agreement.
NOTE
12. STOCK-BASED COMPENSATION
The
Company recorded pretax compensation expense related to the grant of stock options and restricted stock issued of $2,272,656 and
$1,752,579 for the year ended December 31, 2018 and 2017, respectively.
As
of December 31, 2018, the Company had adopted seven separate stock option and restricted stock plans: (i) the 2005 Stock Option
and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006
Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option
and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011
Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option
and Restricted Stock Plan (the “2015 Plan”) and (vii) the 2018 Stock Option and Restricted Stock Plan (the “2018
Plan”). The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan and 2018 Plan are referred to as
the “Plans.”
These
Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total
of 3,425,000 shares of common stock. The 2005 Plan terminated during 2015 with 4,616 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding
as of December 31, 2018 total 23,125. The 2006 Plan terminated during 2016 with 21,087 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding
as of December 31, 2018 total 46,387. The 2007 Plan terminated during 2017 with 82,151 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2007 Plan that remain unexercised and outstanding
as of December 31, 2018 total 12,500. The 2008 Plan terminated during 2018 with 6,249 shares not awarded or underlying options,
which shares are now unavailable for issuance. Stock options granted under the 2008 Plan that remain unexercised and outstanding
as of December 31, 2018 total 32,250.
The
Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have
been granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally
vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide
for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of common
stock that are issuable under its Plans with the SEC. A total of 577,926 shares remained available for awards under the various
Plans as of December 31, 2018.
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The total estimated
grant date fair value stock options issued during the year ended December 31, 2018 was $284,384.
Activity
in the various Plans during the year ended December 31, 2018 is reflected in the following table:
Options
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at January 1, 2018
|
|
|
350,269
|
|
|
$
|
13.44
|
|
Granted
|
|
|
160,000
|
|
|
|
2.20
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(76,257
|
)
|
|
|
(45.52
|
)
|
Outstanding
at December 31, 2018
|
|
|
434,012
|
|
|
$
|
4.62
|
|
Exercisable
at December 31, 2018
|
|
|
354,012
|
|
|
$
|
5.17
|
|
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. There were 160,000
stock options issued during the year ended December 31, 2018.
The
Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with
an intrinsic value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant
to cashless exercises during the year ended December 31, 2018.
At
December 31, 2018, the aggregate intrinsic value of options outstanding was approximately $76,800 and the aggregate intrinsic
value of options exercisable was approximately $76,800. No options were exercised in the year ended December 31, 2018.
As
of December 31, 2018, the unrecognized portion of stock compensation expense on all existing stock options was $142,192.
The
following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable
options under the Company’s option plans as of December 31, 2018:
|
|
|
Outstanding
options
|
|
|
Exercisable
options
|
|
Exercise
price range
|
|
|
Number
of options
|
|
|
Weighted
average remaining contractual life
|
|
|
Number
of options
|
|
|
Weighted
average remaining contractual life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
to $3.49
|
|
|
|
293,500
|
|
|
|
8.7
years
|
|
|
|
213,500
|
|
|
|
8.4
years
|
|
$
|
3.50
to $4.99
|
|
|
|
67,625
|
|
|
|
5.3
years
|
|
|
|
67,625
|
|
|
|
5.3
years
|
|
$
|
5.00
to $6.49
|
|
|
|
—
|
|
|
|
—
years
|
|
|
|
—
|
|
|
|
—years
|
|
$
|
6.50
to $7.99
|
|
|
|
9,312
|
|
|
|
2.8
years
|
|
|
|
9,312
|
|
|
|
2.8
years
|
|
$
|
8.00
to $9.99
|
|
|
|
2,500
|
|
|
|
2.4
years
|
|
|
|
2,500
|
|
|
|
2.4
years
|
|
$
|
10.00
to $19.99
|
|
|
|
55,450
|
|
|
|
1.5
years
|
|
|
|
55,450
|
|
|
|
1.5
years
|
|
$
|
20.00
to $24.99
|
|
|
|
5,625
|
|
|
|
0.7
years
|
|
|
|
5,625
|
|
|
|
0.7
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,012
|
|
|
|
7.00
years
|
|
|
|
354,012
|
|
|
|
6.4
years
|
|
Restricted
stock grants.
The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are
valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over nine months
to four years corresponding to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may
be forfeited upon the termination of service to or employment with the Company, depending upon the circumstances of termination.
Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s
rights, including voting rights and the right to receive cash dividends.
A
summary of all restricted stock activity under the equity compensation plans for the year ended December 31, 2018 is as follows:
|
|
Number
of
Restricted
shares
|
|
|
Weighted
average
grant date
fair
value
|
|
Nonvested
balance, January 1, 2018
|
|
|
791,725
|
|
|
$
|
4.37
|
|
Granted
|
|
|
484,500
|
|
|
|
2.27
|
|
Vested
|
|
|
(470,175
|
)
|
|
|
(3.83
|
)
|
Forfeited
|
|
|
(33,900
|
)
|
|
|
(4.04
|
)
|
Nonvested
balance, December 31, 2018
|
|
|
772,150
|
|
|
$
|
3.40
|
|
The
Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant.
As of December 31, 2018, there were 594,293 of total unrecognized compensation costs related to all remaining non-vested restricted
stock grants, which will be amortized over the next 24 months in accordance with the respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Year
ended December 31,
|
|
Number
of shares
|
|
|
|
|
|
2019
|
|
|
757,025
|
|
2020
|
|
|
15,125
|
|
NOTE
13. COMMON STOCK PURCHASE WARRANTS
The
Company has issued common stock purchase warrants in conjunction with various debt and equity issuances. The warrants are either
immediately exercisable, or have a delayed initial exercise date, no more than nine months from issue date, and allow the holders
to purchase up to 4,657,145 shares of common stock at $2.60 to $16.50 per share as of December 31, 2018. The warrants expire from
December 3, 2018 through July 31, 2023 and allow for cashless exercise.
Certain
common stock purchase warrants issued in August 2014 contained anti-dilution provisions that triggered a reset as a result of
the April 2018 financing transaction. The reset provisions resulted in the 12,200 warrants held at an exercise price of $7.32
per share increased by 159,538 warrants resulting in a final reset to 172,038 warrants at an exercise price of $0.52 per share.
All warrants subject to the reset provisions have now been exercised.
|
|
Warrants
|
|
|
Weighted
average
exercise price
|
|
Vested
Balance, January 1, 2018
|
|
|
3,233,466
|
|
|
$
|
6.57
|
|
Granted
|
|
|
1,478,379
|
|
|
|
2.90
|
|
Warrant
reset
|
|
|
159,538
|
|
|
|
0.52
|
|
Exercised
|
|
|
(171,738
|
)
|
|
|
(0.52
|
)
|
Cancelled
|
|
|
(42,500
|
)
|
|
|
(8.50
|
)
|
Vested
Balance, December 31, 2018
|
|
|
4,657,145
|
|
|
$
|
5.54
|
|
The
total intrinsic value of all outstanding warrants aggregated $45,257 as of December 31, 2018 and the weighted average remaining
term is 35 months.
The
following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable
warrants to purchase common shares as of December 31, 2018:
|
|
|
Outstanding
and exercisable warrants
|
|
Exercise
price
|
|
|
Number
of options
|
|
|
Weighted
average remaining contractual life
|
|
$
|
2.60
|
|
|
|
565,712
|
|
|
|
4.2
years
|
|
$
|
2.75
|
|
|
|
100,000
|
|
|
|
3.7
years
|
|
$
|
3.00
|
|
|
|
916,667
|
|
|
|
4.3
years
|
|
$
|
3.25
|
|
|
|
180,000
|
|
|
|
2.7
years
|
|
$
|
3.36
|
|
|
|
880,000
|
|
|
|
3.4
years
|
|
$
|
3.50
|
|
|
|
36,000
|
|
|
|
0.2
years
|
|
$
|
3.65
|
|
|
|
200,000
|
|
|
|
3.5
years
|
|
$
|
3.75
|
|
|
|
94,000
|
|
|
|
3.6
years
|
|
$
|
5.00
|
|
|
|
800,000
|
|
|
|
3.0
years
|
|
$
|
13.43
|
|
|
|
879,766
|
|
|
|
2.1
years
|
|
$
|
16.50
|
|
|
|
5,000
|
|
|
|
1.5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,657,145
|
|
|
|
2.9
years
|
|
NOTE
14. STOCKHOLDERS’ EQUITY
Underwritten
Public Offering
- On September 26, 2018, the Company entered into an underwriting agreement with Roth Capital Partners,
LLC, as the representative of the underwriters and sole book-running manager, pursuant to which the Company agreed to sell to
the underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 2,400,000 shares
of the Company’s common stock, par value $0.001 per share at a public price of $3.05 per share. The Company also granted
the Underwriters a forty-five (45)-day option to purchase up to an additional 360,000 shares of common stock to cover over-allotments,
if any. Aegis Capital Corp. was a co-manager for the Offering. The Offering was registered and the common stock was issued pursuant
to the Company’s effective shelf registration statement on Form S-3 (File No. 333-225227), which was initially filed with
the Securities and Exchange Commission on May 25, 2018 and was declared effective on June 6, 2018.
On
September 28, 2018, the underwriter exercised its over-allotment option to acquire an additional 200,000 shares at $3.05 per share.
The partial exercise of the over-allotment option resulted in additional gross proceeds of $610,000. The net proceeds to the Company
from the Offering totaled approximately $7,324,900 including the partial exercise of the over-allotment option, after deducting
underwriting discounts and commissions and estimated expenses payable by the Company.
Under
the underwriting agreement the Company agreed not to contract to issue or announce the issuance or proposed issuance of any Common
Stock or Common Stock equivalents for sixty (60) days following the closing of the Offering, subject to certain exclusions as
set forth therein. The Company’s executive officers and directors have entered into sixty (60)-day Lock-Up Agreements with
the Representative pursuant to which they have agreed not to sell, transfer, assign or otherwise dispose of the shares of the
Company’s common stock owned by them, subject to certain exclusions as set forth therein.
Approval
of the 2018 Stock Option Plan and Restricted Stock Plan
- On July 5, 2018 at the Company’s annual meeting, the Company’s
stockholders approved the 2018 Digital Ally, Inc. Stock Option and Restricted Stock Plan and reserving 1,000,000 shares for issuance
under such Plan.
NOTE
15. NET LOSS PER SHARE
The
calculation of the weighted average number of shares outstanding and loss per share outstanding for the years ended December 31,
2018 and 2017 are as follows:
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator
for basic and diluted income per share – Net loss
|
|
$
|
(15,544,551
|
)
|
|
$
|
(12,252,457
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
for basic loss per share – weighted average shares outstanding
|
|
|
8,073,257
|
|
|
|
6,974,281
|
|
Dilutive
effect of shares issuable under stock options and warrants outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted loss per share – adjusted weighted average shares outstanding
|
|
|
8,073,257
|
|
|
|
6,974,281
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.93
|
)
|
|
$
|
(1.76
|
)
|
Diluted
|
|
$
|
(1.93
|
)
|
|
$
|
(1.76
|
)
|
Basic
loss per share is based upon the weighted average number of common shares outstanding during the period. For the years ended December
31, 2018 and 2017, all outstanding stock options to purchase common stock were antidilutive, and, therefore, not included in the
computation of diluted income (loss) per share.
*************************************