United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 20122013
[ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______.
Commission file number:001-33899
001-33899
(Exact name of registrant as specified in its charter)
Nevada | 20-0064269 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) |
9705 Loiret Blvd., Lenexa, KS | 66219 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone, including area code:(913) 814-7774
Securities registered under Section 12(b) of the Exchange Act:None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value | NASDAQ | |
(Title of class) | (Name of each exchange on which registered) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YesIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨[ ] No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ[X] No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ[X] No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer | |||
Non-accelerated filer | ||||
Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YesAs of June 30, 2012,2013, the aggregate market value of the Company’s common equity held by non-affiliates computed by reference to the closing price ($3.52)7.48) of the registrant’s most recently completed second fiscal quarter was:$5,609,758.11,371,507.
The number of shares of our common stock outstanding as of March 15, 201324, 2014 was:2,075,564.2,280,553.
Documents Incorporated by Reference: None.
FORM 10-K
DIGITAL ALLY, INC.
DECEMBER 31, 2012
Page | |||||
PART I | |||||
Business | 4 | ||||
Item 1A. | Risk Factors | 9 | |||
Item 1B. | Unresolved Staff Comments | 9 | |||
Item 2. | Properties | 10 | |||
Item 3. | Legal Proceedings | 10 | |||
Item 4. | Mine Safety Disclosures | 11 | |||
PART II | |||||
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 12 | ||||
13 | |||||
13 | |||||
30 | |||||
30 | |||||
30 | |||||
Item 9A. | Controls and Procedures | 30 | |||
Item 9B. | Other Information | 31 | |||
PART III | |||||
Directors, Executive Officers and Corporate Governance | 31 | ||||
32 | |||||
32 | |||||
32 | |||||
32 | |||||
PART IV | |||||
Item 15. | |||||
Exhibits, Financial Statement Schedules | 32 | ||||
SIGNATURES | |||||
Signatures | 35 |
2 |
Note Regarding Forward Looking Statements
This annual report on Form 10-K contains forward-looking statements as that term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," "intends,"“may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intends,” and other variations of these words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events, circumstances or trends and that do not relate to historical matters are forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
As used in this annual report, “Digital Ally,” the “Company,” “we,” “us,” or “our” refer to Digital Ally, Inc., unless otherwise indicated.
ITEMItem 1. BUSINESS.Business.
Overview
Digital Ally produces digital video imaging and storage products for use in law enforcement, security and commercial applications. Our current products are a low cost, easy-to-install, in-car digital video rear view mirror designed for law enforcement vehicles and commercial fleets, such as ambulances and taxis; weather-resistant and rugged mobile digital video recording systems designed for use in motorcycles, ATV’s and boats; a miniature digital video system designed to be worn on an individual’s body (clipped to a pocket, belt etc.); a hand-held speed detection device;device and a digital video flashlight.flashlight.. These products make self-contained video and audio recordings onto flash memory cards that are incorporated in the body of the digital video rear view mirror, officer-worn video and audio system and flashlight. We sell our products to law enforcement agencies and other security organizations, 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 2013.
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.
We produce and sell digital audio/video recording, storage and other products, including the following product series:
● | in-car, digital audio/video system that is integrated into a rear view mirror which is designed for law enforcement purposes. Products using this system are marketed under the DVM-100, DVM-400, |
● | in-car, digital audio/video system that is integrated into a rear view mirror that serves as an “event recorder” for commercial fleet and mass transit applications, such as ambulances, taxis and buses. Products using this system are marketed under the DVM-250 and |
● | all-weather, mobile digital audio/video system that is designed for motorcycle, ATV and boat uses and marketed as the |
● | miniature, body-worn digital audio/video camera marketed as the FirstVU HD system; and |
● | hand-held, speed detection system known based on LIDAR (Light Detection and Ranging) and marketed as our Laser Ally |
During 2011, we completed the launch of several derivative products as “event recorders” that can be used in taxi cab, limousine, ambulance and other commercial fleet vehicle applications. We plan to launch additional derivative products in 2013 primarily in the in-car video and body worn systems.2014. We also intend to produce and sell other digital video devicesproducts in the future. 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. In addition to selling our products directly to our customers, we may in the future sell assemblies or complete units containing our technology incorporating digital video and sound recording for use in non-competing products to OEM (original equipment manufacturer) customers.
In-Car Digital Video System – DVM-100, DVM-400, DVM-500PlusDVM-500 Plus, DVM-750, and DVM-750
In-car video systems for patrol cars are now a necessity and have generally become standard. CurrentA number of the current systems are primarily digital and VHS-basedbased 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 or at least have begun transitioningand transitioned completely to digital video, but some have had problems obtaining the appropriate technology.
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; |
● | archives to computers (wirelessly) and to DVDs, CD-ROMs, or file servers; |
● | 900 MHz audio transceiver with automatic activation; |
● | marks exact location of incident with integrated GPS; |
● | playback using Windows Media Player; |
● | optional wireless download of stored video evidence; |
● | proprietary software protects the chain of custody; and |
● | records to rugged and durable solid state memory. |
In-Car Digital Video”EventVideo “Event Recorder” System – DVM-250 and DVM-250Plus
We believe there are several other markets and industries whichthat may find our in-car digital video rear view mirror unit useful, such as the ambulance, school bus, mass transit and delivery service industries. We market a product that we believe addressesdesigned to address these commercial fleet markets with the DVM-250 and DVM-250PlusDVM-250 Plus Event Recorders. The DVM-250 is a rear-view mirror based digital audio and video recording system with many, but not all of, the features of our DVM-500PlusDVM-500 Plus and DVM-750 mirror systems at a lower price point. The DVM-250 is designed to capture “events”“events,” such as wrecks and erratic driving or other abnormal occurrences, for evidentiary or training purposes. These potential markets may find our units attractive from both a feature and cost perspective, compared to other providers. Our preliminary marketing efforts indicate that these commercial fleets are adopting this technology, in particular the ambulance and taxi-cab markets.
All-Weather Mobile Digital Video System – DV-500Ultra
This system is a derivative of our in-car video systems, but is more rugged and water-proofed to handle a more hostile outdoor environment. These systems can be used in many applications and are designed specifically for use on motorcycles, ATVs and boats. Current systems are digital and VHS-based with cameras mounted in the frame of the motorcycle, ATV or boat and the recording device generally in the saddle-bag or other compartment. Most manufacturers have already developed or at least have begun transitioning to digital video, but many have had problems obtaining the appropriate technology. We are developing a new product for this market, which we believe is more compact and rugged than our current system and those of our competitors.
Miniature Body-Worn Digital Video System -– FirstVU
This system is also a derivative of our in-car video systems, but is much smaller and lighter, more rugged and water-proofed to handle a more hostile outdoor environment. These systems can be used in many applications 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 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. We plan to launch our next generation FirstVU HD product that will improve the video quality, battery life, and the weight of our body-worn camera later in 2013.
Hand-Held Speed Detection System – Laser Ally
This system is a lightweight, hand-held speed detection device that uses LIDAR (Light Detection and Ranging) technology rather than the traditional radar systems, which use sound waves. LIDAR systems are used in high congestion traffic areas that require extreme accuracy and identification of the subject vehicles. This system uses new technology that prevents the Laser Ally from being detected by current detectors or jammed by current jamming devices. This system was developed and is being manufactured by a third party vendor for us.
During the last year, we have 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 address markets for private security, homeland security, general consumer and commercial and the original equipment manufacturers.commercial. We have made inroads into certain commercial fleet and the ambulance service provider market, which has confirmedconfirming that our DVM-250 product series can become a significant revenue producer for us.
Law Enforcement
We believe that a valuable use of our various digital audio/video products may be 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 digital video flashlightDVF-500 and the FirstVU HD may provide recorded evidence of the suspect’s actions and reactions to police intervention.
Additionally, motorcycle patrolmen rarely have video systems. We believe that the digital video flashlightDVF-500 can becomebe an essential tool for the motorcycle policeman to provide evidence not previously available. We alsoIn addition, we have developed the DV-500UltraDVM-500 Ultra 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 digital video flashlightDVF-500 and the FirstVU HD may record a significant portion of such evidence at a much lower cost for gathering, analyzing and storing data and evidence.
There are numerous potential applications for our digital audio/video camera products. We believe that other 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 commercial markets for our digital video systems include real estate appraisers, plumbers and electricians.
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 digital video flashlightDVF-500 and the FirstVU HD are excellent management tools for these companies to monitor conduct and timing of security rounds. In addition to the digital video flashlightDVF-500 and 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. Private-sectorPublic and private-sector outlays for antiterrorism measures and for protection against other forms of violence have increased significantly since September 11, 2001. Further, federal, state and local government expenditures for security have increased substantially since such date.are significant. These are all 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 intend to 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 have a non-exclusive supply and distribution agreement with DragonEye Technology, LLC regarding the sale and distribution of our Laser Ally product. This vendor developed and is the only manufacturer of this product. The agreement has specified terms and requires us to purchase minimum quantities over a 42-month period ending February 2014. We have purchased approximately $2,470,000 of product under this agreement as of December 31, 2012 and we have remaining obligations to purchase approximately $987,000 from January 1, 2013$635,000 of products through its expiration in February 2014. The agreement is renewable thereafter on an annual basis unless either of the parties determines not to renew it and provided the parties are in compliance with the agreement. The contract may be terminated earlier in case of material breach by either party that is not cured by with thirty days of notice of the breach. The Company filed a lawsuit on June 15, 2013 against Dragoneye for breaching the contract and has ceased all purchases under the agreement. See “Legal Proceedings” for further details.
We also contract with a manufacturer in Asia for the production of our DVM-100, DVM-400, DVM-250, DVM-250PlusDVM-250 Plus and FirstVUDVM-800 products. The contract provides forhas no minimum purchase requirements and has an initial term through July 2016 with Digital Ally having2016. We have the right to exercise three additional options to extend the contract for three additional years each.
License Arrangements
We have entered into several software licenseagreements, including agreements with Sasken-Ingenient Technologies, Inc. (“Ingenient”Sasken”) and Lead Technologies (“Lead”), and Nuvation Research Corporation (“Nuvation”) regarding theto license of certain software products to be used in our video products. The licensors have written certain software for specific Texas Instrument chips which are included in our products. The licenses generally require upfront payments and contain automatic renewal provisions unless either party notifies the other of its intent to not renew prior to expiration or unless the agreement is terminated due to a material breach by the other party.
The followingfollowing is a summary of our license agreements as of December 31, 2012:
License Type | Date | Expiration Date | Terms | |||
Production software license agreement | April 2005 | April | Automatically renews for one year periods unless terminated by either party. | |||
Software sublicense agreement | October 2007 | October | Automatically renews for one year periods unless terminated by either party. | |||
Sales and Marketing
We have changed principally changed to an employee-based, direct sales force that providesenables us with moreto control and monitoring of our sales force andmonitor its daily activities. Additionally, in the past two years we have reduced the size of certain territories and consequently increased the overallsales personnel and number of domestic sales territories and sales personnel from 15 at the beginning of the 2012 to 22 currently20 in order to better penetrate the market. During 2012, we converted one third party sales agent to be an employee-based direct sales person and replaced the remaining third party sales agents with new employee sales personnel. Our objective with this newWe believe our employee-based model including the replacement of the sales agents, was to encourageencourages our sales personnel in lower performing territories to improve their efforts and, consequently, their sales results. We believe a portion of the revenue decrease in 2011 and 2012 was due to third party sales agents reducing their sales efforts because they did not have the financial resources to travel, meet and market directly to their customers as a result of the difficult economic conditions. We believe that our reorganization has addressed these concerns. Our executive team also supports sales agents with significant customer opportunities by providing pricing strategies and customer presentation support.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 our international distributors to market our products. Our key promotional activities include:
● | attendance at industry trade shows and conventions; |
● | use of a cut-away police car model to demonstrate the digital video rear view mirror product at trade shows, conventions and other marketing venues; |
● | direct sales, with a force of industry-specific sales 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; |
● | 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. |
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. Our primary competitors include companies with substantially greater financial, technological, marketing, personnel and research and development resources than we currently have. There are direct competitors with competitive technology and products in the law enforcement and surveillance markets for all of 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 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. We face similar and intense competitive factors for our event recorders in the commercial fleets and 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 residential and 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. See “Risk Factors - Competition.”
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. However, we license the critical technology on which our products are based from third parties, including Sasken-Ingenient Technologies, Inc. and Nuvation Research Corporation.
We have entered into supply and distribution agreements with several companies that produce certain of our products, including our Laser Ally, FirstVU HD, DVM-100, DVM-250, DVM-500 Ultra, and DVM-400DVM-800 products. These supply and distribution agreements contain certain confidentiality provisions that protect our, as well as the third party manufacturers’ proprietary technology.
Some of these patent applications are still under review by the U.S. Patent Office and, therefore, we have not yet been issued anyall of the patents that we applied for in the United States. No assurance can be given thatwhich, or any, of the patents relating to our existing technology will be issued from the United States or any foreign patent offices,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.
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.
Employees
We had 91119 full-time employees as of December 31, 2012.2013. 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.
ITEMItem 1B. UNRESOLVED STAFF COMMENTS.Unresolved Staff Comments.
None.
ITEMItem 2. PROPERTIES.Properties.
The Company entered into a non-cancellable, long-term facility lease in September 2012 to combine all of its operations into one location, commencing in November 2012. The new 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 and providesprovided a rent holiday/abatement period for the first twelve months. Thereafter, the monthly rent will range from $35,634 to $38,533 over the term.
The leases for the previous Company facilities each expired between October 2012 and December 2012 and were not extended.
ITEMItem 3. LEGAL PROCEEDINGS.Legal Proceedings.
On June 8, 2009, we filed suit against Z3 Technologies, LLC ("Z3"(“Z3”) in the U.S. District Court for the District of Kansas claiming breach of a production software license agreement entered into during October 2008 and the rescission of a second limited license agreement entered into during January 2009. Among other claims, we asserted that Z3 failed to deliver the material required under the contracts; that the product that wasZ3 delivered by Z3 was defective and/or unusable; and that the January 2009 contract should be rescinded and declared void, unenforceable and of no force or effect. We paid license fees and made other payments to Z3 totaling $265,000 to-dateto date under these contracts. Z3 denied our claims and filed counterclaims that allege we did not have the right to terminate the contracts and therefore that it was damaged for loss of profits and related damages. In those counterclaims, Z3 sought to recover approximately $4.5 million from us exclusive of “prejudgment interest.” Our insurance carrier settled a portion of the counterclaims under our director and officer liability insurance policy. The counterclaims that were not resolved by that settlement remained in controversy.
The trial of those claims began on June 25, 2012 and concluded with a jury verdict on July 3, 2012. The principal parts of the verdict were (i) an award of $30,000 to us on grounds that Z3 had breached its 2008 contract with us; (ii) an award of $15,000 in favor of Z3 by finding that we had breached the 2008 contract by failing to pay the balance of certain engineering fees; and (iii) an award of $100,000 in favor of Z3 based on the Court’s finding that we breached the 2009 contract by failing to place an initial order for so-called “DM-365 modules” from Z3. As a result, the net judgment against us was $85,000. Further, despite our arguments at trial, the court also refused to reconsider the interlocutory summary judgment rulings rendered against us prior to trial in the amount of $445,000, which became final upon conclusion of the trial. Accordingly, the total judgment entered against us was $530,000 and no prejudgment interest on that sum was awarded.
We believe there are a number of errors in the court’s rulings and the judgment entered on July 3, 2012 and are appealing them. We accrued the $530,000 judgment entered against us as a long-term liability as of December 31, 2012June 30, 2013 due to the expected time required to conclude the appeal process. We have charged $780,350 to operations during the twelve months ended December 31, 2012 as litigation charge and related expenses. Such charges include the $530,000 judgment and all related legal fees and expenses incurred and accrued during the twelve months ended December 31, 2012. We have also accrued the legal fees expected to be incurred during the appeal process. In order to stay the execution of judgment during the appeal process, we were required to post a bond in the amount of $662,500 in July 2012 and the respective funds will be reflected as restricted cash in future balance sheets until such time as the bond is no longer required.
On June 5, 2013, we filed a lawsuit in the District Court of Johnson County, Kansas against Dragoneye, one of its domestic vendors. We had entered into a supply and distribution agreement with Dragoneye on May 1, 2010 under which we were granted the right to sell and distribute a proprietary law enforcement speed measurement device and derivatives to our customers under the trade name LaserAlly. The parties amended the agreement on January 31, 2012. In our complaint we allege that Dragoneye breached the contract because it failed to maintain as confidential information our customer list; it infringed on our trademarks, including LaserAlly and Digital Ally; it tortiously interfered with our existing contracts and business relationships with our dealers, distributors, customers and trading partners; and it engaged in unfair competition and the Kansas Uniform Trade Secrets Statutes. We are seeking the court to award damages related to the alleged actions of Dragoneye and to declare the supply and distribution agreement terminated and cancelled. Finally, we sought temporary, preliminary and permanent injunction to prohibit Dragoneye from using or disclosing any of our trade secrets and trademarks together with reasonable attorneys’ fees, costs and expenses we incur as a result of this action. On October 23, 2009,17, 2013 the Circuitcourt denied our request for this injunction.
Dragoneye was granted a request to remove the lawsuit from the District Court of JacksonJohnson County, Missouri awardedKansas State court and it is now in United States District Court for the District of Kansas. Dragoneye filed its answer to the complaint which denies the allegations and has asserted counter claims against us for alleged breach of the contract. The lawsuit is in the discovery phase and the parties have conducted mediation. Management has reviewed the status of the case with Company an interlocutory judgmentcounsel and determined it was appropriate to accrue a loss of $208,316 at December 31, 2013.
On June 18, 2013, we filed a lawsuit as the plaintiff in the United States District Court for the District of Kansas against BCM Electronics Corp. SDN BHD (“BCM”), which is one of our foreign vendors. We requested the court to award damages related to the alleged breach of contract regarding the failure of BCM to provide the component parts required under two purchase orders (“PO’s”). We also asked the court to declare the two PO’s cancelled and terminated as a former contract manufacturer. The Company had filed for and receivedresult of BCM’s failure to perform. Finally, we requested a temporary, restraining order in June 2009 that forbids the supplierpreliminary and permanent injunction to prohibit BCM from engaging in certain actions involving the Company.using or disclosing any of our trade secrets together with reasonable attorneys’ fees, costs and expenses incurred as a result of this action. The interlocutory judgment was entered in favor of the Company against the supplier that in effect cancelled all purchase orders and confirmed that the Company has no further obligations, whether monetary or otherwise, to the supplier. The Company received a notice of the filing of bankruptcy under Chapter 7 effective October 26, 2009 by this supplier. In the bankruptcy court the Company sought and received relief from the automatic stay in order to liquidate and obtain a final judgment against the supplier. On May 28, 2010, the court grantedissued a default judgment awardingagainst BCM on August 23, 2013 totaling $255,000 and as a result, we cancelled the Company damagesopen payables we had with BCM (approximately $59,000) in the third quarter 2013. We have not accrued any other amounts related to the default judgment due to the uncertainty of collection. Any recovery will be recorded as income if and legal fees totaling $11,166,686.
On October 25, 2013, we filed a garnishment claim against all insurance proceeds from policies issued andcomplaint in force covering the supplier when these actions occurred. The trial relatingUnited States District Court for the District of Kansas to this claim commenced on September 24, 2012. The parties agreed to settleeliminate threats by a competitor, Utility Associates, Inc. (“Utility”), of alleged patent infringement regarding U.S. Patent No. 6,831,556 (the”556 patent”). Specifically, the lawsuit on September 25, 2012. The insurance company involved agreedseeks a declaration that our mobile video surveillance systems do not infringe any claim of the 556 patent. In addition, we will be take steps to pay $610,000invalidate the 556 patent through appropriate procedures at the United States Patent and Trademark Office. We became aware that Utility had recently mailed letters to settlecurrent and prospective purchasers of our mobile video surveillance systems threatening that the litigation relatinguse of such systems purchased from third parties not licensed to the garnishment claim556 patent would create liability for them for patent infringement. We reject Utility’s assertion and will vigorously defend the Company received the payment on October 16, 2012. The Company recorded the $610,000 settlement in litigation charge (credit) and related expenses and all legal fees incurred for the lawsuit were offset against the settlement asright of December 31, 2012. The net amount included in litigation charge (credit) and related expenses at December 31, 2012 for this lawsuit were $(466,400).
We are also involved as a plaintiff and defendant in ordinary, routine litigation and administrative proceedings incidental to its business from time to time, including customer collections, vendor and employment-related matters. Management believes the likely outcome of any other pending cases and proceedings will not be material to its business or its financial condition.
ITEMItem 4. MINE SAFETY DISCLOSURES.Mine Safety Disclosures.
Not applicable.
ITEMItem 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Prices
Our common stock commenced trading on the NASDAQ Capital Market on January 2, 2008 under the symbol “DGLY,” and continues to do so. From July 2007 until we became listed on the NASDAQ Capital Market, our common stock was traded on the OTC Bulletin Board and prior to that it was quoted in the “Pink Sheets.”
The high/low closing prices of our common stock were as follows for the periods below. The following quotations have been retroactively restated for the effects of a one-for-eight reverse stock split which was effective on August 24, 2012. In addition, the quotations below reflect inter-dealer bid prices without retail markup, markdown, or commission and may not represent actual transactions:
High Close | Low Close | |||||||
Year Ended December 31, 2012 | ||||||||
1st Quarter | $ | 6.16 | $ | 3.36 | ||||
2nd Quarter | $ | 6.24 | $ | 2.50 | ||||
3rd Quarter | $ | 7.00 | $ | 2.48 | ||||
4th Quarter | $ | 5.90 | $ | 2.91 | ||||
Year Ended December 31, 2011 | ||||||||
1st Quarter | $ | 15.12 | $ | 10.40 | ||||
2nd Quarter | $ | 11.28 | $ | 7.52 | ||||
3rd Quarter | $ | 9.60 | $ | 5.28 | ||||
4th Quarter | $ | 7.52 | $ | 4.80 |
High Close | Low Close | ||||||||
Year Ended December 31, 2013 | |||||||||
1st Quarter | $ | 4.63 | $ | 3.16 | |||||
2nd Quarter | $ | 8.88 | $ | 3.80 | |||||
3rd Quarter | $ | 16.63 | $ | 6.98 | |||||
4th Quarter | $ | 14.79 | $ | 7.50 | |||||
Year Ended December 31, 2012 | |||||||||
1st Quarter | $ | 6.16 | $ | 3.36 | |||||
2nd Quarter | $ | 6.24 | $ | 2.50 | |||||
3rd Quarter | $ | 7.00 | $ | 2.48 | |||||
4th Quarter | $ | 5.90 | $ | 2.91 |
Holders of Common Stock
As of December 31, 2012,2013, we had approximately 8278 shareholders of record for our common stock.
Dividend Policy
To date, we have not declared or paid cash dividends on our shares of common stock. The holders of our common stock will be entitled to non-cumulative dividends on the shares of common stock, when and as declared by our board of directors, in its discretion. We intend to retain all future earnings, if any, for our business and do not anticipate paying cash dividends in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and such other factors as our board of directors may deem relevant.
Our board of directors adopted the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”) on September 1, 2005. The 2005 Plan authorizes us to reserve 312,500 shares of our common stock for issuance upon exercise of options and grant of restricted stock awards. At December 31, 2012,2013, there were 691716 shares available for issuance under the 2005 Plan.
On January 17, 2006, our board of directors adopted the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”). The 2006 Plan authorizes us to reserve 187,500 shares for future grants under it. At December 31, 2012,2013, there were 36,3871,230 shares available for issuance under the 2006 Plan.
On January 24, 2007, our board of directors adopted the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”). The 2007 Plan authorizes us to reserve 187,500 shares for future grants under it. At December 31, 2012,2013, there were 7,529 shares available for issuance under the 2007 Plan.
On January 2, 2008, our board of directors adopted the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”). The 2008 Plan authorizes us to reserve 125,000 shares for future grants under it. At December 31, 2012,2013, there were 2,8751,499 shares available for issuance under the 2008 Plan.
On March 18, 2011, our board of directors adopted the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”). The 2011 Plan authorizes us to reserve 62,500 shares for future grants under it. At December 31, 2012,2013, there were 41,8751,875 shares available for issuance under the 2011 Plan.
On March 22, 2013, our board of directors adopted the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”). The 2013 Plan authorizes us to reserve 100,000 shares for future grants under it. At December 31, 2013, there were 40,000 shares available for issuance under the 2013 Plan.
The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan and 20112013 Plan are referred to as the “Plans.”
The Plans authorize us to grant (i) to the key employees incentive stock options (except for the 2007 Plan) to purchase shares of common stock and non-qualified stock options to purchase shares of common stock and restricted stock awards, and (ii) to non-employee directors and consultants’ non-qualified stock options and restricted stock. The Compensation Committee of our board of directors administers the Plans by making recommendations to the board or determinations regarding the persons to whom options or restricted stock should be granted and the amount, terms, conditions and restrictions of the awards.
The Plans allow for the grant of incentive stock options (except for the 2007 Plan), non-qualified stock options and restricted stock awards. Incentive stock options granted under the Plans must have an exercise price at least equal to 100% of the fair market value of the common stock as of the date of grant. Incentive stock options granted to any person who owns, immediately after the grant, stock possessing more than 10% of the combined voting power of all classes of our stock, or of any parent or subsidiary corporation, must have an exercise price at least equal to 110% of the fair market value of the common stock on the date of grant. Non-statutory stock options may have exercise prices as determined by our Compensation Committee.
The Compensation Committee is also authorized to grant restricted stock awards under the Plans. A restricted stock award is a grant of shares of the common stock that is subject to restrictions on transferability, risk of forfeiture and other restrictions and that may be forfeited in the event of certain terminations of employment or service prior to the end of a restricted period specified by the Compensation Committee.
On July 31, 2008, we filed registration statements on Form S-8 and an amendment to a previously filed Form S-8 with the SEC which registered 812,500 shares to be issued upon exercise of the stock options underlying the 2005 Plan, 2006 Plan, 2007 Plan and 2008 Plan. On March 28, 2012, we filed a registration statement on Form S-8, which registered 62,500 shares to be issued upon exercise of stock options underlying the 2011 Stock Plan.
The following table sets forth certain information regarding the stock option plans adopted by the Company as of December 31, 2012:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
Equity compensation plans approved by stockholders | 435,208 | $ | 17.87 | 81,828 | ||||||||
Equity compensation plans not approved by stockholders | 117,442 | $ | 17.87 | 7,529 | ||||||||
Total all plans | 552,650 | $ | 17.87 | 89,357 |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
Equity compensation plans approved by stockholders | 404,914 | $ | 18.98 | 45,320 | ||||||||
Equity compensation plans not approved by stockholders | 101,193 | $ | 20.73 | 7,529 | ||||||||
Total all plans | 506,107 | $ | 19.33 | 52,849 |
Recent Sales of Unregistered Securities
During 2013, the Company issued 4,687 shares of unregistered common stock pursuant to the cashless exercise of common stock purchase warrants with an exercise price of $4.00 each. There have beenwere no sales of unregistered securities during the fiscal yearsyear ended December 31, 2012 and 2011.
ITEMItem 6. SELECTED FINANCIAL DATA.Selected Financial Data.
Not applicable.
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal 2009 through 2012;2013; (2) macro-economic risks from the effects of the economic downturn and decrease in budgets for the law-enforcement community; (3) our ability to increase revenues and gross profit margins and return to consistent profitability in the current economic environment; (4) our operation in a developing marketmarkets and uncertainty as to market acceptance of our technology and new products; (5) the impact of the federal government’s stimulus program on the budgets of law enforcement agencies, including the timing, amount and restrictions on funding; (6) our ability to deliver our new product offerings as scheduled including the DVM-250 and DVM-100, and have such new products perform as planned or advertised; (7) whether there will be commercial markets, domestically and internationally, for one or more of our new products, including our DVM-250 for the commercial fleet and mass transit markets, and the degree to which the interest shown in our new products will translate into sales during 2013;2014; (8) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues to their historical levels; (9) our ability to produce our products in a cost-effective manner; (10) competition from larger, more established companies with far greater economic and human resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities as customers; (13) our expenditure of significant resources in anticipation of a sale due to our lengthy sales cycle and the potential to receive no revenue in return; (14) characterization of our market by new products and rapid technological change; (15) our dependence on sales of our DVM -800, DVM-750 and DVM-500PlusDVM-500 Plus products; (16) potential that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (17) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (18) our dependence on key personnel; (19) our reliance on third party distributors and representatives for our marketing capability; (20) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (21) our ability to protect technology through patents; (22) our ability to protect our proprietary technology and information as trade secrets and through other similar means; (23) risks related to our license arrangements; (24) our revenues and operating results may fluctuate unexpectantlyunexpectedly from quarter to quarter; (25) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have significant effect on us and the other stockholders; (26) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (27) possible issuance of common stock subject to options and warrants that may dilute the interest of stockholders; (28) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404 as it may be required; (29) our nonpayment of dividends and lack of plans to pay dividends in the future; (30) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (31) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (32) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; and (33) indemnification of our officers and directors.
Overview
We supply technology-based products utilizing our portab
We experienced a negative trend in our operating results in 2012 and 2011 and have reported operating losses during all but onefor most of the previous eight fiscal quarters.quarters during 2013 and 2012. The following is a summary of our recent operating results on a quarterly basis:
For the Three Months Ended: | ||||||||
December 31, 2012 | September 30, 2012 | June 30, 2012 | March 31, 2012 | December 31, 2011 | September 30, 2011 | June 30, 2011 | March 31, 2011 | |
Total revenue | $ 4,638,087 | $4,596,768 | $4,600,797 | $3,782,456 | $ 4,286,314 | $ 5,817,893 | $ 4,743,253 | $ 4,729,693 |
Gross profit | 2,392,397 | 2,617,310 | 2,475,663 | 1,996,617 | 1,841,104 | 2,989,496 | 1,964,557 | 1,976,773 |
Gross profit margin percentage | 51.6% | 56.9% | 53.8% | 52.8% | 43.0% | 51.4% | 41.4% | 41.8% |
Total selling, general and administrative expenses | 2,807,221 | 2,281,294 | 3,351,193 | 2,728,797 | 3,143,348 | 3,081,936 | 3,064,005 | 3,107,442 |
Operating income (loss) | (414,824) | 336,016 | (875,530) | (732,180) | (1,302,244) | (92,440) | (1,099,448) | (1,130,669) |
Operating margin percentage | (8.9%) | 7.3% | (19.0)% | (19.4)% | (30.4%) | (1.6%) | (23.2%) | (23.9%) |
Net income (loss) | $ (487,099) | $270,040 | $(949,201) | $(804,729) | $ (1,517,136) | $ (162,918) | $ (1,134,903) | $ (1,147,289) |
For the Three Months Ended: | ||||||||||||||||||||||||||||||||
December 31, 2013 | September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | September 30, 2012 | June 30, 2012 | March 31, 2012 | |||||||||||||||||||||||||
Total revenue | $ | 3,505,358 | $ | 4,488,527 | $ | 5,051,895 | $ | 4,780,549 | $ | 4,638,087 | $ | 4,596,768 | $ | 4,600,797 | $ | 3,782,456 | ||||||||||||||||
Gross profit | 1,749,422 | 2,425,326 | 3,037,815 | 2,895,927 | 2,392,397 | 2,617,310 | 2,475,663 | 1,996,617 | ||||||||||||||||||||||||
Gross profit margin percentage | 49.9 | % | 54.0 | % | 60.1 | % | 60.6 | % | 51.6 | % | 56.9 | % | 53.8 | % | 52.8 | % | ||||||||||||||||
Total selling, general and administrative expenses | 3,323,380 | 3,261,988 | 3,059,054 | 2,714,510 | 2,807,221 | 2,281,294 | 3,351,193 | 2,728,797 | ||||||||||||||||||||||||
Operating income (loss) | (1,573,958 | ) | (836,662 | ) | (21,239 | ) | 181,417 | (414,824 | ) | 336,016 | (875,530 | ) | (732,180 | ) | ||||||||||||||||||
Operating margin percentage | (44.9 | )% | (18.6 | )% | (0.4 | )% | 3.8 | % | (8.9 | )% | 7.3 | % | (19.0 | )% | (19.4 | )% | ||||||||||||||||
Net income (loss) | $ | (1,638,649 | ) | $ | (905,836 | ) | $ | (67,151 | ) | $ | 113,695 | $ | (487,099 | ) | $ | 270,040 | $ | (949,201 | ) | $ | (804,729 | ) |
Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result in part from the timing of large individual orders from international, as well as domestic, customers and our newnewer products, such as the DVM-100, DVM-400, DVM-250, FirstVU HD and DVM-250.DVM-800. We incurredreported an operating loss during fourth quarter 2012 of $414,824$1,573,958 on revenues of $4,638,087$3,505,358 for fourth quarter 2013 compared to an operating loss of $836,662 for third quarter 2013 on revenues of $4,488,527 and an operating loss of $21,239 for second quarter 2013 on revenues of $5,051,895. For first quarter 2013, we reported operating income of $336,016$181,417 on total revenues of $4,596,768 in the third quarter 2012.$4,780,549. The operating income reported in the third quarter 2012 reflected the positive effect of a litigation settlement recorded in September 2012 (See Note 102012. Our revenues declined in fourth quarter 2013 compared to the Condensed Consolidated Financial Statements) and was the first profitable quarter since fourth quarter 2009 when we reported operating income of $341,167. We believe that regardless of theprior seven quarters, contributing to our operating loss of $1,573,958 in the fourth quarter of 2012, the operating results for such quarter demonstrates continued improvement from late 2011 and early 2012.quarter. Our gross margin percentage decreased to 51.6% compared to 56.9% in third quarter 2012, 53.8% in second quarter 2012 and 52.8% in first quarter 2012 due to an improvement in international sales, increased costs to improve the wireless transfer modules (“WTM”) and discounting some larger international sales transactions49.9% in the fourth quarter 2012.2013 from 54.0% in third quarter 2013, 60.1% in second quarter 2013 and 60.6% for first quarter 2013. The reduction in gross margin also contributed to the increased operating loss in fourth quarter 2013 compared to third quarter 2013, second quarter 2013 and our operating income for first quarter 2013. Our selling, general and administrative (“SG&A”) expenses increased slightly in the fourth quarter 20122013 compared to third quarter 2012 due2013, and were higher than second quarter 2013 and first quarter 2013. The increased SG&A expenses also contributed to the litigation settlement reportedincreased operating loss in third quarter 2012 that did not recur in the fourth quarter 2012,2013 compared to third and second quarters 2013 and the costs incurred to consolidate our operations into one facility during the fourthoperating income in first quarter 2012 which was approximately $120,000.2013. Our international revenues during 2012 decreased over 2011 levels as we shipped international orders totaling $1,031,066 in 2012,2013 improved to $1,159,183 compared to $2,028,591$1,031,066 during 2011.
We expect to continue to experience significant fluctuations in revenues in 2013 and beyond2014 due to the timing of larger orders from international as well asand domestic customers. For 2013,2014, we are focusing on increasing revenues and improving gross margins on sales in addition to continuingreducing our general and administrative cost reduction and containment measures.costs. We plan, however, to continue to invest in research, development, sales and marketing resources on a prudent basis. Our inventory levels increased slightly during 20122013 compared to 2011 and the primary cause was2012 primarily due to increases in finished goods inventory in the Laser Allynew FirstVU HD product and our mirror products which are subject to minimum purchase requirements. Management has implemented a program to reduce overall inventory levels in anticipation of increased orders in the fourth quarter of 2013 as we attempt to improve sales, decrease production rates and reduce procurement costs throughout our supply chain.
We generated revenues in the fourth quarter |
● | We have recently launched additional products to |
● | Our gross profit on sales |
● | Our international revenues |
● | We |
● | Our recent operating losses caused deterioration in our cash and liquidity in |
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity,
We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 10 to our condensed consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.
We entered into a supply and distribution agreement with Dragoneye on May 1, 2010 under which we were granted the exclusive worldwide right to sell and distribute a proprietary law enforcement speed measurement device and derivatives to itsour customers. The term of the agreement was 42 months after the date the supplierDragoneye began full scale production of the product which commenced in August 2010 and final certification of the product was obtained. The agreement had minimum purchase requirements of 1,000 units per period over three commitment periods. On January 31, 2012, the supply and distribution agreement was amended to reduce the minimum purchase commitment over the second and third years by 52% as compared to the original commitment. We agreed to release our world-wide right to exclusively market the product to the law enforcement community in exchange for the reduction in the purchase commitment. After the initial term has expired, the parties may continue on a month-to-month basis and is terminable by either party upon 30 days advance notice. The contract may be terminated earlier in case of material breach by either party that is not cured within thirty days of notice of the breach.
The agreement contains requiredrequires minimum order quantities and fixed prices per unit accordingthat represent a remaining commitment to the following schedule:
Minimum order commitment amount ($) | ||||||||||||
Commitment time period | Commitment | Purchases | Remaining Commitment | |||||||||
March 2012 through February 2013 | $ | 846,240 | $ | 705,200 | $ | 141,040 | ||||||
March 2012 through February 2014 | 846,240 | — | 846,240 | |||||||||
$ | 1,692,480 | $ | 705,200 | $ | 987,280 |
For the Years Ended December 31, 20122013 and 2011
Results of Operations
Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31, 20122013 and 2011,2012, represented as a percentage of total revenues for each respective year:
Years Ended December 31, | ||||||||
2013 | 2012 | |||||||
Revenue | 100 | % | 100 | % | ||||
Cost of revenue | 43 | % | 46 | % | ||||
Gross profit | 57 | % | 54 | % | ||||
Selling, general and administrative expenses: | ||||||||
Research and development expense | 21 | % | 14 | % | ||||
Selling, advertising and promotional expense | 15 | % | 15 | % | ||||
Stock-based compensation expense | 4 | % | 3 | % | ||||
Litigation charge and related expenses | 1 | % | 2 | % | ||||
General and administrative expense | 29 | % | 30 | % | ||||
Total selling, general and administrative expenses | 70 | % | 64 | % | ||||
Operating loss | (13 | )% | (10 | )% | ||||
Other income and interest expense, net | (1 | )% | (1 | )% | ||||
Loss before income tax benefit | (14 | )% | (11 | )% | ||||
Income tax (provision) | — | % | — | % | ||||
Net loss | (14 | )% | (11 | )% | ||||
Net loss per share information: | ||||||||
Basic | $ | (1.17 | ) | $ | (0.97 | ) | ||
Diluted | $ | (1.17 | ) | $ | (0.97 | ) |
17 |
Years Ended December 31, | ||||||||
2012 | 2011 | |||||||
Revenue | 100 | % | 100 | % | ||||
Cost of revenue | 46 | % | 55 | % | ||||
Gross profit | 54 | % | 45 | % | ||||
Selling, general and administrative expenses: | ||||||||
Research and development expense | 14 | % | 14 | % | ||||
Selling, advertising and promotional expense | 15 | % | 11 | % | ||||
Stock-based compensation expense | 3 | % | 4 | % | ||||
Litigation charge and related expenses | 2 | % | 0 | % | ||||
General and administrative expense | 30 | % | 34 | % | ||||
Total selling, general and administrative expenses | 64 | % | 63 | % | ||||
Operating loss | (10 | %) | (18 | %) | ||||
Interest income (expense) | (1 | %) | (2 | %) | ||||
Loss before income tax benefit | (11 | %) | (20 | %) | ||||
Income tax (provision) | — | % | — | % | ||||
Net loss | (11 | %) | (20 | %) | ||||
Net loss per share information: | ||||||||
Basic | $ | (0.97 | ) | $ | (1.96 | ) | ||
Diluted | $ | (0.97 | ) | $ | (1.96 | ) |
Revenues
Our current product offerings include the following:
Product | Description | Retail Price | ||||
DVM-500 Plus | An in-car digital audio/video system that is integrated into a rear view mirror primarily designed for law enforcement customers. | $ | 4,295 | |||
DVM-500 Ultra | An all-weather mobile digital audio/video system that is designed for motorcycle, ATV and boat users mirror primarily for law enforcement customers. | $ | 4,295 | |||
DVM-750 | An in-car digital audio/video system that is integrated into a rear view mirror primarily designed for law enforcement customers. | $ | 4,995 | |||
DVF-500 | A digital audio/video system that is integrated into a law-enforcement style flashlight primarily designed for law enforcement customers. | $ | 695 | |||
DVM-100 | An in-car digital audio/video system that is integrated into a rear view mirror primarily designed for law enforcement customers. This system uses an integrated fixed focus camera. | $ | 1,895 | |||
DVM-400 | An in-car digital audio/video system that is integrated into a rear view mirror primarily designed for law enforcement customers. This system uses an external zoom camera. | $ | 2,795 | |||
DVM-250 | An in-car digital audio/video system that is integrated into a rear view mirror primarily designed for commercial fleet customers. We also offer the DVM-250 Plus which has additional features and retails for $1,295. | $ | 995 | |||
DVM-800 | An in-car digital audio/video system that is integrated into a rear view mirror primarily designed for law enforcement customers. This system can use an internal fixed focus camera or two external cameras for a total of four video streams. We also offer the Premium Package which has additional warranty and retails for $3,995 | $ | 3,495 | |||
Laser Ally | A hand-held mobile speed detection and measurement device that uses light beams rather than sound waves to measure the speed of vehicles. | $ | 1,995 | |||
FirstVU HD | A body-worn digital audio/video camera system primarily designed for law enforcement customers. | $ | 995 |
We sell our products and services to law enforcement and commercial customers in the following manner:
● | Sales to domestic |
● | 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 |
● | Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer. |
We may discount our prices on specific orders when considering the size of the order, the specific customer and the competitive landscape. We believe that our systems are cost competitive compared to our primary competitionprincipal competitors and generally are lower priced when considering comparable features and capabilities.
Revenues for the years ended December 31, 20122013 and 20112012 were derived from the following sources:
Years ended December 31, | ||||||||
2012 | 2011 | |||||||
DVM-500Plus | 47 | % | 58 | % | ||||
DVM-750 | 20 | % | 23 | % | ||||
DVM-100 & DVM-400 | 6 | % | 3 | % | ||||
Laser Ally | 3 | % | 3 | % | ||||
DVM-250 & DVM- 250 Plus | 4 | % | 2 | % | ||||
Repair and service | 2 | % | 1 | % | ||||
FirstVu | 1 | % | 1 | % | ||||
Accessories and other revenues | 17 | % | 9 | % | ||||
100 | % | 100 | % |
Years ended December 31, | ||||||||
2013 | 2012 | |||||||
DVM-500 Plus | 39 | % | 47 | % | ||||
DVM-750 | 16 | % | 20 | % | ||||
DVM-100 & DVM-400 | 10 | % | 6 | % | ||||
DVM-250 & DVM- 250 Plus | 7 | % | 4 | % | ||||
Laser Ally | 3 | % | 3 | % | ||||
FirstVu HD and FirstVu | 3 | % | 1 | % | ||||
DVM-800 | 2 | % | — | % | ||||
Repair and service | 2 | % | 2 | % | ||||
Accessories and other revenues | 18 | % | 17 | % | ||||
100 | % | 100 | % |
We experienced a change in the sales mix of our products for the year ended December 31, 20122013 compared to the year ended December 31, 2011.2012. Our newer products, including the DVM-800, the First VU HD, the DVM-100, the DVM-400, the DVM-250, the DVM-250Plus, and the Laser Ally,DVM-250 Plus, contributed 13%22% of our total sales for the twelve months ended December 31, 2012,2013 compared to 8%11% for the comparable period ending December 31, 2011.fiscal 2012. We expect that the sales mix will continue to transition from the DVM-550DVM-500 Plus and DVM-750 to our newer products during 2013.
Revenues for the years ended December 31, 2013 and 2012 were $17,826,329 and 2011 were $17,618,108, and $19,577,153, respectively, a decreasean increase of $1,959,045 (10%$208,221 (1%), due to the following factors:
● | Our revenues | |
● | Our average order size |
Our revenues from commercial fleet customers increased to |
● | Our international revenues |
Cost of revenue on units sold for the year ended December 31, 2013 and 2012 was $7,717,839 and 2011 was $8,136,121, and $10,805,223, respectively, a decrease of $2,669,102 (25%$418,282 (5%). The decrease in costs of goods sold in 2013 is partiallyprimarily due to the 10% decreasemigration of our sales mix to our new products with better margins, in revenues duringparticular the year ended December 31, 2012 compared to 2011,DVM-100, DVM-400, DVM-250 and improvement in cost of goods sold as a percent of revenues during the twelve months ended December 31, 2012 compared to 2011.FirstVU HD. Cost of sales as a percentage of revenues decreased to 46%43% during the year ended December 31, 20122013 compared to 55%46% for the year ended December 31, 2011.2012. Our goal is to reduce cost of sales as a percentage of revenues during 20132014 and beyond. Improving gross margins through reductions in conversion costs (engineering changes and rework) and manufacturing inefficiencies related to our base products, such as the DVM-750 and DVM-500Plus, are main focuses of management and engineering. In addition, we are continuing to reorganizehave reorganized our production and manufacturing operations by placing a greater emphasis upon contract manufacturers, including those located offshore. Uncertainties regarding the size and timing of large international orders make it difficult for us to maintain efficient production and staffing levels if all orders are processed through our manufacturing facility. By outsourcing more of our production requirements to contract manufacturers, we believe that we can benefit from greater volume purchasing and production efficiencies while at the same time reducingand reduce our fixed and semi-fixed overhead costs. We believe that the selected contractour manufacturers will be able to ramp up production quickly in order to meet the varying demands of our international customers. We expect that our newer product offerings, in particular the DVM-100, DVM-250, DVM-400, DVM-250,DVM-800 and DVM-250Plus,FirstVU HD, should improve our cost of goods sold as a percentage of sales. We do not expect to incur significant capital expenditures to ramp up production of the new products because our internal process is largely assembling subcomponents, testing and shipping of completed products or we use contract manufacturers. We rely on our subcontractors to produce finished circuit boards that represent the primary components of our products, thereby reducing our need to purchase capital equipment.
We had $377,330$260,713 and $547,182$377,330 in reserves for obsolete and excess inventories at December 31, 20122013 and December 31, 2011,2012, respectively. We are maintaining component parts specific to the legacy DVM-500 in inventory at levels reasonably expected to be consumed for service and repair demands. Total raw materials and component parts were $2,475,827$2,204,216 and $2,168,761$2,475,857 at December 31, 20122013 and December 31, 2011,2012, respectively, an increasea decrease of $307,096 (14%$271,641 (11%). The increasedecrease in raw materials and component parts is primarily attributable to inventory levels returning to normal after a buildup in anticipation of moving our assembly and warehousing operations to a new facilityslight ramp up in late November 2012 andassociated with the associated delays in ramping upconsolidation of operations into our assembly operations before December 31, 2012.new building. We believe thethat introduction of new parties to our supply chain will continue to help reduce cost of sales as a percent of revenues during 2013.2014. Finished goods balances were $5,050,572$6,097,254 and $4,844,446$5,050,572 at December 31, 20122013 and December 31, 2011,2012, respectively, an increase of $206,126 (4%$1,046,682 (21%). The increase in finished goods was primarily in the Laser Allyour new FirstVU HD products which are subject to minimum purchase requirements.and our mirror products for pending or expected orders. Finished goods at December 31, 2012 are2013 consist primarily of the Laser Ally products, the new FirstVU HD, and the DVM-500Plus products which will be used to fulfill international and domestic orders during 2013. Finished goods also included increased suppliesnormal levels of our other newer products, including the FirstVU, DVM-250, DVM-400DVM-500 Plus and DVM-100 at December 31, 2012.DVM-750 products. The reserve for excess and obsolete inventory as a percent of total inventory balances decreased to 4.9%3.1% as of December 31, 20122013 compared to 7.6%4.9% at December 31, 2011.2012. We believe that our obsolescence risk was less at December 31, 20122013 compared to December 31, 20112012 because our management teamwe made a concerted effort in 2012 to dispose ofscrap unusable parts from the older versions of our products. Therefore, previously reserved obsolete parts were disposed of during 20122013 and have been applied to our reserve balance. We believe thesethe reserves are appropriate given our inventory levels at December 31, 2012.
Gross Profit
Gross profit for the years ended December 31, 2013 and 2012 was $10,108,490 and 2011 was $9,481,987, and $8,771,930, respectively, an increase of $710,057 (8%$626,503 (7%). The increase is commensurate with the significant improvement in cost of sales as a percent of revenue during the twelve months ended December 31, 20122013 compared to the same period 2011 offset by2012 and the 10% decline1% increase in revenues. Cost of sales as a percentage of revenues decreased to 43% for the year ended December 31, 2013 from 46% for the year ended December 31, 2012 from 55% for the year ended December 31, 2011.2012. Our goal is to continue to improve our margins based upon the expected margins of our newer products, in particular the DVM-100, DVM-250, DVM-400, DVM-250DVM-800 and DVM-250Plus,FirstVU HD, if they gain traction in the marketplace and we increase commercial production in 2013.2014. In addition, as revenues increase from these products, we will seek to further improve our margins from these new products through economies of scale and more efficiently utilizing fixed manufacturing overhead components. We plan to continue our initiative on more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.
Selling, general and administrative expenses were $11,168,505 $12,358,932 and $12,396,731 $11,168,505 for the years ended December 31, 2013 and 2012, and 2011, respectively, a decreasean increase of $1,228,226 (10%$1,190,427 (11%). Overall selling,Selling, general and administrative expenses as a percentage of sales increased to 70% from 64% from 63% in 20122013 and 2011.
Year ended December 31, | ||||||||
2012 | 2011 | |||||||
Research and development expense | $ | 2,528,790 | $ | 2,773,962 | ||||
Selling, advertising and promotional expense | 2,587,427 | 2,232,831 | ||||||
Stock-based compensation expense | 521,427 | 839,232 | ||||||
Professional fees and expense | 657,818 | 740,894 | ||||||
Executive, sales, and administrative staff payroll | 2,119,921 | 2,990,808 | ||||||
Litigation charge and related expenses | 313,950 | — | ||||||
Other | 2,439,172 | 2,819,004 | ||||||
Total | $ | 11,168,505 | $ | 12,396,731 |
The significant components of selling, general and administrative expenses are as follows:
Year ended December 31, | ||||||||
2013 | 2012 | |||||||
Research and development expense | $ | 3,669,022 | $ | 2,528,790 | ||||
Selling, advertising and promotional expense | 2,699,884 | 2,587,427 | ||||||
Stock-based compensation expense | 705,612 | 521,427 | ||||||
Professional fees and expense | 603,375 | 657,818 | ||||||
Executive, sales, and administrative staff payroll | 2,058,839 | 2,119,921 | ||||||
Litigation charge and related expenses | 208,316 | 313,950 | ||||||
Other | 2,413,884 | 2,439,172 | ||||||
Total | $ | 12,358,932 | $ | 11,168,505 |
Research and development expense.We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $2,528,790$3,669,022 and $2,773,962$2,528,790 for the years ended December 31, 2013 and 2012, respectively, an increase of $1,140,232 (45%). We have a number of development projects underway with several nearing completion, which are the primary reasons for the increased research and 2011, respectively, a decrease of $245,172 (9%) because of our continued cost containment efforts and increased scrutiny ofdevelopment expenses for the year ended December 31, 2013 compared to December 31, 2012. Our internal engineering resources. are managing these projects, but we have increased our utilization of external resources to complete certain projects. This strategy has allowed us to avoid hiring excess engineers who will not be required after completion of the projects. We employed a total of 2030 engineers at December 31, 2012,2013, most of whom are dedicated to research and development activities for new products.products compared to 20 engineers at December 31, 2012. Research and development expenses as a percentage of total revenues were 14%21% in 20122013 and 14% in 2011,2012, illustrating our continuing commitment to bring new products to market and expanding our current product line. We have active researchlaunched the FirstVu HD during June 2013 and development projects on several new products, as well as upgrades to our existing product lines. Wethe DVM-800 during December 2013 and anticipate launching at least twoother new products during 2013,2014, including some ancillary products for the FirstVU HD, and UltraVU products,all of which are the results of our research and development efforts. We consider our research and development capabilities and new product focus to be a competitive advantage and will continue to invest in this area on a prudent basis.
Selling, advertising and promotional expenses.Selling, advertising and promotional expense totaled $2,587,427$2,699,884 and $2,232,831$2,587,427 for the years ended December 31, 20122013 and 2011,2012, respectively, an increase of $354,596 (16%$112,457 (4%). A large componentSalesman salaries and commissions represent the primary components of selling, promotionalthese costs and advertising expense was commissions paid to our independent agents who represent our sales force in the domestic market. These agents generally received a commission on sales ranging from 5.0% to 12% of the gross sales price to the end customer. Sales commissions totaled $573,863were $2,237,989 and $1,930,779$2,069,087 for the years ended December 31, 2013 and 2012, respectively, an increase of $168,902 (8%). The overall effective commission rate was 12.6% and 2011,11.7% for the years ended December 31, 2013 and 2012, respectively, a decreasean increase of $1,356,916 (70%), Sales commissions as a percentage of overall sales decreased0.9%.
Promotional and advertising expenses totaled $461,895 during the year ended December 31, 2013 compared to 3.3%$518,340 during the year ended December 31, 2012, compareda decrease of $56,445 (11%). The decrease is primarily attributable to 9.9%reduced media advertising in trade publications for the year ended December 31, 2011. The decrease in our overall sales commissions as a percentage of sales reflects the results of our sales force reorganization initiative that is intended2013 compared to improve our revenues.
Professional fees and expense. Professional fees and expenses totaled $657,818 $603,375 and $740,894 $657,818 for the years ended December 31, 20122013 and 2011,2012, respectively, a decrease of $83,076 (11%$54,443 (8%). Professional fees during 20122013 were related primarily to normal public company matters, (including the reverse stock split), intellectual property matters and litigation matters. The decrease in professional fees and expenses in the year ended December 31, 2013 compared to 2012 is primarily attributable to lower litigation expenses and the Company’s cost containment measures coupled with the settlement of certain litigation. In addition, professional fees associated with the litigation against a former contract manufacturer and Z3 have been classified separately as “Litigation charge and related expenses” in the Statement of Operations for year ended December 31, 2012. We expect increased legal fees regarding several patents and trademarks that have been or may be filed on our new products and litigation expense in 2013.measures.
Executive, sales and administrative staff payroll.Executive, sales and administrative staff payroll expenses totaled $2,119,921 and $2,990,808 $2,058,839 and $2,119,921 for the years ended December 31, 20122013 and 2011,2012, respectively, a decrease of $870,887 (29%$61,082 (3%). This decrease is primarily attributable to approximately $100,000savings associated with the resignation of severance costs we incurred in first quarter 2011 as part of the cost containment initiative that did not recur in the twelve months ended December 31, 2012. In January 2012, the Vice President of Marketing retired and the Vice President of Corporate Development resigned and their responsibilities were assumed by the executive officers for a savings of approximately $350,000 for the twelve months ended December 31, 2012. In June 2012, the Vice President of Engineering resignedin June 2012 and his responsibilities werebeing assumed by other engineering management for a savings of approximately $90,000 for the twelve months ended December 31, 2012. In addition,(approximately $90,000). During 2012 we reduced the number of our sales support staff during 2012 in connection with the restructuring of our sales and marketing organization. Management anticipates the reductionHowever, in executive, sales and administrative payroll will continue during 2013 as the full benefit of the headcount reductions is realized. However, such reductions may be offset partially because we may find it necessary to hirehired additional technical support staff in 2013 to handle field inquiries, aswireless download and installation matters because our installed customer base continues to increasehas expanded and additional technical support iswas required for our new products, such as the FirstVU HD, UltraVU, DVM-250, DVM-400, DVM-100 and DVM-100.FirstVU HD.
Litigation charge (credit) and related expenses. Litigation charges and expenses totaled $313,950 $208,316 and $-0- $313,950 for the years ended December 31, 2013 and 2012, and 2011, respectively, an increasea decrease of $313,950 (100%$105,634 (34%). On June 5, 2013, the Company filed a lawsuit against Dragoneye, one of its domestic vendors. See “Legal Proceedings” for more details on the lawsuit. Dragoneye was granted a request to move the lawsuit to the United States District Court and has filed its answer to the complaint. On October 17, 2013, the court denied the Company’s request for temporary, preliminary and permanent injunction. The lawsuit is in the discovery phase. Management has reviewed the status of the case with Company counsel and determined it was appropriate to accrue a loss of $208,316 at December 31, 2013.
The trial against a former contract manufacturer began on September 24, 2012 and the parties agreed to a settle the lawsuit on September 25, 2012. The insurance company involved agreed to pay $610,000 to settle the litigation. Legal fees incurred for defense of the lawsuit were offset against the proceeds and the net settlement for this lawsuit was $(466,400) at December 31, 2012.
The Z3 trial began on June 25, 2012 and concluded with a jury verdict on July 3, 2012 that resulted in a net judgment against us in the amount of $85,000. Further, despite our arguments at trial, the court also refused to reconsider the interlocutory summary judgment rulings rendered against us prior to trial in the amount of $445,000 which became final upon conclusion of the trial. Accordingly, the total judgment entered against us was $530,000. We believe there were a number of errors in the court'scourt’s rulings and the judgment entered on July 3, 2012 and are appealing them. We incurred $79,316 and $250,350 of additional legal fees during the yearyears ended December 31, 2013 and 2012, respectively, to defend the Z3 lawsuit, which included the accrual of legal fees expected during the appeal process.process.
Other. Other selling, general and administrative expenses totaled $2,439,172 $2,413,884 and $2,819,004 $2,439,172 for the years ended December 31, 20122013 and 2011,2012, respectively, a decrease of $379,832 (14%$25,288 (1%). The decrease in 2012 was attributable to our cost containment measures that generally reduced the cost of information technology, telephone and internet services as we negotiated better contracts rates or moved to new service providers. We plan to continue our cost containment initiatives in 20132014 and expect that other selling, general and administrative costs will continue to decline in 2013.2014.
For the reasons previously stated, our operating loss was $1,686,518$2,250,442 and $3,624,801$1,686,518 for the years ended December 31, 2013 and 2012, and 2011, respectively, an improvementa deterioration of $1,938,283 (54%$563,924 (33%). Operating loss as a percentage of revenues decreasedincreased to 13% in 2013 from 10% in 2012 compared to 18% in 2011.
Interest Income
Interest income decreasedincreased to $10,088$11,390 in the year ended December 31, 20122013 from $16,108$10,088 in 2011. The decrease in interest2012.
Other Income
Other income was a result of our decreased average cash balances and lower average interest rates earned on such balances duringincreased to $19,073 for the year ended December 31, 2012 compared3013 from $-0- in 2012. The increase is attributable to 2011.
Interest Expense
We incurred interest expense of $294,559$277,961 and $222,460$294,559 during the years ended December 31, 20122013 and 2011,2012, respectively. We issued a NoteNotes in the principal amount of $1.5$2.5 million during second quarter 2011 that remained outstanding during the proceeds of which were used to repay the outstanding line of credit. We issued another Note in the principal amount of $1.0 million in fourth quarter 20112013 and extended the maturity date of the first Note such that both Notes are due and payable in full on May 30, 2013. In July 2012 weperiods. The extended the maturity dates of the Notes from May 2013 tois May 30, 2014.2015. The outstanding principal balance on our Notes was $2.5 million as of December 30, 2012,31, 2013, less the unamortized discount of $96,378.
During November 2011, we extended the maturity date of the $1.5 million Note issued in May 2011 and issued a second Note for $1.0 million under the same terms. The modification of the original Note payable was treated as an early extinguishment of the debt. Accordingly, the remaining unamortized discount as of the date of modification ($131,093), was charged off and reflected as a loss on extinguishment of debt in the Statement of Operations. The Note was restructured again in July 2012 and it was determined this modification was not an early extinguishment of debt and the remaining unamortized discount of the note payable will be amortized to interest expense ratably over the modified terms of the Notes.
As a result of the above, we reported a loss before income tax benefit of $1,970,989$2,497,940 and $3,962,246$1,970,989 for the years ended December 31, 2013 and 2012, and 2011, respectively, an improvementa deterioration of $1,991,257 (50%$526,951 (27%).
Income Tax Benefit
We recorded no income tax benefit related to our losses for the years ended December 31, 20122013 and 2011,2012, respectively, due to our decision to continue providing a full valuation reserve on our net deferred tax assets as of December 31, 20122013 and 2011,2012, respectively. During 2012,2013, we increased our valuation reserve on deferred tax assets by $565,000$1,575,000 whereby our deferred tax assets continue to be fully reserved due to our recent operating losses. We had approximately $7,800,000$10,100,000 of net operating loss carryforwards and $1,083,000$1,306,000 of research and development tax credit carryforwards as of December 31, 20122013 available to offset future net taxable income.
Net Loss
As a result of the above, for the years ended December 31, 20122013 and 2011,2012, we reported net losses of $2,497,940 and $1,970,989 for the years ended December 31, 2013 and $3,962,246,2012, respectively, an improvementa deterioration of $1,991,257 (50%$526,951 (27%).
Basic and Diluted Loss per Share
The basic and diluted loss per share was $0.97$1.17 and $1.96$0.97 for the years ended December 31, 20122013 and 2011,2012, respectively, for the reasons previously noted. All outstanding stock options were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the years ended December 31, 20122013 and 20112012 because of the net loss reported for each period.
Overall:On May 31,During 2011, we borrowed $1.5a total of $2.5 million under an unsecured credit facility (“Notes”) with a private, third-party lender. On November 7, 2011, we borrowed an additional $1.0 million under an unsecured credit facility with the same private, third party lender. The loans are represented by two promissory notes (the "Notes") that bear interest at the rate of 8% per annum and are payable interest only on a monthly basis. The Notes are subordinated to all existing and future senior indebtedness; as such term is defined in the Notes. On July 24, 2012,December 4, 2013, we entered into an agreement with the lender that extended the maturity dates of both of the Notes from May 30, 20132014 to May 30, 2014.2015.
The existing Notes are unsecured and do not prevent us from obtaining new senior secured financings. We may seek additional credit facilities to complement the Notes and provide us with funding should the need arise to finance growth or other expenditures.
We had over $700,000$450,000 of available cash and equivalents and net working capital of approximately $8.9$7.9 million as of December 31, 2012.2013. Net working capital as of December 31, 20122013 includes approximately $3.0$1.8 million of accounts receivable and $7.3$8.0 million of inventory. Management believes that it can achieve reducedreduce inventory levels into 2013in 2014 to provide funding for operations; however no assurances can be given in that regard.
On March 24, 2014, the Company completed a private placement of $2.0 aggregate principal amount of Senior Secured Convertible Notes (the “Notes”). The Notes bear interest at 6% payable quarterly and are secured by all assets of the Company. Principal payments are not consider raising capitalrequired until the sixth month after origination and continue ratably for the remaining 24-month term of the Notes. The principal and interest payments can be made through the payment of cash or in-kind by transferring unrestricted and fully registered shares in an equity offeringamount equivalent to be80% of the volume weighted average trading price for the 20 consecutive trading days preceding the payment date. The Notes are convertible to common shares at the holder’s option at a viable alternativeconversion price of $8.55 per share at any time the Notes are outstanding. In addition, the Company may force conversion if the market price of the Company’s common stock exceeds $17.10 per share for 20 consecutive trading days. The Company issued warrants to supplementpurchase 100,000 shares of common stock (the “Warrants”) at $10.00 per share which are exercisable immediately and expire March 24, 2019. The Notes and Warrants contain anti-dilution provisions and restrict the incurrence of additional secured indebtedness. The Company will pay a placement agent fee of $120,000 and will reimburse all third-party costs of the transaction, including legal fees, not to exceed $50,000. The Company intends to use the net proceeds of this facility for general working capital needs, given our current public equity valuation. However, we may find itpurposes. We believe the funds generated by this credit facility will provide the working capital necessary to raise additional capital if we do not regain profitability during 2013, are unable to improve liquidity through a reduction in our inventory and accounts receivable levels in the near term, add to our existing credit facilities, and do not have other means to support our planned operating activities. Our ability to obtain such capital, if required, could have a material adverse impact on our business, operations and financial condition, including our ability to continue operating as a going concern. Further such capital, if available, most likely would not be on terms favorable to us and our shareholders.
Cash and cash equivalents balances: As of December 31, 2012,2013, we had cash and cash equivalents with an aggregate balance of $703,172,$454,978, a decrease from a balance of $2,270,393$703,172 at December 31, 2011.2012. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $1,567,221$248,194 net decrease in cash during the year ended December 31, 2012:2013:
● | Operating activities: | $ | |
| Investing activities: | $ | |
| ● | Financing activities: | $ |
The net result of these activities was a decrease in cash of $1,567,221$248,194 to $703,172$454,978 for the year ended December 31, 2012.
Commitments:
We had $703,172$454,978 of cash and cash equivalent balances and net positive working capital approximating $8.9$7.9 million as of December 31, 2012.2013. Accounts receivable balances represented $2,956,654$1,835,780 of our net working capital at December 31, 2012.2013. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2013,2014, which would help to provide positive cash flow to support our operations during 2013.2014. Inventory represented $7,294,721$8,046,471 of our net working capital at December 31, 20122013 and finished goods represented $5,050,572$6,097,254 of total inventory. We expect that finished goods will be converted to cash when customer orders are received and shipments occur during 2013.2014. We are actively managing the overall level of inventory and believe that such levels will be reduced during 20132014 by our sales activities, which should provide additional cash flow to help support our operations during 2013.
Capital Expenditures. We had no material commitments for capital expenditures to various contractors who provided leasehold improvements, furniture and equipment for our new facility that we moved to in late 2012. Such commitments for capital expenditures totaled $306,975 at December 31, 2012.2013.
Lease commitments-Operating LeasesLeases.. We have severala non-cancelable long-term operating lease agreementsagreement for office space and warehouse space that expire at various dates throughexpires during April 2020. In September 2012, the Company entered into a non-cancelable long-term facility lease to combine all of their operations into one location effective November 2012. We have also entered into month-to-month leases for equipment and facilities. Rent expense for the years ended December 31, 2013 and 2012 was $398,624 and 2011 was $405,234, and $383,530, respectively, related to these leases. We paid a security depositFollowing are our minimum lease payments for each year and in conjunction with the new facility lease in September 2012 in the amount of $116,888. As reflected in the table below, we have a rent holiday and discounted rent for the first 12 months of the new facility lease, which was effective November 1, 2012.total.
Year ending December 31: | ||||
2014 | $ | 428,505 | ||
2015 | 433,965 | |||
2016 | 439,707 | |||
2017 | 445,449 | |||
2018 | 451,248 | |||
Thereafter | 611,458 | |||
$ | 2,810,332 |
Year ending December 31: | ||||
2013 | $ | 172,595 | ||
2014 | 428,505 | |||
2015 | 433,965 | |||
2016 | 439,707 | |||
2017 and thereafter | 1,508,155 | |||
$ | 2,982,927 |
License agreements.We have several license agreements whereby we have been assigned the rights to certain licensed materials used in itsour products. Certain of these agreements require us 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 $35,785$36,645 and $19,909$35,785 for the years ended December 31, 2013 and 2012, and 2011, respectively.
Following is a summary of our licenses as of December 31, 2012:
License Type | Effective Date | Expiration Date | Terms | |||
Production software license agreement | April 2005 | April | Automatically renews for | |||
Software sublicense agreement | October 2007 | October | Automatically renews for | |||
Supply and distribution agreement.We entered into a supply and distribution agreement with Dragoneye on May 1, 2010 under which we were granted the exclusive worldwide right to sell and distribute a proprietary law enforcement speed measurement device and derivatives to itsour customers. The term of the agreement was 42 months after the date the supplierDragoneye began full scale production of the product, which commenced in August 2010 and final certification of the product was obtained. The agreement had minimum purchase requirements of 1,000 units per period over three commitment periods. On January 31, 2012, the parties amended the supply and distribution agreement was amended to reduce the minimum purchase commitmentscommitment over the second and third years by 52% fromas compared to the original commitment. We also agreed to terminaterelease our world wideworld-wide right to exclusively market the productsproduct to the law enforcement community in exchange for the reduction in the purchase commitment.
The agreement contains requiredrequires minimum order quantities and fixed prices per unit accordingthat represent a remaining commitment to the following schedule:
Minimum order commitment amount ($) | ||||||||||||
Commitment time period | Commitment | Purchases | Remaining Commitment | |||||||||
March 2012 through February 2013 | $ | 846,240 | $ | 705,200 | $ | 141,040 | ||||||
March 2012 through February 2014 | 846,240 | — | 846,240 | |||||||||
$ | 1,692,480 | $ | 705,200 | $ | 987,280 |
We filed a lawsuit on June 15, 2013 against Dragoneye for breaching the contract. See “Legal Proceedings.” We discontinued purchases of additional units as of that date.
Litigation.
On June 8, 2009, we filed suit against Z3Z3Technologies, LLC (“Z3”) in the U.S. District Court for the District of Kansas claiming breach of a production software license agreement entered into during October 2008 and the rescission of a second limited license agreement entered into during January 2009. Among other claims, we asserted that Z3 failed to deliver the material required under the contracts; that the product that was delivered by Z3 was defective and/or unusable; and that the January 2009 contract should be rescinded and declared void, unenforceable and of no force or effect. We paid license fees and made other payments to Z3 totaling $265,000 to-dateto date under these contracts. Z3 denied our claims and filed counterclaims that allege we did not have the right to terminate the contracts and therefore that it was damaged for loss of profits and related damages. In those counterclaims, Z3 sought to recover approximately $4.5 million from us exclusive of “prejudgment interest”.interest.” Our insurance carrier settled a portion of the counterclaims under our director and officer liability insurance policy. The counterclaims that were not resolved by that settlement remained in controversy.
The trial of those claims began on June 25, 2012 and concluded with a jury verdict on July 3, 2012. The principal parts of the verdict were (i) an award of $30,000 to us on grounds that Z3 had breached its 2008 contract with us; (ii) an award of $15,000 in favor of Z3 by finding that we had breached the 2008 contract by failing to pay the balance of certain engineering fees; and (iii) an award of $100,000 in favor of Z3 based on the Court’s finding that we breached the 2009 contract by failing to place an initial order for so-called “DM-365 modules” from Z3. As a result, the net judgment against us was $85,000. Further, despite our arguments at trial, the court also refused to reconsider the interlocutory summary judgment rulings rendered against us prior to trial in the amount of $445,000, which became final upon conclusion of the trial. Accordingly, the total judgment entered against us was $530,000 and no prejudgment interest on that sum was awarded.
We believe there are a number of errors in the court’s rulings and the judgment entered on July 3, 2012 and are appealing them. We accrued the $530,000 judgment entered against us as a long termlong-term liability as of December 31, 2012June 30, 2013 due to the expected time required to conclude the appeal process. We have charged $780,350 to operations during the twelve months ended December 31, 2012 as litigation charge and related expenses. Such charges include the $530,000 judgment and all related legal fees and expenses incurred and accrued during the twelve months ended December 31, 2012. We have also accrued the legal fees expected to be incurred during the appeal process. In order to stay the execution of judgment during the appeal process, we were required to post a bond in the amount of $662,500 in July 2012 and the respective funds will be reflected as restricted cash in future balance sheets until such time as the bond is no longer required.
On June 5, 2013, we filed a lawsuit in the District Court of Johnson County, Kansas against Dragoneye, one of its domestic vendors. We had entered into a supply and distribution agreement with Dragoneye on May 1, 2010 under which we were granted the right to sell and distribute a proprietary law enforcement speed measurement device and derivatives to our customers under the trade name LaserAlly. The parties amended the agreement on January 31, 2012. In our complaint we allege that Dragoneye breached the contract because it failed to maintain as confidential information our customer list; it infringed on our trademarks, including LaserAlly and Digital Ally; it tortiously interfered with our existing contracts and business relationships with our dealers, distributors, customers and trading partners; and it engaged in unfair competition and the Kansas Uniform Trade Secrets Statutes. We are seeking the court to award damages related to the alleged actions of Dragoneye and to declare the supply and distribution agreement terminated and cancelled. Finally, we sought temporary, preliminary and permanent injunction to prohibit Dragoneye from using or disclosing any of our trade secrets and trademarks together with reasonable attorneys’ fees, costs and expenses we incur as a result of this action. On October 23, 2009,17, 2013 the Circuitcourt denied our request for this injunction.
Dragoneye was granted a request to remove the lawsuit from the District Court of JacksonJohnson County, Missouri awardedKansas State court and it is now in United States District Court for the District of Kansas. Dragoneye filed its answer to the complaint which denies the allegations and has asserted counter claims against us for alleged breach of the contract. The lawsuit is in the discovery phase. Management has reviewed the status of the case with Company an interlocutory judgmentcounsel and determined it was appropriate to accrue a loss of $208,316 at December 31, 2013.
On June 18, 2013, we filed a lawsuit as the plaintiff in the United States District Court for the District of Kansas against BCM Electronics Corp. SDN BHD (“BCM”), which is one of our foreign vendors. We requested the court to award damages related to the alleged breach of contract regarding the failure of BCM to provide the component parts required under two purchase orders (“PO’s”). We also asked the court to declare the two PO’s cancelled and terminated as a former contract manufacturer. The Company had filed for and receivedresult of BCM’s failure to perform. Finally, we requested a temporary, restraining order in June 2009 that forbids the supplierpreliminary and permanent injunction to prohibit BCM from engaging in certain actions involving the Company.using or disclosing any of our trade secrets together with reasonable attorneys’ fees, costs and expenses incurred as a result of this action. The interlocutory judgment was entered in favor of the Company against the supplier that in effect cancelled all purchase orders and confirmed that the Company has no further obligations, whether monetary or otherwise, to the supplier. The Company received a notice of the filing of bankruptcy under Chapter 7 effective October 26, 2009 by this supplier. In the bankruptcy court the Company sought and received relief from the automatic stay in order to liquidate and obtain a final judgment against the Supplier. On May 28, 2010, the court grantedissued a default judgment awardingagainst BCM on August 23, 2013 totaling $255,000 and as a result, we cancelled the Company damagesopen payables we had with BCM (approximately $59,000) in the third quarter 2013. We have not accrued any other amounts related to the default judgment due to the uncertainty of collection. Any recovery will be recorded as income if and legal fees totaling $11,166,686.
On October 25, 2013, we filed a garnishment claim against all insurance proceeds from policies issued andcomplaint in force covering the supplier when these actions occurred. The trial relatingUnited States District Court for the District of Kansas to this claim commenced on September 24, 2012. The parties agreed to settleeliminate threats by a competitor, Utility Associates, Inc. (“Utility”), of alleged patent infringement regarding U.S. Patent No. 6,831,556 (the “556 patent”). Specifically, the lawsuit on September 25, 2012. The insurance company involved agreedseeks a declaration that our mobile video surveillance systems do not infringe any claim of the 556 patent. In addition, we will be take steps to pay $610,000invalidate the 556 patent through appropriate procedures at the United States Patent and Trademark Office. We became aware that Utility had recently mailed letters to settlecurrent and prospective purchasers of our mobile video surveillance systems threatening that the litigation relatinguse of such systems purchased from third parties not licensed to the garnishment claim556 patent would create liability for them for patent infringement. We reject Utility’s assertion and will vigorously defend the Company received the payment on October 16, 2012. The Company recorded the $610,000 settlement in litigation charge (credit) and related expenses and all legal fees incurred for the lawsuit were offset against the settlement asright of December 31, 2012. The net amount included in litigation charge (credit) and related expenses at December 31, 2012 for this lawsuit were $(466,400).
We are also involved as a plaintiff and defendant in ordinary, routine litigation and administrative proceedings incidental to its business from time to time, including customer collections, vendor and employment-related matters. Management believes the likely outcome of any other pending cases and proceedings will not be material to its business or its financial condition.
401 (k) Plan.We sponsor a 401(k) retirement savings plan for the benefit of our employees. The plan, as amended, requires us 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. We made matching contributions totaling $108,312$125,190 and $121,745$108,312 for the years ended December 31, 20112013 and 2010,2012, respectively. Each participant is 100% vested at all times in employee and employer matching contributions.
Stock Repurchase Program. During June 2008, our Board of Directors approved a program that authorized the repurchase of up to $10 million of our common stock in the open market, or in privately negotiated transactions, through July 1, 2010. Our Board of Directors approved an extension of this program to July 1, 2012, which terminated at such point. We made no purchases under this program during the years ended December 31, 2012 and 2011. The Company has repurchased 63,518 shares at a total cost of $2,157,226 (average cost of $33.96 per share) under this program from inception to December 31, 2012.
Our significant accounting policies are summarized in note 1 to our consolidated financial statements included in Item 1, “Financial Statements”,Statements,” of this report. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions:
● | Revenue Recognition/ Allowance for Doubtful Accounts; |
● | Allowance for Excess and Obsolete Inventory; |
● | Warranty Reserves; |
● | Stock-based Compensation Expense; and |
● | Accounting for Income Taxes. |
Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all four of the following conditions are met:
(i) | Persuasive evidence of an arrangement exists; |
(ii) | Delivery has occurred; |
(iii) | The price is fixed or determinable; and |
(iv) | Collectability is reasonably assured. |
We review all significant, unusual or nonstandard shipments of product or delivery of services as a routine part of our accounting and financial reporting process to determine compliance with these requirements.
Our principal customers are state, local and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we do have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible with less than $130,000$132,000 charged off as uncollectible on cumulative revenues of $144.9$148.4 million since we commenced deliveries during 2006. As of December 31, 20122013 and December 31, 2011,2012, we recorded a reserve for doubtful accounts of $55,033 and $70,193, and $110,000, respectively.
We periodically perform a specific review of significant individual receivables outstanding for risk of loss due to uncollectibility. Based on our specific review, we consider our reserve for doubtful accounts to be adequate as of December 31, 2012.2013. However, shouldif the balance due from any significant customer ultimately becomebecomes uncollectible, then our allowance for bad debts will not be sufficient to cover the charge-off and we will be required to record additional bad debt expense in our statement of operations.
Allowance for Excess and Obsolete Inventory.We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost.
Inventories consisted of the following at December 31, 20122013 and December 31, 2011:
December 31, 2012 | December 31, 2011 | |||||||
Raw material and component parts | $ | 2,475,857 | $ | 2,168,761 | ||||
Work-in-process | 145,622 | 217,264 | ||||||
Finished goods | 5,050,572 | 4,844,446 | ||||||
Subtotal | 7,672,051 | 7,230,471 | ||||||
Reserve for excess and obsolete inventory | (377,330 | ) | (547,182 | ) | ||||
Total | $ | 7,294,721 | $ | 6,683,289 |
December 31, 2013 | December 31, 2012 | |||||||
Raw material and component parts | $ | 2,204,216 | $ | 2,475,857 | ||||
Work-in-process | 5,714 | 145,622 | ||||||
Finished goods | 6,097,254 | 5,050,572 | ||||||
Subtotal | 8,307,184 | 7,672,051 | ||||||
Reserve for excess and obsolete inventory | (260,713 | ) | (377,330 | ) | ||||
Total | $ | 8,046,471 | $ | 7,294,721 |
We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk of inventory obsolescence due to changing technology and customer requirements. As reflected above, our inventory reserves represented 3.1% of the gross inventory balance at December 31, 2013, compared to 4.9% of the gross inventory balance at December 31, 2012, compared to 7.6% of the gross inventory balance at December 31, 2011.2012. Finished goods at December 31, 20122013 are composed primarily of the Laser Ally products, our new FirstVU HD, and the DVM-500Plus products, which will be used to fulfill international and domestic orders during 2013. Finished goods also included suppliesnormal levels of our newer products, including the FirstVU, DVM-250, DVM-400DVM-500 Plus and DVM-100DVM-750 products. Raw material inventory balances were less at December 31, 2012. Raw material and component part inventory balances were increased at December 31, 20122013 compared to December 31, 2011,2012, as we moved our assemblyrespective balances had ramped up during the consolidation of operations and warehousing to a new location in late November 2012. We experienced some2012 and have now returned to more expected delays in ramping up our assembly operations as a result of the move which lead to the increased levels in raw materials at December 31, 2012.levels. We believe that our obsolescence risk was less at December 31, 20122013 compared to December 31, 20112012 because our management team made a concerted effort in 2012 to scrap unusable parts from the older versions of our products. Therefore, previously reserved obsolete parts were disposed of during 20122013 and were applied to our reserve balance. We believe the reserves are appropriate given our inventory levels at December 31, 2012.
If actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established.
Warranty Reserves. We generally provide up to a two-year parts and labor warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. TheseWe established these estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were decreased to $167,970 as of December 31, 2013 compared to $173,385 as of December 31, 2012, compared to $211,421 as of December 31, 2011, which reflects the decreased number of units under warranty and the resolution of the wireless transfer module failures experienced in early 2012. Our new DVM-750 product failure rate has improved significantly during 20112012 and 2012,2013, which has contributed to the relatively stable level of warranty reserves. We haverecently introduced several new products, including the FirstVU Laser Ally, DVM-100, DVM-400, DVM-250HD and Thermal Ally,DVM-800, for which we have limited exposure since the third party manufacturers of these products are responsibleexperience and will monitor our reserve for all warranty claims. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products.products and our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.
28 |
Stock-based Compensation Expense.We grant stock options to our employees and directors and such benefits provided are share-based payment awards, which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock which are obtained from public data sources. We granted 141,375 40,000 options during the year ended December 31, 2012.2013. The assumptions used for determining the grant-date fair value of options granted during the year ended December 31, 20122013 are reflected in the following table:
Year ended December 31, | ||||
Expected term of the options in years | 2-5 years | |||
Expected volatility of Company stock | ||||
Expected dividends | None | |||
Expected forfeiture rate |
If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect our estimates of fair values of our share-based compensation. Certain share-based payment awards, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
In addition, we are required to net estimated forfeitures against compensation expense. This requires us to estimate the number of awards that will be forfeited prior to vesting. If actual forfeitures in future periods are different than our initial estimate, the compensation expense that we ultimately record may differ significantly from what was originally estimated. The estimated forfeiture rate for unvested options outstanding as of December 31, 20122013 range from 5%0% to 75%10%.
As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2011,2012, cumulative valuation allowances in the amount of $5,830,000$6,395,000 were recorded in connection with the net deferred income tax assets. Based on a review of our deferred tax assets and recent operating performance,
As required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We have no recorded liability as of December 31, 20122013 representing uncertain tax positions.
We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year. We do not believe that our business is seasonal in nature however; generally we generate higher revenues during the second half of the calendar year compared to the first half.
ITEMItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
ITEMItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Financial Statements and Supplementary Data.
The financial statements of the Company are included as an exhibit to this annual report on Form 10-K commencing on page F-1.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on their evaluation as of December 31, 2012,2013, the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Annual Report, were recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms, and was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
● | Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the filing of this annual report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.2013. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission inInternal Control—Integrated Framework. Based on our assessment using those criteria, management believes that, as of December 31, 2012,2013, our internal control over financial reporting is effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the year ended December 31, 2012,2013, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Information with respect to our directors and executive officers, is incorporated herein by reference to our definitive proxy statement, to be filed no later than 120 days after December 31, 20122013 (our 20132014 Proxy Statement).
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference to our 20132014 Proxy Statement.
Information with respect to our code of business conduct and ethics is incorporated herein by reference to our 20132014 Proxy Statement.
Information with respect to our corporate governance disclosures is incorporated herein by reference to our 20132014 Proxy Statement.
ITEMItem 11. EXECUTIVE COMPENSATION. Executive Compensation.
Information with respect to the compensation of our executive officers and our directors is incorporated herein by reference to our 20132014 Proxy Statement.
ITEMItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners and management and related stockholder matters, is incorporated herein by reference to our 20132014 Proxy Statement.
ITEMItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.Certain Relationships and Related Transactions, and Director Independence.
Information with respect to certain relationships and related transactions, and director independence is incorporated herein by reference to our 20132014 Proxy Statement.
ITEMItem 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.Principal Accounting Fees and Services.
Information with respect to the fees paid to and services provided by our principal accountants is incorporated herein by reference to our 20132014 Proxy Statement.
(a) The following documents are filed as part of this annual report on Form 10-K:
The consolidated financial statements required to be included in Part II, Item 8, Financial Statements and Supplementary Data, begin on Page F-1 and are submitted as a separate section of this annual report. | ||||||
2. | Financial Statement Schedules: | |||||
All schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes in this annual report. |
3. | Exhibits: |
Exhibit Number | Description | Incorporated by Reference to: | Filed Herewith | |||
2.1 | Plan of Merger among Vegas Petra, Inc., a Nevada corporation, and Digital Ally, Inc., a Nevada corporation, and its stockholders, dated November 30, 2004. | Exhibit 2.1 of the Company’s Form SB-2, filed October 16, 2006, No. 333-138025 (the “October 2006 Form SB-2). | ||||
3.1 | Amended and Restated Articles of Incorporation of Registrant, dated December 13, 2004. | Exhibit 3.1 of the October 2006 Form SB-2. | ||||
3.2 | Amended and Restated By-laws of Registrant. | Exhibit 3.2 of the October 2006 Form SB-2. | ||||
3.3 | Audit Committee Charter, dated September 22, 2005. | Exhibit 3.3 of the October 2006 Form SB-2. | ||||
3.4 | Compensation Committee Charter, dated September 22, 2005 | Exhibit 3.4 of the October 2006 Form SB-2. | ||||
3.5 | Nominating Committee Charter dated December 27, 2007. | Exhibit 3.5 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
3.6 | Corporate Governance Guidelines | Exhibit 99.1 of the Current Report on Form 8-K dated November 20, 2009. | ||||
3.7 | Nominating and Governance Charter, Amended and Restated as of February 25, 2010. | Exhibit 3.7 of the Annual Report on Form 10K for the Year ending December 31, 2009. | ||||
3.8 | Strategic Planning Committee Charter, dated June 28, 2009. | Exhibit 3.8 of the Annual Report on Form 10K for the Year ending December 31, 2009. | ||||
3.9 | Certificate of Change Pursuant to NRS 78.209 of Digital Ally, Inc. | Exhibit 3.1 to Form 8-K filed August 30, 2012. | ||||
4.1 | Form of Common Stock Certificate. | Exhibit 4.1 of the October 2006 Form SB-2. | ||||
4.2 | Form of Common Stock Purchase Warrant. | Exhibit 4.2 of the October 2006 Form SB-2. |
5.1 | Opinion of Quarles & Brady LLP as to the legality of securities being registered (includes consent). | Exhibit 5.1 of the October 2006 Form SB-2. | ||||
10.1 | 2005 Stock Option and Restricted Stock Plan. | Exhibit 10.1 of the October 2006 Form SB-2. | ||||
10.2 | 2006 Stock Option and Restricted Stock Plan. | Exhibit 10.2 of the October 2006 Form SB-2. | ||||
10.3 | Form of Stock Option Agreement (ISO and Non-Qualified) 2005 Stock Option Plan. | Exhibit 10.3 of the October 2006 Form SB-2. | ||||
10.4 | Form of Stock Option Agreement (ISO and Non-Qualified) 2006 Stock Option Plan. | Exhibit 10.4 of the October 2006 Form SB-2. | ||||
10.5 | Promissory Note Extension between Registrant and Acme Resources, LLC, dated May 4, 2006, in the principal amount of $500,000. | Exhibit 10.5 of the October 2006 Form SB-2. | ||||
10.6 | Promissory Note between Registrant and Acme Resources, LLC, dated September 1, 2004, in the principal amount of $500,000. | Exhibit 10.6 of the Company’s Amendment No. 1 to Form SB-2, filed January 31, 2007, No. 333-138025 (“Amendment No. 1 to Form SB-2”) | ||||
10.7 | Promissory Note Extension between Registrant and Acme Resources, LLC, dated October 31, 2006. | Exhibit 10.7 of Amendment No. 1 to Form SB-2. | ||||
10.8 | Software License Agreement with Ingenient Technologies, Inc., dated March 15, 2004.* | Exhibit 10.8 of Amendment No. 1 to Form SB-2. | ||||
10.9 | Software License Agreement with Ingenient Technologies, Inc., dated April 5, 2005.* | Exhibit 10.9 of Amendment No. 1 to Form SB-2. | ||||
10.10 | Stock Option Agreement with Daniels & Kaplan, P.C., dated September 25, 2006. | Exhibit 10.10 of Amendment No. 1 to Form SB-2. | ||||
10.11 | Memorandum of Understanding with Tri Square Communications (Hong Kong) Co., Ltd. dated November 29, 2005. | Exhibit 10.11 of Amendment No. 1 to Form SB-2. | ||||
10.12 | 2007 Stock Option and Restricted Stock Plan. | Exhibit 10.3 of the Company’s Form S-8, filed October 23, 2007, No. 333-146874. | ||||
10.13 | Form of Stock Option Agreement (ISO and Non-Qualified) 2007 Stock Option Plan. | Exhibit 10.13 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
10.14 | Amendment to 2007 Stock Option and Restricted Stock Plan. | Exhibit 10.14 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
10.15 | 2008 Stock Option and Restricted Stock Plan. | Exhibit 10.15 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
10.16 | Form of Stock Option Agreement (ISO and Non-Qualified) 2008 Stock Option Plan. | Exhibit 10.16 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
10.17 | Promissory Note with Enterprise Bank dated February 13, 2009. | Exhibit 10.17 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
10.18 | First Amendment to Promissory Note with Enterprise Bank dated February 13, 2009. | Exhibit 10.18 of the Annual Report on Form 10K for the Year ending December 31, 2008. | ||||
10.19 | First Amendment to Promissory Note with Enterprise Bank dated June 30, 2009. | Exhibit 10.19 of the Quarterly Report on Form 10Q for the Quarter ending June 30, 2008. | ||||
10.20 | Modification and Renewal of Promissory Note with Enterprise Bank dated February 1, 2010. | Exhibit 10.20 of the Annual Report on Form 10K for the Year ending December 31, 2009. | ||||
10.21 | Forms of Restricted Stock Agreement for 2005, 2006, 2007 and 2008 Stock Option and Restricted Stock Plans. | Exhibit 10.21 of the Annual Report on Form 10K for the Year ending December 31, 2009. | ||||
10.22 | Loan Modification or Renewal Agreement of Promissory Note with Enterprise Bank dated March 2, 2011. | Exhibit 10.22 of the Annual Report on Form 10K for the Year ending December 31, 2010. |
10.23 | 2011 Stock Option and Restricted Stock Plan | Exhibit 10.23 to Form 8-K filed June 1, 2011 | ||||
10.24 | Form of Stock Option Agreement for 2011 Stock Option and Restricted Stock Plan | Exhibit 10.24 to Form 8-K filed June 1, 2011 | ||||
10.25 | 8% Subordinated Promissory Note in principal amount of $1,500,000 | Exhibit 10.25 to Form 8-K filed June 3, 2011 |
10.26 | Common Stock Purchase Warrant | Exhibit 10.26 to Form 8-K filed June 3, 2011 | ||||
10.27 | 8% Subordinated Promissory Note in principal amount of $1,000,000 | Exhibit 10.27 to Form 8-K filed November 10, 2011 | ||||
10.28 | Common Stock Purchase Warrant | Exhibit 10.28 to Form 8-K filed November 10, 2011 | ||||
10.29 | Allonge to 8% Subordinated Promissory Note in principal amount of $1,000,000 | Exhibit 10.29 to Form 8-K filed November 10, 2011 | ||||
10.30 | Amendment to Common Stock Purchase Warrant | Exhibit 10.30 to Form 8-K filed November 10, 2011 | ||||
10.31 | Second Allonge to 8% Subordinated Note, dated July 24, 2012. | Exhibit 10.31 to Form 8-K filed July 30, 2012 | ||||
10.32 | Allonge to 8% Subordinated Note ($1.0 million) dated July 24, 2012. | Exhibit | ||||
10.33 | Second Amendment to Common Stock Purchase Warrants (300,000 shares) dated July 24, 2012. | Exhibit | ||||
10.34 | Amendment to Common Stock Purchase Warrants (150,000 shares) dated July 24, 2012. | Exhibit | ||||
10.35 | Third Allonge to 8% Subordinated Note, dated December 4, 2013. | Exhibit 10.35 to Form 8-K filed December 9, 2013 | ||||
10.36 | Second Allonge to 8% Subordinated Note ($1.0 million) dated December 4, 2013. | Exhibit 10.36 to Form 8-K filed December 9, 2013 | ||||
10.37 | Common Stock Purchase Warrant (40,000 shares), dated December 4, 2013 | Exhibit 10.37 to Form 8-K filed December 9, 2013 | ||||
10.38 | Purchase Agreement | Exhibit 10.38 to Form 8-K filed March 25, 2014 | ||||
10.39 | Registration Rights Agreement | Exhibit 10.39 to Form 8-K filed March 25, 2014 | ||||
10.40 | Form of Senior Secured Convertible Note. | Exhibit 10.40 to Form 8-K filed March 25, 2014 | ||||
10.41 | Form of Warrant to Purchase Common Stock. | Exhibit 10.41 to Form 8-K filed March 25, 2014 | ||||
10.42 | Pledge and Security Agreement | Exhibit 10.42 to Form 8-K filed March 25, 2014 | ||||
10.43 | Patent Assignment for Security | Exhibit 10.43 to Form 8-K filed March 25, 2014 | ||||
10.44 | Trademarks Assignment for Security | Exhibit 10.44 to Form 8-K filed March 25, 2014 | ||||
10.45 | Guaranty | Exhibit 10.45 to Form 8-K filed March 25, 2014 | ||||
10.46 | Deposit Account Control Agreement | Exhibit 10.46 to Form 8-K filed March 25, 2014 | ||||
10.47 | Form of Voting Agreement | Exhibit 10.47 to Form 8-K filed March 25, 2014 | ||||
10.48 | Form of Lock-Up Agreement | Exhibit 10.48 to Form 8-K filed March 25, 2014 | ||||
14.1 | Code of Ethics and Code of Conduct. | Exhibit 3.5 of the Annual Report on Form 10KSB for the Year ending December 31, 2007. | ||||
21.1 | Subsidiaries of Registrant | Exhibit 21.1 of the Annual Report on Form 10K for the Year ending December 31, 2009. | ||||
Consent of Grant Thornton LLP | X | |||||
23.2 | Consent of Quarles & Brady LLP (Included in 5.1 above) | Exhibit 5.1 of the October 2006 Form SB-2. | ||||
Power of Attorney. | X | |||||
Certificate of Stanton E. Ross, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | |||||
Certificate of Thomas J. Heckman, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | |||||
Certificate of Stanton E. Ross, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | |||||
Certificate of Thomas J. Heckman, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | |||||
99.1 | Audited Financial Statements of Digital Ally, Inc. as of and for the years ended December 31, | X | ||||
101.INS** | XBRL Instance Document. | |||||
101.SCH** | XBRL Taxonomy Extension Schema Document | |||||
101.CAL** | XBRL Taxonomy Calculation Linkbase Document. | |||||
101.LAB** | XBRL Taxonomy Labels Linkbase Document. | |||||
101.PRE** | XBRL Taxonomy Presentation Linkbase Document. |
* Information marked [*] has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. Omitted material for which confidential treatment has been granted has been filed separately with the Securities and Exchange Commission.
** The XBRL related information in Exhibit 101 to this annual report on Form 10-K shall not be deemed "filed"“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that Section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
34 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIGITAL ALLY, INC., | |||
a Nevada corporation | |||
By: | |||
Stanton E. Ross | |||
President and Chief Executive Officer |
Each person whose signature appears below authorizes Stanton E. Ross to execute in the name of each such person who is then an officer or director of the registrant, and to file, any amendments to this Annual Report on Form 10-K necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934 and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such Report as such attorney-in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature and Title | Date | |
/s/Stanton E. Ross | March 27, | |
Stanton E. Ross, Director and Chief Executive Officer | ||
/s/Leroy C. Richie | March 27, | |
Leroy C. Richie, Director | ||
/s/Elliot M. Kaplan | March 27, | |
Elliot M. Kaplan, Director | ||
/s/ Daniel F. Hutchins | March 27, | |
Daniel F. Hutchins, Director | ||
/s/ | March 27, | |
Stephen Gans, Director | ||
/ | March 27, | |
Thomas J. Heckman, Chief Financial Officer, Secretary, Treasurer and Principal Accounting Officer |
December 31, 2012 | December 31, 2011 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 703,172 | $ | 2,270,393 | ||||
Accounts receivable-trade, less allowance for doubtful accounts of $70,193 – 2012 and $125,000 – 2011 | 2,956,654 | 2,853,049 | ||||||
Accounts receivable-other | 71,148 | 104,318 | ||||||
Inventories | 7,294,721 | 6,683,289 | ||||||
Prepaid expenses | 258,642 | 302,318 | ||||||
Total current assets | 11,284,337 | 12,213,367 | ||||||
Furniture, fixtures and equipment | 4,392,880 | 4,073,713 | ||||||
Less accumulated depreciation and amortization | 3,454,087 | 3,212,827 | ||||||
938,793 | 860,886 | |||||||
Restricted cash | 662,500 | — | ||||||
Intangible assets, net | 217,660 | 226,802 | ||||||
Other assets | 241,446 | 97,854 | ||||||
Total assets | $ | 13,344,736 | $ | 13,398,909 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,520,207 | $ | 847,036 | ||||
Accrued expenses | 793,524 | 833,260 | ||||||
Capital lease obligation-current | 66,087 | — | ||||||
Income taxes payable | 6,717 | 21,046 | ||||||
Customer deposits | 1,878 | 31,899 | ||||||
Total current liabilities | 2,388,413 | 1,733,241 | ||||||
�� | ||||||||
Long-term liabilities: | ||||||||
Subordinated note payable-long-term, net of discount of $96,378 and $142,711 | 2,403,622 | 2,357,289 | ||||||
Litigation accrual-long term | 530,000 | — | ||||||
Capital lease obligation-long term | 120,988 | — | ||||||
Total long term liabilities | 3,054,610 | 2,357,289 | ||||||
Commitments and contingencies | ||||||||
Common stock, $0.001 par value; 9,375,000 shares authorized; shares issued: 2,099,082 – 2012 and 2,082,832 – 2011 | 2,099 | 2,083 | ||||||
Additional paid in capital | 23,304,401 | 22,740,094 | ||||||
Treasury stock, at cost (shares: 63,518 – 2012 and 63,518 - 2011) | (2,157,226 | ) | (2,157,226 | ) | ||||
Accumulated deficit | (13,247,561 | ) | (11,276,572 | ) | ||||
Total stockholders’ equity | 7,901,713 | 9,308,379 | ||||||
Total liabilities and stockholders’ equity | $ | 13,344,736 | $ | 13,398,909 |
Year ended December 31, | ||||||||
2012 | 2011 | |||||||
Product revenue | $ | 16,691,136 | $ | 18,858,656 | ||||
Other revenue | 926,972 | 718,497 | ||||||
Total revenue | 17,618,108 | 19,577,153 | ||||||
Cost of revenue | 8,136,121 | 10,805,223 | ||||||
Gross profit | 9,481,987 | 8,771,930 | ||||||
Selling, general and administrative expenses: | ||||||||
Research and development expense | 2,528,790 | 2,773,962 | ||||||
Selling, advertising and promotional expense | 2,587,427 | 2,232,831 | ||||||
Stock-based compensation expense | 521,427 | 839,232 | ||||||
Litigation charge and related expenses | 313,950 | — | ||||||
General and administrative expense | 5,216,911 | 6,550,706 | ||||||
Total selling, general and administrative expenses | 11,168,505 | 12,396,731 | ||||||
Operating loss | (1,686,518 | ) | (3,624,801 | ) | ||||
Interest income | 10,088 | 16,108 | ||||||
Interest expense | (294,559 | ) | (222,460 | ) | ||||
Loss on extinguishment of debt | — | (131,093 | ) | |||||
Loss before income tax expense | (1,970,989 | ) | (3,962,246 | ) | ||||
Income tax expense | — | — | ||||||
Net loss | $ | (1,970,989 | ) | $ | (3,962,246 | ) | ||
Net loss per share information: | ||||||||
Basic | $ | (0.97 | ) | $ | (1.96 | ) | ||
Diluted | $ | (0.97 | ) | $ | (1.96 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic | 2,029,109 | 2,018,979 | ||||||
Diluted | 2,029,109 | 2,018,979 |
Common Stock | Additional Paid In | |||||||||||||||||||||||
Shares | Amount | Capital | Treasury stock | Accumulated deficit | Total | |||||||||||||||||||
Balance, January 1, 2011 | 2,081,582 | $ | 2,082 | $ | 21,664,137 | $ | (2,157,226 | ) | $ | (7,314,326 | ) | $ | 12,194,667 | |||||||||||
Stock-based compensation | — | — | 839,232 | — | — | 839,232 | ||||||||||||||||||
Restricted common stock grant | 1,250 | 1 | (1 | ) | — | — | — | |||||||||||||||||
Issuance of common stock purchase warrants related to issuance of subordinated note payable | — | — | 236,726 | — | — | 236,726 | ||||||||||||||||||
Net loss | — | — | — | — | (3,962,246 | ) | (3,962,246 | ) | ||||||||||||||||
Balance, January 1, 2012 | 2,082,832 | 2,083 | 22,740,094 | (2,157,226 | ) | (11,276,572 | ) | 9,308,379 | ||||||||||||||||
Stock-based compensation | — | — | 521,427 | — | — | 521,427 | ||||||||||||||||||
Restricted common stock grant | 16,250 | 16 | (16 | ) | — | — | — | |||||||||||||||||
Issuance of common stock purchase warrants related to issuance of subordinated note payable | — | — | 38,052 | — | — | 38,052 | ||||||||||||||||||
Issuance of common stock purchase warrants related to consulting agreement | — | — | 4,844 | — | — | 4,844 | ||||||||||||||||||
Net loss | — | — | — | — | (1,970,989 | ) | (1,970,989 | ) | ||||||||||||||||
Balance, December 31, 2012 | 2,099,082 | $ | 2,099 | $ | 23,304,401 | $ | (2,157,226 | ) | $ | (13,247,561 | ) | $ | 7,901,713 |
2012 | 2011 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | (1,970,989 | ) | $ | (3,962,246 | ) | ||
Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||
Depreciation and amortization | 672,090 | 1,062,103 | ||||||
Stock based compensation | 521,427 | 839,232 | ||||||
Provision for inventory obsolescence | (169,852 | ) | (186,396 | ) | ||||
Provision for doubtful accounts receivable | (54,807 | ) | 15,000 | |||||
Loss on extinguishment of debt | — | 131,093 | ||||||
Change in assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable - trade | (48,798 | ) | 1,911,504 | |||||
Accounts receivable - other | 33,170 | 241,393 | ||||||
Inventories | (441,580 | ) | 3,041,829 | |||||
Prepaid expenses | 42,874 | 39,266 | ||||||
Other assets | (143,592 | ) | (6,721 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable | 673,171 | (2,309,997 | ) | |||||
Accrued expenses | (39,736 | ) | 104,781 | |||||
Litigation accrual | 530,000 | — | ||||||
Income taxes payable | (14,329 | ) | (4,579 | ) | ||||
Customer deposits | (30,021 | ) | 29,257 | |||||
Net cash provided by (used in) operating activities | (440,972 | ) | 945,519 | |||||
Cash Flows from Investing Activities: | ||||||||
Purchases of furniture, fixtures and equipment | (389,037 | ) | (120,978 | ) | ||||
Additions to intangible assets | (26,556 | ) | (30,123 | ) | ||||
Restricted cash for appealed litigation | (662,500 | ) | — | |||||
Net cash used in investing activities | (1,078,093 | ) | (151,101 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of subordinated note payable | — | 2,309,774 | ||||||
Proceeds from issuance of common stock purchase warrants | — | 190,226 | ||||||
Change in line of credit | — | (1,500,000 | ) | |||||
Deferred issuance costs for subordinated note payable | — | (147,500 | ) | |||||
Payments on capital lease obligation | (48,156 | ) | — | |||||
Net cash provided by (used in) financing activities | (48,156 | ) | 852,500 | |||||
Net increase (decrease) in cash and cash equivalents | (1,567,221 | ) | 1,646,918 | |||||
Cash and cash equivalents, beginning of period | 2,270,393 | 623,475 | ||||||
Cash and cash equivalents, end of period | $ | 703,172 | $ | 2,270,393 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash payments for interest | $ | 209,877 | $ | 112,036 | ||||
Cash payments for income taxes | $ | 9,150 | $ | 4,416 | ||||
Supplemental disclosures of non-cash investing and financing activities: | �� | |||||||
Issuance of common stock purchase warrants for issuance costs of subordinated notes payable | $ | 38,052 | $ | 46,500 | ||||
Issuance of common stock purchase warrants related to consulting agreement | $ | 4,844 | $ | — | ||||
Restricted common stock grant | $ | 16 | $ | 1 | ||||
Capital expenditures financed by capital lease obligations | $ | 234,933 | $ | — |
Year ended December 31, | ||||||||
2012 | 2011 | |||||||
Sales by geographic area: | ||||||||
United States of America | 16,587,042 | 17,548,562 | ||||||
Foreign | 1,031,066 | 2,028,591 | ||||||
$ | 17,618,108 | $ | 19,577,153 |
Year ended December 31, | ||||||||
Distributor/Agent | 2012 | 2011 | ||||||
Number 1 | $ | 1,697,412 | $ | 3,674,015 | ||||
Number 2 | $ | 1,186,197 | $ | 2,436,076 |
December 31, 2012 | December 31, 2011 | |||||||
Beginning balance | $ | 125,000 | $ | 110,000 | ||||
Provision for bad debts | — | 25,301 | ||||||
Charge-offs to allowance, net of recoveries | (54,807 | ) | (10,301 | ) | ||||
Ending balance | $ | 70,193 | $ | 125,000 |
December 31, 2012 | December 31, 2011 | |||||||
Raw material and component parts | $ | 2,475,857 | $ | 2,168,761 | ||||
Work-in-process | 145,622 | 217,264 | ||||||
Finished goods | 5,050,572 | 4,844,446 | ||||||
Subtotal | 7,672,051 | 7,230,471 | ||||||
Reserve for excess and obsolete inventory | (377,330 | ) | (547,182 | ) | ||||
Total | $ | 7,294,721 | $ | 6,683,289 |
Estimated Useful Life | December 31, 2012 | December 31, 2011 | |||||||
Office furniture, fixtures and equipment | 3-10 years | $ | 2,055,668 | $ | 1,753,859 | ||||
Warehouse and production equipment | 3-5 years | 1,249,382 | 1,367,342 | ||||||
Demonstration and tradeshow equipment | 2-5 years | 781,799 | 778,800 | ||||||
Leasehold improvements | 2-5 years | 209,556 | 88,196 | ||||||
Website development | 3 years | 11,178 | 11,178 | ||||||
Other equipment | 3 years | 85,297 | 74,338 | ||||||
Total cost | 4,392,880 | 4,073,713 | |||||||
Less: accumulated depreciation and amortization | (3,454,087 | ) | (3,212,827 | ) | |||||
Net furniture, fixtures and equipment | $ | 938,793 | $ | 860,886 |
December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Gross value | Accumulated amortization | Net carrying value | Gross value | Accumulated amortization | Net carrying value | |||||||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||
Licenses | $ | 255,000 | $ | 255,000 | $ | — | $ | 255,000 | $ | 230,536 | $ | 24,464 | ||||||||||||
Patents and Trademarks | 26,731 | 10,300 | 16,431 | 5,467 | 1,685 | 3,782 | ||||||||||||||||||
Unamortized intangible assets: | ||||||||||||||||||||||||
Patents and trademarks pending | 201,229 | — | 201,229 | 198,556 | — | 198,556 | ||||||||||||||||||
Total | $ | 482,960 | $ | 265,300 | $ | 217,660 | $ | 459,023 | $ | 232,221 | $ | 226,802 |
Year ending December 31: | ||||
2013 | $ | 8,910 | ||
2014 | 7,521 | |||
2015 | — | |||
2016 | — | |||
2017 and thereafter | — | |||
$ | 16,431 |
December 31, 2012 | December 31, 2011 | |||||||
Subordinated notes payable, at par | $ | 2,500,000 | $ | 2,500,000 | ||||
Unamortized discount | (96,378 | ) | (142,711 | ) | ||||
Total notes payable | 2,403,622 | 2,357,289 | ||||||
Less: Current Maturities of long-term debt | — | — | ||||||
Subordinated notes payable, long-term | $ | 2,403,622 | $ | 2,357,289 |
Year ending December 31: | ||||
2013 | $ | 80,529 | ||
2014 | 80,529 | |||
2015 | 48,520 | |||
2016 | — | |||
2017 and thereafter | — | |||
Total future minimum lease payments | 209,578 | |||
Less amount representing interest | 22,503 | |||
Present value of minimum lease payments | 187,075 | |||
Less current portion | 66,087 | |||
Capital lease obligations, less current portion | $ | 120,988 | ||
7 |
December 31, 2012 | ||||
Office furniture, fixtures and equipment | $ | 234,933 | ||
Less: accumulated amortization | (7,226 | ) | ||
Net furniture, fixtures and equipment | $ | 227,707 |
December 31, 2012 | December 31, 2011 | |||||||
Accrued warranty expense | $ | 173,385 | $ | 211,421 | ||||
Accrued sales commissions | 39,639 | 64,782 | ||||||
Accrued payroll and related fringes | 329,960 | 305,328 | ||||||
Accrued insurance | 60,149 | 61,355 | ||||||
Accrued rent | 66,287 | 7,222 | ||||||
Other | 124,104 | 183,152 | ||||||
$ | 793,524 | $ | 833,260 |
2012 | 2011 | |||||||
Beginning balance | $ | 211,421 | $ | 228,233 | ||||
Provision for warranty expense | 296,830 | 432,456 | ||||||
Charges applied to warranty reserve | (334,866 | ) | (449,268 | ) | ||||
Ending balance | $ | 173,385 | $ | 211,421 |
2012 | 2011 | |||||||
Current taxes: | ||||||||
Federal | $ | — | $ | — | ||||
State | — | — | ||||||
Total current taxes | — | — | ||||||
Deferred tax (provision) benefit | — | — | ||||||
Income tax (provision) benefit | $ | — | $ | — |
2012 | 2011 | |||||||
U.S. Statutory tax rate | 34.0 | % | 34.0 | % | ||||
State taxes, net of Federal benefit | 3.0 | % | 2.7 | % | ||||
State tax credits | 1.8 | % | 2.3 | % | ||||
Federal Research and development tax credits | 3.7 | % | 4.9 | % | ||||
Stock based compensation | (9.3 | )% | (11.1 | )% | ||||
Change in valuation reserve on deferred tax assets | (29.2 | )% | (36.5 | )% | ||||
Other, net | (4.0 | )% | 3.7 | % | ||||
Income tax (provision) benefit | (0.0 | )% | (0.0 | )% |
2012 | 2011 | |||||||
Deferred tax assets: | ||||||||
Stock-based compensation | $ | 1,270,000 | $ | 1,285,000 | ||||
Start-up costs | 165,000 | 165,000 | ||||||
Inventory reserves | 138,000 | 200,000 | ||||||
Uniform capitalization of inventory costs | — | 5,000 | ||||||
Allowance for doubtful accounts receivable | 25,000 | 45,000 | ||||||
Other reserves | 5,000 | 10,000 | ||||||
Equipment depreciation | 125,000 | — | ||||||
Accrued expenses | 313,000 | 140,000 | ||||||
Net operating loss carryforward | 2,850,000 | 2,570,000 | ||||||
Research and development tax credit carryforward | 1,085,000 | 1,010,000 | ||||||
Alternative minimum tax credit carryforward | 90,000 | 90,000 | ||||||
State jobs credit carryforward | 264,000 | 245,000 | ||||||
State research and development credit carryforward | 203,000 | 195,000 | ||||||
Other | 10,000 | — | ||||||
Total deferred tax assets | 6,543,000 | 5,960,000 | ||||||
Valuation reserve | (6,395,000 | ) | (5,830,000 | ) | ||||
Net deferred tax assets | 148,000 | 130,000 | ||||||
Deferred tax liabilities: | ||||||||
Domestic international sales company | (138,000 | ) | (105,000 | ) | ||||
State taxes | (10,000 | ) | (10,000 | ) | ||||
Equipment depreciation | — | (15,000 | ) | |||||
Net deferred tax assets (liability) | $ | — | $ | — | ||||
Net deferred tax asset (liability) are classified in our consolidated balance sheets as follows: | ||||||||
Current | $ | — | $ | — | ||||
Non-current | $ | — | $ | — |
Year ending December 31: | ||||
2013 | $ | 172,595 | ||
2014 | 428,505 | |||
2015 | 433,965 | |||
2016 | 439,707 | |||
2017 and thereafter | 1,508,155 | |||
$ | 2,982,927 |
Minimum order commitment amount ($) | ||||||||||||
Commitment time period | Commitment | Purchases | Remaining Commitment | |||||||||
March 2012 through February 2013 | $ | 846,240 | $ | 705,200 | $ | 141,040 | ||||||
March 2012 through February 2014 | 846,240 | — | 846,240 | |||||||||
$ | 1,692,480 | $ | 705,200 | $ | 987,280 |
Options | Shares | Weighted Average Exercise Price | ||||||
Outstanding at January 1, 2012 | 505,663 | $ | 20.72 | |||||
Granted | 141,375 | 3.83 | ||||||
Exercised | — | — | ||||||
Exercised and surrendered/cancelled (cashless exercise) | — | — | ||||||
Forfeited | (94,388 | ) | 12.05 | |||||
Outstanding at December 31, 2012 | 552,650 | $ | 17.87 | |||||
Exercisable at December 31, 2012 | 344,050 | $ | 23.70 | |||||
Weighted-average fair value for options granted during the period at fair value | 141,375 | $ | 1.32 |
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 $3.99 | 62,250 | 9.5 years | 9,125 | 9.4 years | |||||
$4.00 to $6.99 | 51,250 | 9.0 years | 625 | 8.9 years | |||||
$7.00 to $9.99 | 141,522 | 4.1 years | 116,715 | 3.1 years | |||||
$10.00 to $12.99 | 77,629 | 4.7 years | 70,623 | 4.5 years | |||||
$13.00 to $15.99 | 89,999 | 7.6 years | 21,187 | 6.9 years | |||||
$16.00 to $18.99 | 1,375 | 4.3 years | 1,375 | 4.3 years | |||||
$19.00 to $29.99 | 10,500 | 6.2 years | 6,275 | 5.8 years | |||||
$30.00 to $55.00 | 118,125 | 4.9 years | 118,125 | 4.9 years | |||||
552,650 | 6.0 years | 344,050 | 4.5 years |
Restricted stock | Weighted average grant date fair value | |||||||
Nonvested balance, January 1, 2012 | 2,813 | $ | 16.72 | |||||
Granted | 16,250 | 3.52 | ||||||
Vested | (8,126 | ) | 5.75 | |||||
Forfeited | — | — | ||||||
Nonvested balance, December 31 2012 | 10,937 | $ | 5.27 |
Year ended December 31, | Number of shares | |||
2013 | 8,125 | |||
2014 | 625 | |||
2015 | 937 | |||
2016 | 1,250 |
Warrants | Weighted average exercise price | |||||||
Vested Balance, January 1, 2012 | 70,000 | $ | 4.00 | |||||
Granted | 11,250 | $ | 4.11 | |||||
Vested Balance, December 31, 2012 | 81,250 | $ | 4.02 |
Year ended December 31, | ||||||||
2012 | 2011 | |||||||
Numerator for basic and diluted income per share – Net loss | $ | (1,970,989 | ) | $ | (3,962,246 | ) | ||
Denominator for basic loss per share – weighted average shares outstanding | 2,029,109 | 2,018,979 | ||||||
Dilutive effect of shares issuable under stock options and warrants outstanding | — | — | ||||||
Denominator for diluted loss per share – adjusted weighted average shares outstanding | 2,029,109 | 2,018,979 | ||||||
Net loss per share: | ||||||||
Basic | $ | (0.97 | ) | $ | (1.96 | ) | ||
Diluted | $ | (0.97 | ) | $ | (1.96 | ) |