Digital Ally(DGLY) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The financial statements show improved equity and reduced net loss, despite ongoing operating losses and a significant Entertainment segment gross loss, supported by capital raises and debt reduction Condensed Consolidated Financial Statements This section provides the company's condensed consolidated balance sheets, statements of operations, and cash flows Condensed Consolidated Balance Sheets | Financial Metric | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $25,963,663 | $27,736,573 | | Total Liabilities | $17,811,958 | $36,750,003 | | Total Equity (Deficit) | $8,151,705 | ($9,013,430) | Condensed Consolidated Statements of Operations (Three Months Ended June 30) | Income Statement (Three Months Ended June 30) | 2025 | 2024 | | :--- | :--- | :--- | | Total Revenue | $5,632,039 | $5,616,235 | | Gross Profit (Loss) | ($632,625) | $242,392 | | Operating Loss | ($4,095,073) | ($3,914,221) | | Net Loss Attributable to Common Stockholders | ($4,545,201) | ($5,083,861) | | Diluted EPS | ($3.21) | ($3,479.71) | Condensed Consolidated Statements of Operations (Six Months Ended June 30) | Income Statement (Six Months Ended June 30) | 2025 | 2024 | | :--- | :--- | :--- | | Total Revenue | $10,107,303 | $11,145,586 | | Gross Profit | $968,874 | $1,763,830 | | Operating Loss | ($5,069,753) | ($7,553,193) | | Net Loss Attributable to Common Stockholders | ($281,730) | ($9,014,882) | | Diluted EPS | ($0.54) | ($6,234.36) | Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30) | Cash Flow (Six Months Ended June 30) | 2025 | 2024 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($8,644,106) | ($3,408,757) | | Net Cash (Used in) Provided by Investing Activities | ($313,041) | $36,504 | | Net Cash Provided by Financing Activities | $9,125,653 | $3,208,817 | Note 1: Nature of Business, Policies, and Going Concern This note details the company's operating segments, recent reverse stock splits, and management's assessment of its going concern status - The company operates in three reportable segments: Video Solutions, Revenue Cycle Management, and Entertainment[24] - The company executed two reverse stock splits in May 2025: a 1-for-20 split on May 6, and a 1-for-100 split on May 22[25][26] - The company acknowledges that substantial operating losses raise doubt about its ability to continue as a going concern, however, management believes its cost-cutting measures and recent equity offerings (raising $14.3 million in Feb 2025) mitigate this doubt, having improved working capital and stockholders' equity to positive balances as of June 30, 2025[63][64][69] Note 4: Goodwill and Other Intangible Assets This note details the company's goodwill and intangible assets, including a significant impairment charge taken in late 2024 - As of June 30, 2025, the company held net goodwill and other intangible assets of $9,972,472, a decrease from $10,654,325 at year-end 2024[72] - An interim impairment test as of September 30, 2024, resulted in a non-cash goodwill impairment charge of $4.32 million for the Revenue Cycle Management segment and $307,000 for the Entertainment segment, driven by declines in service demand, economic uncertainty, and a decrease in stock price[78][81] - No additional impairment was noted during the annual test as of December 31, 2024, or in the first two quarters of 2025[75] Note 5: Debt Obligations This note outlines the company's debt structure and significant reductions achieved through public offering proceeds Debt Obligations Summary | Debt Obligations | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Debt Obligations | $742,805 | $5,102,526 | | Current Maturities | $603,476 | $4,961,443 | | Long-Term Debt | $139,329 | $141,083 | - The company significantly reduced its debt, paying off $3.6 million in Senior Secured Promissory Notes in full on February 13, 2025, using proceeds from its public equity offering[100] - In February 2025, the Entertainment Segment entered into a new $600,000 unsecured promissory note[88] Note 9: Commitments and Contingencies This note details Nasdaq listing compliance issues and the status of significant legal proceedings - The company received multiple notifications from Nasdaq regarding non-compliance with listing rules, including the Minimum Bid Price Requirement, the Stockholders' Equity Requirement, and the Low Priced Stocks Rule[120][121][125] - On May 1, 2025, a Nasdaq Hearings Panel granted the company's request for continued listing, subject to meeting certain conditions by specific dates, and management believes it has regained compliance with the key requirements as of June 30, 2025[127] - In the Culp McAuley lawsuit, the court entered a judgment in favor of the Company for approximately $4.0 million against Culp McAuley and two individuals, though the company is uncertain about the amount it will ultimately recover[114] Note 12: Stockholders' Equity This note details the significant increase in stockholders' equity primarily due to a public equity offering in February 2025 - On February 13, 2025, the company completed an underwritten public offering of units and pre-funded units, raising aggregate net proceeds of approximately $14.3 million[150][156] - The proceeds were used for working capital, to repay a short-term merchant advance, and to pay off the $3.6 million senior secured promissory notes issued in November 2024[152] Note 13: Related Party Transactions This note outlines modifications to a related-party note payable and repayment of loans from the CEO - A related-party note payable to a trust associated with an officer of TicketSmarter was modified multiple times in 2025, with these modifications, including principal reduction and interest elimination, ultimately treated as deemed capital contributions totaling $1,871,994, rather than gains on debt extinguishment[169][170][171] - The company's CEO provided loans totaling $140,000 in late 2024, which were paid off in full during the first six months of 2025[172] Note 17: Operating Segments This note presents detailed financial performance data for the company's Video Solutions, Revenue Cycle Management, and Entertainment operating segments Segment Performance (Three Months Ended June 30, 2025) | Segment Performance (Three Months Ended June 30, 2025) | Net Revenues | Operating Income (Loss) | | :--- | :--- | :--- | | Video Solutions | $1,340,672 | ($172,646) | | Revenue Cycle Management | $1,432,294 | $114,281 | | Entertainment | $2,859,073 | ($2,567,886) | | Corporate | N/A | ($1,468,822) | | Total | $5,632,039 | ($4,095,073) | Segment Performance (Six Months Ended June 30, 2025) | Segment Performance (Six Months Ended June 30, 2025) | Net Revenues | Operating Income (Loss) | | :--- | :--- | :--- | | Video Solutions | $2,262,954 | ($5,365) | | Revenue Cycle Management | $2,782,845 | $121,651 | | Entertainment | $5,061,504 | ($2,872,465) | | Corporate | N/A | ($2,313,574) | | Total | $10,107,303 | ($5,069,753) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses operational and financial events, highlighting improved liquidity from a public offering, reduced SG&A, and a lower net loss despite gross profit declines from the Entertainment segment Results of Operations - Comparison of Three Months Ended June 30, 2025 and 2024 This section analyzes the company's financial performance for the three months ended June 30, 2025, compared to the prior year - Total revenue was flat at ~$5.6 million, with Video Solutions product revenue falling 29.4% due to competition and inventory shortages, while Entertainment product revenue grew 9.7% driven by the Country Stampede music festival[217][223] - Gross profit swung from a $242k profit in Q2 2024 to a ($633k) loss in Q2 2025, primarily caused by the Entertainment segment's gross loss widening significantly to ($1.55 million), largely due to negative margins from the 2025 Country Stampede Music Festival[233] - Selling, General and Administrative (SG&A) expenses decreased by 17% to $3.5 million from $4.2 million, reflecting significant cost-cutting in R&D and selling/advertising[234] - Net loss attributable to common stockholders improved to ($4.5 million) from ($5.1 million), mainly due to a non-cash gain of $857k from the change in fair value of warrant derivative liabilities[249][257] Results of Operations - Comparison of Six Months Ended June 30, 2025 and 2024 This section analyzes the company's financial performance for the six months ended June 30, 2025, compared to the prior year - Total revenue decreased 9.3% to $10.1 million from $11.1 million, driven by a 63.3% drop in Video Solutions product revenue[262][264] - Gross profit decreased to $0.97 million from $1.76 million, with the Entertainment segment's gross loss widening from ($155k) to ($974k)[273] - Operating loss improved by 32.9% to ($5.1 million) from ($7.6 million), a direct result of a 35% ($3.3 million) reduction in SG&A expenses from company-wide right-sizing efforts[274][277] - Net loss attributable to common stockholders improved dramatically to ($282k) from ($9.0 million), primarily due to a $3.4 million non-cash gain on warrant derivative liabilities and a $2.2 million gain on extinguishment of liabilities[282][283][292] Liquidity and Capital Resources This section discusses the company's cash position, operating cash flows, and significant capital raising activities - Cash and cash equivalents increased to $622,820 at June 30, 2025, from $454,314 at year-end 2024[295] - Net cash used in operating activities was $8.6 million for the six-month period, a significant increase from $3.4 million in the prior year, mainly due to repayment of accounts payable[299] - Financing activities provided $9.1 million in cash, primarily from the February 2025 public equity offering which raised $14.3 million in net proceeds, with these funds used to repay debt and fund operations[299] - The company's recurring losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern[294] Critical Accounting Estimates This section identifies key accounting estimates requiring significant management judgment, including goodwill impairment and warrant derivative valuations - Management identifies several critical accounting estimates, including Revenue Recognition, Allowance for Excess and Obsolete Inventory, Goodwill and other intangible assets, Warranty Reserves, Fair value of assets and liabilities acquired in business combinations, Fair value of warrant derivative liabilities, Stock-based Compensation Expense, and Accounting for Income Taxes[308] - Goodwill impairment testing requires significant judgment regarding future cash flows and discount rates, with an interim test in Q3 2024 leading to a significant impairment charge[329][332] - Warrant derivative liabilities are accounted for at fair value using the Black-Scholes model, which includes subjective inputs that can materially affect fair value estimates and result in non-cash gains or losses[334][335] - The company maintains a full valuation allowance against its deferred tax assets due to a history of operating losses, meaning it is not recognizing any potential future tax benefits from its losses[337] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide disclosures on market risk - Not Applicable[341] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2025, with a remediation plan currently in progress - The CEO and CFO have concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2025[342] - A remediation plan is in progress, involving a full review of internal controls, hiring additional personnel, and establishing more robust processes[343] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company refers to Note 9 for legal proceedings and does not expect current claims to materially affect its financial condition - Information regarding legal proceedings is incorporated by reference from Note 9 – Commitments and Contingencies[346] - Management does not expect pending lawsuits to have a material adverse effect on the company's operations, financial condition, or cash flows[347] Item 1A. Risk Factors As a smaller reporting company, the company is not required to provide information on risk factors - As a smaller reporting company, the company is not required to provide the information required by this Item[348]