Digital Ally(DGLY) - 2021 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The company's liquidity improved dramatically from financing activities, though it reported a Q2 net loss while initiating a new healthcare venture Condensed Consolidated Balance Sheets The balance sheet reflects a surge in assets and liabilities, driven by significant financing activities and new warrant derivative liabilities Balance Sheet Comparison (Unaudited) | Financial Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $58,276,178 | $4,361,758 | | Total current assets | $72,997,645 | $17,830,106 | | Total assets | $83,099,135 | $20,797,527 | | Liabilities & Equity | | | | Warrant derivative liabilities | $29,527,224 | $0 | | Total current liabilities | $32,787,911 | $3,720,608 | | Total liabilities | $36,392,340 | $6,441,022 | | Total stockholders' equity | $46,706,795 | $14,356,505 | - Total assets surged to $83.1 million from $20.8 million, primarily driven by a more than 13-fold increase in cash and cash equivalents resulting from financing activities[14] - A new significant liability, Warrant derivative liabilities, was recorded at $29.5 million as of June 30, 2021, contributing to a substantial increase in total liabilities[14] Condensed Consolidated Statements of Operations Revenue and gross profit grew, but a Q2 net loss widened while H1 net income was achieved due to a large non-cash gain Three Months Ended June 30 (Unaudited) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total revenue | $2,493,671 | $1,732,192 | +44.0% | | Gross profit | $1,260,800 | $392,758 | +221.0% | | Operating loss | ($2,616,884) | ($2,143,154) | +22.1% | | Net loss | ($5,382,487) | ($497,894) | +981.0% | | Diluted EPS | ($0.10) | ($0.03) | - | Six Months Ended June 30 (Unaudited) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total revenue | $5,029,501 | $4,157,936 | +21.0% | | Gross profit | $2,072,683 | $1,657,788 | +25.0% | | Operating loss | ($5,482,578) | ($4,070,519) | +34.7% | | Net income (loss) | $16,339,371 | ($2,832,004) | - | | Diluted EPS | $0.34 | ($0.17) | - | - For the six months ended June 30, 2021, the company reported a net income of $16.3 million, primarily driven by a non-cash gain of $21.7 million from the change in fair value of warrant derivative liabilities[17] Condensed Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' equity increased substantially, primarily due to direct offerings, warrant exercises, and net income for the period - Total stockholders' equity increased significantly from $14.4 million at December 31, 2020, to $46.7 million at June 30, 2021[19][21] - The increase in equity was primarily driven by registered direct offerings, the exercise of pre-funded common stock purchase warrants, and a net income of $16.3 million for the six-month period[19][20][21] Condensed Consolidated Statements of Cash Flows A significant net increase in cash was driven by strong financing activities, which offset cash used in operations and investments Cash Flow Summary for Six Months Ended June 30 (Unaudited) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($6,149,773) | ($4,057,003) | | Net cash used in investing activities | ($6,506,407) | ($163,109) | | Net cash provided by financing activities | $66,570,600 | $20,025,977 | | Net increase in cash | $53,914,420 | $15,805,865 | - Financing activities provided $66.6 million in cash, primarily from registered direct offerings ($13.3M) and the exercise of pre-funded warrants ($53.2M)[24] - Investing activities used $6.5 million, including $5.5 million for purchases of property, plant, and equipment and $1.0 million for a business acquisition[24] Notes to the Condensed Consolidated Financial Statements Notes detail significant financing events, the accounting for warrant liabilities, a new healthcare venture, and the conclusion of patent litigation - The company formed Digital Ally Healthcare, LLC in June 2021 to enter the medical billing market and subsequently acquired Elite Medical Billing Specialists[44][147] - Warrants issued in Q1 2021 are classified as derivative liabilities and measured at fair value, with changes reported in earnings, due to a net cash settlement provision[68][124] - The company's appeal in its patent infringement lawsuit against Axon was denied, and the company has abandoned any further appeals[111] - In Q1 2021, the company completed two registered direct offerings, raising combined net proceeds of approximately $66.4 million through the sale of common stock, pre-funded warrants, and common stock purchase warrants[134][140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth, wider operating losses, strategic expansion into healthcare, and a significantly improved liquidity position Results of Operations for the Three Months Ended June 30, 2021 and 2020 Q2 2021 revenue grew 44% and gross margin improved to 51%, but higher SG&A expenses and a large non-cash loss widened the net loss Q2 2021 vs Q2 2020 Performance | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Total Revenue | $2,493,671 | $1,732,192 | | Gross Profit | $1,260,800 | $392,758 | | Gross Margin | 51% | 23% | | Operating Loss | ($2,616,884) | ($2,143,154) | | Net Loss | ($5,382,487) | ($497,894) | - Product revenues increased by 63% ($665,751), partly due to the launch of new product lines (ThermoVu™ and Shield™) in response to the COVID-19 pandemic[173] - Selling, general and administrative (SG&A) expenses rose by 53% ($1,341,772), driven by increased travel, promotional activities, and higher legal and professional fees as business activities resumed post-COVID restrictions[192] Results of Operations for the Six Months Ended June 30, 2021 and 2020 H1 2021 revenue grew 21%, but a significant non-cash gain on warrant liabilities turned an operating loss into a $16.3 million net income H1 2021 vs H1 2020 Performance | Metric | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Total Revenue | $5,029,501 | $4,157,936 | | Gross Profit | $2,072,683 | $1,657,788 | | Gross Margin | 41% | 40% | | Operating Loss | ($5,482,578) | ($4,070,519) | | Net Income/(Loss) | $16,339,371 | ($2,832,004) | - The company achieved a net income of $16.3 million for the six-month period, reversing a $2.8 million loss from the prior year, primarily due to a $21.7 million gain on the change in fair value of warrant derivative liabilities[261][264] - SG&A expenses increased by 32% ($1,826,954), fueled by higher promotional costs as NASCAR/IndyCar seasons resumed, and increased legal fees related to offerings and acquisitions[241][244][245] Liquidity and Capital Resources Liquidity improved dramatically, with cash rising to $58.3 million after raising $66.4 million from offerings to fund operations and acquisitions - Cash and cash equivalents increased by $53.9 million during the six months ended June 30, 2021, reaching a balance of $58.3 million[270][273] - The company raised approximately $66.4 million in net proceeds from two registered direct offerings of common stock and warrants in Q1 2021[266][272] - Significant capital expenditures included the acquisition of a new $5.3 million commercial office/warehouse building and the acquisition of Elite Medical Billing for approximately $1.4 million[275][276] Critical Accounting Policies Key policies require significant judgment, particularly for warrant derivative liabilities, while a full valuation allowance is maintained for deferred tax assets - Key critical accounting policies involve significant estimates for revenue recognition, inventory and warranty reserves, stock-based compensation, and income taxes[291][292] - The valuation of warrant derivative liabilities is a new critical policy, requiring the use of a Black-Scholes model with subjective inputs like stock volatility[309][310] - The company maintains a full valuation allowance of $24.6 million against its net deferred tax assets, as it has not yet demonstrated a sustained level of profitability to ensure their realization[315] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this section is not applicable - Not Applicable[320] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[322] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[324] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company has abandoned its patent infringement appeal against Axon and expects no other material impact from legal matters - The company's appeal in its patent infringement lawsuit against Axon Enterprise, Inc. was denied, and the company has abandoned its right to any further appeals[111] - Management believes that the final outcome of other various claims and legal proceedings will not have a material adverse effect on the company's consolidated financial condition, results of operations, or cash flows[327] Item 1A. Risk Factors As a smaller reporting company, Digital Ally, Inc is not required to provide the information for this item - As a smaller reporting company, this section is not required[328] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has indicated that this section is not applicable - Not applicable[330] Item 3. Defaults Upon Senior Securities The company has indicated that this section is not applicable - Not applicable[332] Item 4. Mine Safety Disclosures The company has indicated that this section is not applicable - Not applicable[334] Item 5. Other Information The company has indicated that this section is not applicable - Not applicable[336] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Interactive Data Files (XBRL) - The report includes CEO and CFO certifications pursuant to Rule 13a-14(a) and 13a-14(b) of the Securities and Exchange Act of 1934, as well as Interactive Data Files[339]