Digital Ally(DGLY) - 2021 Q4 - Annual Report

Part I Business Digital Ally, Inc. diversified into Revenue Cycle Management and Ticketing segments in 2021, significantly increasing revenue while continuing its legacy Video Solutions business - The company expanded into Revenue Cycle Management and Ticketing as new operating segments, alongside its legacy Video Solutions business[21] Net Revenues by Segment (2021 vs. 2020) | Segment | 2021 Net Revenues ($) | 2020 Net Revenues ($) | | :--- | :--- | :--- | | Video Solutions | $9,073,626 | $10,514,868 | | Revenue Cycle Management | $1,630,048 | — | | Ticketing | $10,709,760 | — | | Total Net Revenues | $21,413,434 | $10,514,868 | - The Video Solutions segment offers in-car video systems, body-worn cameras, the VuLink auto-activation system, and health safety products[22] - The Revenue Cycle Management segment, established in Q2 2021 through acquisitions, provides billing and back-office services to healthcare organizations[23][24] - The Ticketing segment, formed in Q3 2021 via the TicketSmarter acquisition, operates an online marketplace for over 125,000 live events with over 48 million tickets for sale[26][28] - As of December 31, 2021, the company had approximately 146 full-time employees across its segments[80][84] - In December 2021, the company formed Worldwide Reinsurance Ltd., a Bermuda-based captive insurance subsidiary for liability coverage[70] Risk Factors This section is not applicable - Not applicable[92] Unresolved Staff Comments The company reports no unresolved staff comments - None[94] Properties In 2021, the company acquired a 71,361 sq. ft. commercial building for $5.3 million in Lenexa, Kansas, for its future headquarters, and assumed operating leases from recent acquisitions - On April 30, 2021, the company purchased a 71,361 sq. ft. commercial office building in Lenexa, Kansas, for approximately $5.3 million in cash[97] - The company assumed operating leases for office spaces from recent acquisitions, with terms ending between December 2022 and July 2024[98][99][100] Legal Proceedings The company's primary legal proceeding, a patent infringement lawsuit against Axon, concluded with appeals denied and no material adverse effect expected from ongoing litigation - The company's patent infringement suit against Axon, filed in January 2016, resulted in a summary judgment for Axon in June 2019[104][107] - Appeals to the U.S. Court of Appeals were denied in April 2020, and the company has abandoned further appeal rights[108] - The company records legal liabilities when probable and estimable, with no material adverse effect expected from current proceedings[109][110] Mine Safety Disclosures This section is not applicable - Not applicable[112] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'DGLY', initiated a $10 million share repurchase program in Q4 2021, has not paid dividends, and maintains equity compensation plans Quarterly Stock Price Range (High/Low) | Period | 2021 High ($) | 2021 Low ($) | 2020 High ($) | 2020 Low ($) | | :--- | :--- | :--- | :--- | :--- | | 1st Quarter | $3.98 | $1.51 | $2.02 | $0.64 | | 2nd Quarter | $2.24 | $1.56 | $7.10 | $0.67 | | 3rd Quarter | $1.83 | $1.17 | $4.43 | $1.80 | | 4th Quarter | $1.60 | $0.97 | $3.19 | $1.91 | - On December 6, 2021, the Board approved a share repurchase program for up to $10 million of common stock, expiring December 31, 2022[119] Share Repurchases in Q4 2021 | Period | Total Shares Purchased | Average Price Paid ($) | Approx. Dollar Value Remaining in Program ($) | | :--- | :--- | :--- | :--- | | December 2021 | 1,734,838 | $1.14 | $8,024,921 | - The company has not declared or paid cash dividends and intends to retain future earnings for business operations[120] Equity Compensation Plan Information (as of Dec 31, 2021) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights ($) (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 1,086,064 | $2.37 | 915,845 | Reserved This section is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, total revenue more than doubled to $21.4 million driven by new segments, leading to a $25.5 million net income primarily from non-cash gains on warrant derivatives, and significantly improved liquidity to $32.0 million cash from $66.4 million in offerings Consolidated Results of Operations Summary | Metric | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Revenue | $21,413,434 | $10,514,868 | | Gross Profit | $5,663,775 | $4,062,594 | | Operating Loss | ($14,760,910) | ($7,663,651) | | Net Income (Loss) | $25,530,961 | ($2,625,881) | | Basic and Diluted EPS | $0.51 | ($0.12) | - The significant increase in total revenue was driven by the new Ticketing and Revenue Cycle Management segments, established through acquisitions in the second half of 2021[162] - Net income resulted primarily from a $36.7 million non-cash gain on warrant derivative liabilities and a $3.7 million gain on contingent consideration from acquisitions[230][231] - SG&A expenses increased 74.2% to $20.4 million in 2021, driven by new acquisitions, increased promotional activities, and higher professional fees[213][214][215][216] - The company raised approximately $66.4 million in net proceeds from two registered direct offerings in Q1 2021, significantly strengthening liquidity[247][251][255] - Cash and cash equivalents increased to $32.0 million at year-end 2021 from $4.4 million in 2020, primarily due to financing activities[265] Results of Operations (2021 vs. 2020) Total revenues surged 103.6% to $21.4 million in 2021, driven by new segments, resulting in a $25.5 million net income despite increased operating loss and SG&A, primarily due to non-cash gains Revenue by Type and Segment (2021 vs. 2020) | Revenue Type / Segment | 2021 ($) | 2020 ($) | % Change | | :--- | :--- | :--- | :--- | | Product Revenues | | | | | Video Solutions | $6,393,050 | $8,029,457 | (20.4)% | | Ticketing | $2,787,237 | — | 100% | | Total Product Revenues | $9,180,287 | $8,029,457 | 14.3% | | Service & Other Revenues | | | | | Video Solutions | $2,680,576 | $2,485,411 | 7.9% | | Ticketing | $7,922,523 | — | 100% | | Revenue Cycle Management | $1,630,048 | — | 100% | | Total Service Revenues | $12,233,147 | $2,485,411 | 392.2% | | Total Revenues | $21,413,434 | $10,514,868 | 103.6% | Gross Profit by Segment (2021 vs. 2020) | Segment | 2021 Gross Profit ($) | 2020 Gross Profit ($) | | :--- | :--- | :--- | | Video Solutions | $2,002,345 | $4,062,594 | | Revenue Cycle Management | $521,047 | — | | Ticketing | $3,140,383 | — | | Total Gross Profit | $5,663,775 | $4,062,594 | - SG&A expenses increased by $8.7 million (74.2%) to $20.4 million, driven by new acquisitions, increased promotional expenses, and higher payroll[213] - A non-cash gain of $36,664,907 from the change in fair value of warrant derivative liabilities was the primary driver of net income[230] - A gain of $3,732,789 was recognized from the change in fair value of contingent consideration related to acquisitions[231][232] Liquidity and Capital Resources The company's liquidity significantly improved in 2021, with cash increasing to $32.0 million from $4.4 million, primarily due to $66.4 million in net proceeds from direct offerings, despite substantial cash usage in operating and investing activities - The company raised approximately $66.4 million in net proceeds from two registered direct offerings in Q1 2021, providing adequate liquidity for the foreseeable future[247] Summary of Cash Flows (2021 vs. 2020) | Cash Flow Activity | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($17,825,108) | ($13,274,715) | | Net Cash Used in Investing Activities | ($19,124,379) | ($1,499,189) | | Net Cash Provided by Financing Activities | $64,595,521 | $18,775,977 | - Investing activities in 2021 included approximately $5.3 million for a new building and cash payments for three acquisitions[269][270][271][272] - Financing activities in 2021 were dominated by $66.6 million gross proceeds from two public offerings, offset by approximately $2.0 million in share repurchases[263] - As of December 31, 2021, the company had net working capital of $33.1 million, a significant improvement from the prior year[264] Critical Accounting Policies The company's critical accounting policies involve significant judgment, including Revenue Recognition, Allowance for Excess and Obsolete Inventory ($3.9 million reserve), Goodwill and Intangible Asset impairment, Warranty Reserves, Stock-based Compensation, and Income Taxes with a full valuation allowance against deferred tax assets - Key critical accounting policies include Revenue Recognition, Allowance for Excess and Obsolete Inventory, Goodwill and other intangible assets, Warranty Reserves, Stock-based Compensation Expense, Fair value of warrants, Fair value of assets and liabilities acquired in business combinations, and Accounting for Income Taxes[289] - Revenue for the ticketing segment is recorded on a gross basis for inventory sales and a net basis for marketplace transactions[298][299][300] - The reserve for excess and obsolete inventory was $3.9 million as of December 31, 2021, up from $2.0 million in 2020, primarily due to older product obsolescence and new ticketing segment reserves[312] - The company maintains a full valuation allowance of $17.0 million against its net deferred tax assets as of December 31, 2021, due to recurring operating losses[327] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable - Not applicable[332] Financial Statements and Supplementary Data This section presents the consolidated financial statements for 2021 and 2020, along with RBSM LLP's unqualified audit opinion, which highlights critical audit matters regarding goodwill and intangible valuation and inventory reserves - The independent auditor, RBSM LLP, issued an unqualified opinion on the consolidated financial statements[387] - Critical Audit Matters included the valuation of goodwill and intangibles from the TicketSmarter acquisition and the valuation of inventory reserves due to estimation uncertainty and complex judgment[392][399] Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2021 ($) | 2020 ($) | | :--- | :--- | :--- | | Total Assets | $82,989,197 | $20,797,527 | | Total Liabilities | $27,125,958 | $6,441,021 | | Total Equity | $55,863,239 | $14,356,506 | - Warrant derivative liabilities of $14.8 million were recorded as a current liability in 2021, not present in 2020[410] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[336] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, excluding recently acquired businesses, with integration ongoing - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[338] - Management's report on internal control over financial reporting concluded that controls were effective as of December 31, 2021[342] - The evaluation of internal control over financial reporting excluded the TicketSmarter and Goody Tickets acquisitions from September 2021[341] Other Information The company reports no other information - None[345] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable - Not applicable[347] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the 2022 Proxy Statement[350] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the 2022 Proxy Statement[352] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item, including equity compensation plans, is incorporated by reference from the company's definitive proxy statement and Part II, Item 5 of this report - Information is incorporated by reference to the 2022 Proxy Statement[354] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the 2022 Proxy Statement[357] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference to the 2022 Proxy Statement[359] Part IV Exhibits and Financial Statement Schedules This section lists documents filed with the Annual Report on Form 10-K, including consolidated financial statements starting on page F-1, omitted schedules, and a comprehensive list of exhibits - The consolidated financial statements required by Item 8 are included starting on page F-1[362] - All financial statement schedules have been omitted as not applicable or included elsewhere[363] - Key exhibits include stock option plans, placement agency agreements, the real estate sales contract, and agreements for the Nobility and TicketSmarter acquisitions[364][365]