Digital Ally(US:DGLY)2022-11-13 16:00PART I – FINANCIAL INFORMATION This section presents the company's financial statements, management's discussion and analysis, market risk disclosures, and internal controls Financial Statements The company's financial statements for Q3 and nine months ended September 30, 2022, show decreased cash and assets, substantial revenue growth from acquisitions, and a shift from net income to a net loss Condensed Consolidated Balance Sheets As of September 30, 2022, total assets decreased to $68,397,464 from $82,989,197, primarily due to a sharp reduction in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Sep 30, 2022 ($) | Dec 31, 2021 ($) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 6,295,391 | 32,007,792 | | Total current assets | 34,680,191 | 56,144,975 | | Total assets | 68,397,464 | 82,989,197 | | Liabilities & Equity | | | | Warrant derivative liabilities | — | 14,846,932 | | Total current liabilities | 13,935,052 | 23,022,687 | | Total liabilities | 20,352,356 | 27,125,958 | | Total stockholders' equity | 48,045,108 | 55,863,239 | Condensed Consolidated Statements of Operations For Q3 and the nine months ended September 30, 2022, revenues significantly increased, but the company reported a net loss due to higher costs and a non-cash gain in the prior year Statement of Operations Summary (Unaudited) | Metric | Q3 2022 ($) | Q3 2021 ($) | Nine Months 2022 ($) | Nine Months 2021 ($) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 8,484,153 | 4,639,822 | 28,130,392 | 9,669,323 | | Gross Profit | 595,500 | 1,400,570 | 4,254,198 | 3,473,254 | | Operating Loss | (6,567,023) | (3,598,973) | (20,031,610) | (9,081,553) | | Change in fair value of warrant derivative liabilities | 1,164,849 | 11,585,204 | 6,726,638 | 33,274,039 | | Net Income (Loss) | (1,919,071) | 8,048,936 | (9,299,498) | 24,388,307 | | Basic EPS | (0.04) | 0.16 | (0.19) | 0.49 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, cash decreased by $25,712,401 due to significant outflows from operating, investing, and financing activities, including stock repurchases Cash Flow Summary for Nine Months Ended Sep 30 (Unaudited) | Cash Flow Activity | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | (17,797,992) | (12,230,781) | | Net cash used in investing activities | (3,488,972) | (17,958,520) | | Net cash (used in) provided by financing activities | (4,425,437) | 66,570,600 | | Net (decrease) increase in cash | (25,712,401) | 36,381,299 | | Cash, end of period | 6,295,391 | 40,743,057 | - The company repurchased and cancelled $4,026,523 of common stock in the first nine months of 202225 Notes to the Condensed Consolidated Financial Statements The notes detail the company's segment structure, accounting policies, a going concern warning, Nasdaq delisting notice, and a subsequent preferred stock purchase agreement - The company is divided into three reportable operating segments: Video Solutions, Revenue Cycle Management, and Ticketing31 - Management concluded that without additional funding, the company will not have sufficient funds to meet its obligations within one year, raising substantial doubt about its ability to continue as a going concern3638 - On July 7, 2022, the company received a delisting notice from Nasdaq for its stock price falling below the $1.00 minimum bid price requirement, with a compliance deadline of January 3, 2023138 - Subsequent to the quarter, on October 13, 2022, the company entered into a securities purchase agreement to sell $15,000,000 in Series A and Series B Convertible Redeemable Preferred Stock211 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses significant revenue growth driven by acquisitions, alongside compressed gross margins, widened operating losses, tightened liquidity, and a going concern warning, with capital bolstered by a preferred stock offering Results of Operations For the nine months ended September 30, 2022, total revenues surged 191.0% due to new segments, but gross margin compressed, operating losses widened, and the company shifted to a net loss Revenue by Segment - Nine Months Ended Sep 30 | Segment | 2022 Revenue ($) | 2021 Revenue ($) | % Change | | :--- | :--- | :--- | :--- | | Video Solutions | 6,152,733 | 7,058,161 | -12.8% | | Revenue Cycle Management | 6,039,807 | 2,050,679 | +194.5% | | Ticketing | 15,937,852 | 560,483 | +2743.6% | | Total Net Revenues | 28,130,392 | 9,669,323 | +191.0% | Gross Profit by Segment - Nine Months Ended Sep 30 | Segment | 2022 Gross Profit ($) | 2021 Gross Profit ($) | % Change | | :--- | :--- | :--- | :--- | | Video Solutions | 1,543,057 | 2,663,131 | -42.1% | | Revenue Cycle Management | 2,520,709 | 197,681 | +1175.1% | | Ticketing | 190,432 | 612,442 | -68.9% | | Total Gross Profit | 4,254,198 | 3,473,254 | +22.5% | - Selling, general and administrative (SG&A) expenses increased by 93% to $24,300,000 for the nine months ended Sep 30, 2022, up from $12,600,000 in the prior year, primarily due to acquisitions303 Liquidity and Capital Resources The company's liquidity significantly decreased, with cash falling to $6,295,391, driven by cash outflows from operations, investing, and financing, leading to a going concern warning and the termination of a stock repurchase program - The company experienced a net decrease in cash of $25,712,401 during the first nine months of 2022, reducing the cash balance to $6,295,391324 - Management states that recurring losses and cash used in operations raise substantial doubt about the company's ability to continue as a going concern323 - A stock repurchase program was terminated on June 30, 2022, after the company repurchased 5,460,824 shares for a total cost of $6,001,602 under the program170329 Critical Accounting Estimates Management identifies critical accounting estimates including revenue recognition, inventory valuation, goodwill, warranty reserves, warrant derivative liabilities, stock-based compensation, and income taxes, with a full valuation allowance on deferred tax assets - Key critical accounting estimates include: Revenue Recognition, Allowance for Excess and Obsolete Inventory, Goodwill, Warranty Reserves, Fair value of warrant derivative liabilities, Stock-based Compensation, and Accounting for Income Taxes332 - Inventory reserves for excess and obsolete items were $3,800,000 as of September 30, 2022, representing 25.6% of the gross inventory balance351 - The company maintains a full valuation allowance on its net deferred tax assets as of September 30, 2022, due to its history of operating losses110367 Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the company's current reporting status - Not Applicable373 Controls and Procedures As of September 30, 2022, the company's disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022375 - No material changes to internal control over financial reporting occurred during the third quarter of 2022376 PART II - OTHER INFORMATION This section provides details on legal proceedings, risk factors, equity sales, other information, and exhibits Legal Proceedings The company is involved in a lawsuit against Culp McAuley, Inc. for breach of obligations, with counterclaims filed, though management does not expect a material adverse effect - The company filed a lawsuit against Culp McAuley, Inc. on May 31, 2022, alleging breach of obligations, with the defendant filing counterclaims for breach of contract136 - Management does not expect the lawsuit, individually or in aggregate with other claims, to have a material adverse effect on its financial results or condition137380 Risk Factors As a smaller reporting company, the registrant is not required to provide risk factor disclosures in its Form 10-Q - As a smaller reporting company, the registrant is not required to provide risk factor disclosures in its Form 10-Q381 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred in Q3 2022 that were not already reported on a Form 8-K - No unregistered sales of equity securities occurred in Q3 2022 that were not already reported on a Form 8-K382 Other Information This section is not applicable for the company's current reporting status - Not applicable388 Exhibits This section lists the exhibits filed with the quarterly report, including merger agreements, articles of incorporation, bylaws, and officer certifications