Digital Ally, Inc. Announces First Quarter Operating Results

LENEXA, KS--(Marketwired - May 14, 2014) - Digital Ally, Inc. (NASDAQ: DGLY), which develops, manufactures and markets advanced video surveillance products for law enforcement, homeland security and commercial applications, today announced its operating results for the first quarter of 2014. An investor conference call is scheduled for 11:15 a.m. EDT tomorrow, May 15, 2014 (see details below).

First Quarter Highlights

• Total revenue approximated $3.9 million in the most recent quarter, which represented a decrease of 18% from the prior-year quarter and an increase of 11% relative to the fourth quarter of 2013. 
• Gross profit margin improved to 59.4% of total revenue, compared with 49.9% in the fourth quarter of 2013, 54.0% in the third quarter of 2013, 60.1% in the second quarter of 2013, and 60.6% in the first quarter of 2013. 
• Selling, general and administrative expenses increased 6% from year-earlier levels, but decreased 14% when compared with the fourth quarter of 2013.
• The Company reported an operating loss of ($546,152), compared with operating income of $181,417 a year earlier. However, the operating loss in the most recent quarter improved 65% relative to a fourth quarter 2013 operating loss of ($1,573,958).
• A net loss of ($871,499), or ($0.39) per share, was posted in the quarter ended March 31, 2013, an improvement of 47% when compared with a net loss of ($1,638,649), or ($0.74) per share in the fourth quarter of 2013. During the first quarter of 2014, the Company recorded a one-time charge of $224,438 related to senior convertible note issuance expenses. In the prior-year quarter, the Company reported net income of $113,695, or $0.05 per diluted share.
• On a non-GAAP basis, the Company reduced its adjusted net loss by 73% to ($301,152), or ($0.13) per share, when compared with a non-GAAP adjusted net loss of ($1,116,204), or ($0.50) per share, in the three months ended December 31, 2013. The Company reported non-GAAP net income of $393,552, or $0.19 per diluted share, in the first quarter of 2013.
• Shipments of the new DVM-800 digital in-car video system, which was introduced in the fourth quarter of 2013, accounted for 27% of the Company's total sales in the first quarter of 2014.
• In March 2014, the Company completed a $2.0 million financing through a senior secured convertible note offering.
  
  

Management Comments

"We are pleased with the improvement in sales and gross profit margins, along with the significant reduction in net operating loss during the first quarter, relative to the fourth quarter of 2013, and we foresee continued progress during the balance of the year as our newly released, higher-margin products gain traction in the marketplace," stated Stanton Ross, Chief Executive Officer of Digital Ally, Inc. "The new DVM-800 in-car video system, which was introduced in December 2013, generated 27% of our total sales in the first quarter of 2014. This positions the DVM-800 as our second-leading product in terms of sales, behind only our legacy DVM-500Plus system, which generated 28% of first quarter revenue."

"Although the FirstVU HD body camera was responsible for only 4% of sales in the most recent quarter, it continues to gain traction and is the subject of several large bids for over 1,000 units each. Customer feedback on the FirstVU HD has been very positive, and we are optimistic that many of the outstanding bids will convert into sales contracts during the balance of 2014. Currently, we are developing a cloud-based solution for this product that we expect to introduce to the market this summer. The availability of cloud hosting, storage, and retrieval should elevate the appeal of the FirstVU HD within a number of large law enforcement agencies that desire such capabilities."

"Domestically, sales to law enforcement agencies improved by approximately $800,000, sequentially, from the fourth quarter of 2013 to the first quarter of 2014," continued Ross. "We believe that the disruption caused by the federal government budget sequester in 2013 has largely been mitigated, while positive developments in our patent litigation with Utility Associates, Inc. have alleviated some customer confusion in recent months. These two factors appear to be playing an important role in boosting sales to our law enforcement customers."

"First quarter sales would have been stronger if a significant statewide contract had not been delayed due to funding issues that caused product shipments to shift from the first quarter to the second quarter of 2014 and beyond. We are confident that our products will be fully deployed by law enforcement agencies in this state, albeit at a slower pace than previously expected."

"Overall, we were able to reduce our selling, general and administrative expenses by $456,000 in the first quarter of 2014, relative to the fourth quarter of 2013. R&D expenses are being scaled back without restricting our ability to move forward with planned new product development programs, now that we have completed the DVM-800 and FirstVU HD development projects. We plan to launch several key products in 2014, including the VuLink, and to introduce certain options and added features for the DVM-800 and FirstVU HD. Nonetheless, we expect R&D expenses to continue to decline during the balance of the year." 

"In closing, we are encouraged by a number of improving trends in the first quarter and look forward to further progress in the year ending December 31, 2014," concluded Ross. 

First Quarter Results

For the three months ended March 31, 2014, the Company's total revenue decreased 18% to approximately $3.9 million, compared with revenue of approximately $4.8 million in the first quarter of the previous year. However, first quarter revenue improved 11% relative to $3.5 million in the fourth quarter of 2013, and the Company believes first quarter 2014 sales would have been higher had a large state contract customer not encountered funding issues that delayed its purchases to later quarters in 2014. International revenue declined to $20,509 (1% of total revenue) in the first quarter of 2014, versus $80,814 (2% of total revenue) in the prior-year period.

Gross profit declined 20% to $2,320,939 (59.4% of revenue) in the three months ended March 31, 2014, versus $2,895,927 (60.6% of revenue) in the first quarter of 2013. Management's goal is to improve gross profit margins to 60% of revenue, or higher, during the balance of 2014, partly in response to growing demand for new higher-margin products, including the DVM-800 and the FirstVU HD. These two new products accounted for 31% of total sales in the most recent quarter, versus 0% in the prior-year quarter.

Selling, General and Administrative ("SG&A") expenses increased 6% to $2,867,091 in the most recent quarter, versus $2,714,510 a year earlier. Research and Development costs rose 8%, reflecting spending on several development projects that are nearing completion. Selling, advertising and promotional expense rose 6% due to the Company increasing the size of its domestic sales force during the second half of 2013 in order to improve geographical coverage, resulting in higher total salaries and commission expense. In addition, the Company increased the funds allocated to advertising and other marketing initiatives designed to help penetrate new commercial markets for the DVM-250 and develop awareness of the DVM-800 in the law enforcement channel. Stock-based compensation expense increased 26%, primarily due to the amortization of restricted stock granted to the Company's officers and other employees in 2014. Professional fees and related expenses rose 9%, primarily attributable to higher litigation expenses. Executive, sales and administrative staff payroll expenses increased 11%, primarily due to the addition of technical support staff required to handle field inquiries and installation matters, in light of an expanding installed customer base and the introduction of new products. 

The Company reported an operating loss of ($546,152) for the three months ended March 31, 2014, compared with operating income of $181,417 in the corresponding period in 2013.

Net interest and other expense increased 380% to $325,347 in the three months ended March 31, 2014, from $67,722 in the first quarter of 2013. Included in the first quarter of 2014 was a one-time charge of $224,438 related to senior convertible note issuance costs.

The Company reported a first quarter 2014 net loss of ($871,499), or ($0.39) per share, compared with prior-year net income of $113,695, or $0.05 per diluted share, and a net loss of ($1,638,649), or ($0.74) per share, in the fourth quarter of 2013. The loss in the first quarter 2014 included a one-time charge of $224,438 related to secured convertible note issuance expenses. No income tax provision or benefit was recorded in the first quarters of either 2014 or 2013. The Company expects to continue to maintain a full valuation allowance on its deferred tax assets, including net operating loss carry forwards, until it determines that it can sustain a level of profitability that demonstrates its ability to realize such assets. 

On a non-GAAP basis, the Company reported an adjusted net loss (before depreciation, amortization, interest expense, litigation-related expenses and stock-based compensation), a non-GAAP financial measure, of ($301,152), or ($0.13) per share, for the three months ended March 31, 2014, versus an adjusted net profit of $393,552, or $0.19 per diluted share, in the three months ended March 31, 2013, and an adjusted net loss of ($1,116,204), or ($0.50) per share, in the three months ended December 31, 2013. (Non-GAAP adjusted net income is described in greater detail in a table at the end of this press release).

Non-GAAP Financial Measures

Digital Ally, Inc. has provided financial information in this release that has not been prepared in accordance with GAAP. This information includes non-GAAP adjusted net income (loss). Digital Ally uses such non-GAAP financial measures internally in analyzing its financial results and believes they are useful to investors, as a supplement to GAAP measures, in evaluating Digital Ally's ongoing operational performance. Digital Ally believes that the use of these non-GAAP financial measures provides an additional tool for investors to evaluate ongoing operating results and trends and in comparing its financial measures with other companies in Digital Ally's industry, many of which present similar non-GAAP financial measures to investors. As noted, the non-GAAP financial measures discussed above exclude certain non-cash and/or non-recurring expenses/income including: (1) income tax expense/benefit, (2) depreciation and amortization expense, (3) net interest expense, (4) share-based compensation expense, and (5) secured convertible note payable issuance expenses.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measure as detailed above. As previously mentioned, a reconciliation of GAAP to the non-GAAP financial measures has been provided in the tables included as part of this press release.

Investor Conference Call

The Company will host an investor conference call at 11:15 a.m. Eastern Daylight Time (EDT) tomorrow, May 15, 2014, to discuss its operating results for the quarter ended March 31, 2014, along with other topics of interest. Shareholders and other interested parties may participate in the conference call by dialing 877-374-8416 (international/local participants dial 412-317-6716) and asking to be connected to the "Digital Ally Conference Call" a few minutes before 11:15 a.m. Eastern Time on May 15, 2014. 

A replay of the conference call will be available one hour after the completion of the conference call from May 15, 2014 until 9:00 a.m. on July 16, 2014 by dialing 877-344-7529 (international/local participants dial 412-317-0088) and entering the conference ID# 10046379.

About Digital Ally, Inc.

Digital Ally, Inc. develops, manufactures and markets advanced technology products for law enforcement, homeland security and commercial applications. The Company's primary focus is digital video imaging and storage. For additional information, visit www.digitalallyinc.com.

The Company is headquartered in Lenexa, Kansas, and its shares are traded on The Nasdaq Capital Market under the symbol "DGLY".

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These forward-looking statements are based largely on the 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 the control of management. Therefore, actual results could differ materially from the forward-looking statements contained in this press release. A wide variety of factors that may cause actual results to differ from the forward-looking statements include, but are not limited to, the following: whether the Company will be able to improve its revenues and operating results in 2014 given the current economic environment; its ability to generate sufficient positive cash flow to pay its senior secured convertible note and subordinated debt as required; whether it will be able to achieve improved production and other efficiencies to increase its gross and operating margins; whether the federal economic stimulus funding for law enforcement agencies will have a positive impact on the Company's revenue; the Company's ability to deliver its new product offerings, including the FirstVU HD and DVM-800, as scheduled, obtain the required components and products on a timely basis, and have them perform as planned; its ability to maintain or expand its share of the markets in which it competes, including those outside the law enforcement industry; whether there will be a commercial market, domestically and internationally, for one or more of its new products, including the FirstVU HD and DVM-800; whether the interest shown in the Company's newer products will translate into sales of such products; whether the FirstVU HD and DVM-800 will continue to generate an increasing portion of its total sales; whether the Company will be able to adapt its technology to new and different uses, including being able to introduce new products; whether and the extent to which the new patents allowed by the US Patent Office will give the Company effective, enforceable protection of the intellectual property contained in its products in the marketplace; the outcomes of the Company's litigation with various parties; competition from larger, more established companies with far greater economic and human resources; its ability to attract and retain customers and quality employees; the effect of changing economic conditions; and changes in government regulations, tax rates and similar matters. These cautionary statements should not be construed as exhaustive or as any admission as to the adequacy of the Company's disclosures. The Company cannot predict or determine after the fact what factors would cause actual results to differ materially from those indicated by the forward-looking statements or other statements. The reader should consider statements that include the words "believes", "expects", "anticipates", "intends", "estimates", "plans", "projects", "should", or other expressions that are predictions of or indicate future events or trends, to be uncertain and forward-looking. The Company does not undertake to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Additional information respecting factors that could materially affect the Company and its operations are contained in its annual report on Form 10-K for the year ended December 31, 2013 and its quarterly report on Form 10-Q for the three months ended March 31, 2014, as filed with the Securities and Exchange Commission. 

(Financial Highlights Follow)

DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2014 AND DECEMBER 31, 2013
				March 31, 2014				December 31, 2013
Assets				(Unaudited)
Current assets:
	Cash and cash equivalents			$	1,374,935			$	454,978
	Accounts receivable-trade, less allowance for doubtful accountsof $55,033 - 2014 and $55,033 - 2013				2,193,433				1,835,780
	Accounts receivable-other				106,575				153,563
	Inventories				8,183,706				8,046,471
	Prepaid expenses				437,720				402,823
		Total current assets			12,296,369				10,893,615
Furniture, fixtures and equipment					4,599,953				4,559,504
Less accumulated depreciation and amortization					3,690,924				3,621,432
					909,029				938,072
Restricted cash					662,500				662,500
Intangible assets, net					302,709				267,281
Other assets					253,891				245,045
	Total assets			$	14,424,498			$	13,006,513
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable			$	1,551,565			$	1,441,151
	Accrued expenses				1,335,257				1,471,458
	Secured convertible note payable-current				666,667				-
	Warrant derivative liability				355,873				-
	Capital lease obligation-current				92,683				91,279
	Deferred revenue-current				29,596				6,000
	Income taxes payable				8,585				8,615
	Customer deposits				1,878				1,878
			Total current liabilities		4,042,104				3,020,381
Long-term liabilities:
	Subordinated note payable-long-term, net of discount of $154,523 - 2014 and $187,634 - 2013				2,345,477				2,312,366
	Secured convertible note payable-long-term, net of discount of $353,638 - 2014 and $0 - 2013				979,695				-
	Litigation accrual-long term				530,000				530,000
	Deferred revenue-long term				171,600				24,000
	Capital lease obligation-long term				41,497				64,989
Total long term liabilities					4,068,269				2,931,355
Commitments and contingencies
	Common stock, $0.001 par value; 9,375,000 shares authorized; sharesissued: 2,359,071 - 2014 and 2,284,048 - 2013				2,359				2,284
	Additional paid in capital				25,085,992				24,955,220
	Treasury stock, at cost (shares: 63,518 - 2014 and 63,518 - 2013)				(2,157,226	)			(2,157,226	)
	Accumulated deficit				(16,617,000	)			(15,745,501	)
			Total stockholders' equity		6,314,125				7,054,777
		Total liabilities and stockholders' equity		$	14,424,498			$	13,006,513

(FOR ADDITIONAL INFORMATION, PLEASE REFER TO THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2014 FILED WITH THE SEC)

DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2014 AND 2013
(Unaudited)
			Three Months ended March 31,
			2014				2013
Product revenue			$	3,781,128			$	4,513,792
Other revenue				127,213				266,757
Total revenue				3,908,341				4,780,549
Cost of revenue				1,587,402				1,884,622
		Gross profit		2,320,939				2,895,927
Selling, general and administrative expenses:
		Research and development expense		855,249				794,162
		Selling, advertising and promotional expense		607,144				574,439
		Stock-based compensation expense		130,847				103,492
		General and administrative expense		1,273,851				1,242,417
Total selling, general and administrative expenses				2,867,091				2,714,510
		Operating income (loss)		(546,152	)			181,417
Interest income				2,514				3,183
Interest expense				(99,812	)			(70,905	)
Secured convertible note payable issuance expenses				(224,438	)			-
Other expense				(3,611	)			-
Income (loss) before income tax expense				(871,499	)			113,695
	Income tax expense			-				-
	Net income (loss)		$	(871,499	)		$	113,695
Net income (loss) per share information:
		Basic	$	(0.39	)		$	.06
		Diluted	$	(0.39	)		$	.05
Weighted average shares outstanding:
		Basic		2,252,571				2,064,328
		Diluted		2,252,571				2,073,708

(FOR ADDITIONAL INFORMATION, PLEASE REFER TO THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2014 FILED WITH THE SEC)

DIGITAL ALLY, INC.
RECONCILIATION OF NET INCOME (LOSS) TO
NON-GAAP ADJUSTED NET INCOME (LOSS)
FOR THE THREE MONTHS ENDED
MARCH 31, 2014 AND 2013
(unaudited)
		Three Months Ended March 31,
		2014				2013
Net income (loss)		$	(871,499	)		$	113,695
Non-GAAP adjustments:
	Stock-based compensation		130,847				103,492
	Depreciation and amortization		115,250				105,460
	Interest expense		99,812				70,905
	Secured convertible note payable issuance expenses		224,438				-
Non-GAAP adjustments, net			570,347				279,857
Non-GAAP adjusted net income (loss)		$	(301,152	)		$	393,552
Non-GAAP adjusted net loss per share information:
	Basic	$	(0.13	)		$	0.19
	Diluted	$	(0.13	)		$	0.19
Weighted average shares outstanding:
	Basic		2,252,571				2,064,328
	Diluted		2,252,571				2,073,708

(FOR ADDITIONAL INFORMATION, PLEASE REFER TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2014 FILED WITH THE SEC)

DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
(Unaudited)
			2014				2013
Cash Flows From Operating Activities:
	Net income (loss)		$	(871,499	)		$	113,695
	Adjustments to reconcile net loss to net cash flowsused in operating activities:
		Depreciation and amortization		115,250				105,460
		Secured convertible note payable issuance expenses		224,438				-
		Stock based compensation		130,847				103,492
		Provision for inventory obsolescence		31,618				(53,212	)
		Provision for doubtful accounts receivable		-				(10,160	)
	Change in assets and liabilities:
	(Increase) decrease in:
		Accounts receivable - trade		(357,653	)			719,797
		Accounts receivable - other		46,988				(38,491	)
		Inventories		(168,853	)			(307,581	)
		Notes receivable - current		-				(65,000	)
		Prepaid expenses		(41,403	)			(196,904	)
		Other assets		(8,846	)			(10,736	)
	Increase (decrease) in:
		Accounts payable		110,414				(574,410	)
		Accrued expenses		(136,201	)			87,544
		Income taxes payable		(30	)			(900	)
		Unearned income		171,196				-
	Net cash used in operating activities			(753,734	)			(127,406	)
Cash Flows from Investing Activities:
	Purchases of furniture, fixtures and equipment			(40,449	)			(162,180	)
	Additions to intangible assets			(39,333	)			(2,605	)
	Net cash used in investing activities			(79,782	)			(164,785	)
Cash Flows from Financing Activities:
	Proceeds from secured convertible note payable			2,000,000				-
	Debt issuance expenses for secured convertible note payable			(224,438	)			-
	Payments on capital lease obligation			(22,089	)			(16,236	)
	Net cash provided by (used) in financing activities			1,753,473				(16,236	)
Net increase (decrease) in cash and cash equivalents				919,957				(308,427	)
Cash and cash equivalents, beginning of period				454,978				703,172
Cash and cash equivalents, end of period			$	1,374,935			$	394,745
Supplemental disclosures of cash flow information:
	Cash payments for interest		$	55,938			$	53,896
	Cash payments for income taxes		$	10,030			$	1,175
Supplemental disclosures of non-cash investing and financing activities:
	Issuance of common stock purchase warrants for new secured note payable		$	355,873			$	-
	Restricted common stock grant		$	75			$	-

(FOR ADDITIONAL INFORMATION, PLEASE REFER TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2014 FILED WITH THE SEC)