Digital Ally's (DGLY) CEO Stanton Ross on Q2 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Digital Ally, (DGLY)

Digital Ally, Inc. (NASDAQ:DGLY)

Q2 2014 Earnings Conference Call

August 14, 2014 11:15 a.m. ET

Executives

Stanton Ross – Chairman and Chief Executive Officer

Thomas Heckman – Chief Financial Officer, Treasurer and Secretary

Analysts

Bill Sutherland – Emerging Growth Equities

Jeffrey Scott – Scott Asset Management

Operator

Hello, and welcome to the Digital Ally Inc. Second Quarter 2014 Operating Results Conference Call. (Operator Instructions)

Earlier today, Digital Ally Inc. issued a press release that included certain cautionary language with respect to forward-looking statements. The company would ask you to review the language in the press release, regarding forward-looking statements as they are equally applicable to any forward-looking statements made during this conference call. Please note this event is being recorded.

I would now like to turn the conference over to Stan Ross, CEO. Mr. Ross?

Stanton Ross

Thanks Roco [ph]. Thanks everybody for joining us today. With me is Tom Heckman, our CFO. Tom will be doing a brief overview of our second quarter operation results and also touching on the numbers a little bit. We had quite an exciting second quarter in regards to some of the surprises that popped up but also how it started to lead us on into the third quarter and it seems to be carrying over and that is with some of our new products, we’re seeing some real nice pickup in volume and it is clearly the DVM-800 tied with the VuLink and body camera has been getting a lot of traction lately but we will elaborate on that here in a little bit but for now I would like Tom to just do a quick recap of the second quarter.

Thomas Heckman

Thank you, Stan and welcome everyone. Glad that you’re able to join us today. Just to remind you that we did file our Form 10-Q with the Securities Exchange Commission this morning and my comments will be brief here but please refer to the 10-Q that has filed for more thorough discussion of the operating results and what happened or didn't happen during the second quarter.

With that, looking at the second quarter, it just was not a very good quarter, all the way around. The primary and basic reason was revenue -- revenue shortfall, and that's what I will concentrate on in my remarks here.

Revenues were down $1.6 million from the prior year quarter and 460,000 from our Q1 of 2014. So both very disappointing, pretty large drops in revenue. And what I will do is really give you some more color behind why those numbers dropped – the revenue numbers dropped and the biggest issue that I saw was the absence of large orders. I keep track of large orders and how I define those is any or individual order and shipment over $100,000, I label as a large order. We had no single orders over 100,000 in the second quarter.

If you look at a year ago quarter, now remember we’re 1.6 million less in revenues than a year ago quarter. A year ago quarter we had three orders over 100,000, that totaled 1.6 million. So virtually identical absent those large orders. In the first quarter 2014, we had two orders over 100,000 that totaled 500,000. We were 460,000 less in revenues than in the first quarter. So if you pull out the large orders that were generated in those previous quarters and in the year ago quarter, our, what I call walk-in revenue, or day-to-day revenue was virtually the same. So the primary reason is the absence of those large orders.

Now what are the drivers behind those? Typically large orders are generated with state police contracts. We have roughly 8 or 9 sole sourced state contracts on the books and probably up to 30 in the states with where we're approved vendors in in that state. Those are likely generators of large orders and also international orders tend to be large and that would also drive large orders.

In looking at what happened in the state orders, we announced the West Virginia state contract in the fourth quarter 2013 and to date we have not received a PO on that new state contract. And the primary reason is they do not have the funding as of yet allocated to their budget. So as soon as it's done that the funding is allocated, we are expecting large orders -- significant orders generated by the West Virginia contract and we’re hopeful that happens in the second half but we don't control the funding from the state legislature obviously.

There's also another sole-sourced state contract that we were expecting an order in the first quarter and also an order in the second quarter, that was put on hold because they wanted time to evaluate the DVM-800. The contract we have was for DVM 500+ and they wanted time to review and evaluate and potentially change to the DVM 800 and I'm happy to say that that we came through that, we are evaluated well and we appear to have retained that state contract with our DVM 800 but it did take time to get the contract amended, adjusted and increased to accommodate our DVM 800. So we believe we will see those orders here in the third and fourth quarter from that individual state.

And there are also many other customers, historical customers not necessarily in the state contracts, large cities or counties that have our legacy products being DVM 500+ or DVM 750 that are also pausing in their purchasing to evaluate the DVM 800 in particular in light of our new VuLink technology and product that connects it to the FirstVU which is a body worn camera. So really the pause I think is really a good omen for the second half and hopefully on into 2015 that these customers will come back and buy the DVM 800 together with the VuLink and potentially the FirstVU as well. So hopefully that's a good omen for us.

Stanton Ross

One thing allow me to jump in here, Tom but one of the things that we are starting to see is that some of the state and city bids are actually going out there and the bids are requesting an in-car video system, a body camera and a device that has these two products being able to talk to each other. That is very encouraging because we are the only ones that have such a product that’s out there and it reminds me that early days you had municipalities going out there and states stating they wanted an in-car video system that had all these specs and by the way it’s got to be in the rear-view mirror. So I think the similarities of what we've seen back in the ‘06-‘07 timeframe, ’08 even, we’re starting to see that again, where some of these specs are written to where it's -- would be a challenge for anyone to even get into the game. We know that we’re going to be the winner on this. So that’s starting to occur, and that’s one of the things that I was I guess leaning towards in my opening comments is that it appears that things are really starting to come around again because the 800 is getting traction, body camera along with the VuLink, I mean they’re actually ordering packages. So sorry about that, Tom.

Thomas Heckman

Yea, sure, thanks, thanks, Stan. The other area where big orders are typically generated is in the international arena. We did have one larger order, not large order but a larger order than normal in the second quarter, that being 88,000. In fact, that was our largest order during the quarter, it was an international order.

As we said before, you can never predict when and where and how much contracts from the international customers will hit. The only thing I do know is they will hit some time. We’ve got a number of large RFPs and quotes out there that they could hit any day. We hope that it hits in the third quarter, fourth quarter but we’re not completely sure when that will happen. I just know that it will happen at some point.

One area that negatively affected our revenues is Utility Associates has been sending out new threat letters to our customers and potential customers. Interesting enough we’re hearing that from our customers that are sending us these letters and basically it’s having the opposite reaction that they’re saying who are these clowns and why are they sending this to us. So hopefully it’s not having that big of an impact but it's unsure, we just don't know how much that is actually impacting our revenues at this point. All we do know it is a very interesting way to market your product and they continue to do that.

We have filed two lawsuits against Utility to try to get them in court, so they have to explain themselves to the judge and jury. They have yet to do that but we are pursuing them with two lawsuits. We’re also challenging the patent at the Patent Office. We and our attorneys are very confident that we will get to stop and will no longer be a threat to us or customers. But in the meantime we do want to assure all our customers that we will aggressively pursue Utility regarding this matter. We will defend ourselves, our customers and our products and we will indemnify our customers if we’re ever needed but again we’re very competent that it will never come to pass. So anyway that had some negative impact, we just don't know how much on revenues.

Another area is VuLink, the patent was issued in early July, we’re very happy about that. We're shipping units. We began shipping units at the last week of June. So it really had very little impact on the second quarter. It is stirring up a lot of interest like Stan mentioned earlier, some of our customers are actually getting very creative with what they’re doing with the VuLink, for instance, prison systems are looking at it that whenever night lockdown happens and their guards wearing our FirstVU walks by the entrance to the cells, it automatically turns them on, that’s a creative use of the VuLink as well as assisted care transportation, they are using it too, when the doors open to load or unload a passenger, it turns on the FirstVU. So our customers are getting creative beyond what we even dreamed of and I think we'll see more of that in the future. The VuLink is a very exciting product for us.

As Stan said the RFPs are coming in and the quotes on full systems -- I see that everyday now and I am seeing actually invoices going out where we are selling full systems. By full systems I mean our in-car video system, typically the DVM 800 together with the FirstVU and the VuLink in a package situation. So we’re seeing a lot of meaningful RFPs and quotes going out and I really believe that we'll see a meaningful impact to our revenues in the second half of 2014 directly related to the VuLink and its availability now.

Our new products are clearly catching on with our customers. In fact, one in five new in-car video and FirstVU orders are actually from new customer. So we’re gaining new customers as well as retaining old customers with these new products. The DVM 800 is officially our flagship product. We knew it was going take off well. We didn't know that it would take off this immediately and it has happened quickly.

In the first six months of 2014, the DVM 800 represented 31% of our total revenues as compared to the DVM 500 and 750 combined only generated 25% of our revenue. So it's clearly our leading product and we’re very happy with that. It's a very stable product. We have very few warrantee returns on it, or issues with it. It's very user-friendly and it has up to a five year warranty period on it. So our customers are very happy with that.

Our challenge there has really been ramping up production and availability of that unit -- that the demand for it caught us by surprise. We are ramping up, we currently have about $200,000 with the backlog that we still have to get out primarily in the form of DVM 800s and VuLinks. So it is catching on and we’re catching up with production on it.

The FirstVu HD represented about 6% of our revenue for the first half of 2014, somewhat disappointing. We expected more than that but I think with the VuLink now available and out there it's really going to help the sale of FirstVu and we continue to have some very very large RFPs out there that have not been determined yet. Some of these have been outstanding for 6 to 9 months, and the city states and counties are taking their sweet time and in selecting a vendor on that. And quite frankly it’s working into our favor now that we’ve got the VuLink available for it as well.

Other notable events in in the quarter. During July right after the quarter ended, we did convert approximately $1.8 million of our senior debt to equity at $6.25 per share amounts, amounted to 280,000 new shares being issued. We believe the timing was right to lighten our debt load and the price was reasonable. So we went ahead and allowed the conversion of that debt.

The Z3 litigation which has been going on for several years is now complete. The appeal and final judgment was issued. The final judgment was paid out to Dome [ph[that we had posted and about $70,000 cash was returned to us paying the judgment and the bond is now extinguished.

The Dragoneye litigation, we believe, has been settled or in the process of settlement. The parties have agreed in principle now that the attorneys are going back and forth on the wording of the settlement agreement. And we expect to have that settled here shortly with very little if no impact to the financials as you see them.

I think everyone is aware of the Stephen Gans litigation that was filed last quarter. It is moving forward in the courts and we have answered the lawsuit denying all claims and have also filed counterclaims against Mr. Gans at this time. It’s very early in the process. There is not a whole lot else we can talk about in regards to the Gans litigation.

The other major litigation item is Utility Associates, we’ve already talked about that .That continues to go on and again we’re quite anxious to get the Utility in front of the judge and jury and explain their actions there.

To wrap up, revenues have been a challenge, they continue to be our challenge. Although with the new products coming online and some of these states getting back into their normal purchasing patterns, we really see the second half of 2014 being much better than the first half revenue wise. And history has really shown us that as well. Historically we've always done better in the second half of the year than the first half.

We’ve lightened our debt load through the conversion of the debt. We were looking at some pretty significant principal repayment requirements had we not done that and we have actually taken care of that through the conversion.

The VuLink will be a factor in revenues for the rest of the year, at least the rest of the year and probably into 2015 and especially with the DVM 800 and FirstVu gaining traction as well. So Stan?

Stanton Ross

Yes, a couple more things to touch on about our products and designs that we set out to put into the marketplace. That is not only our recording capability but also our streaming video capabilities. We have successfully showed that our body camera can do a very nice job as far as the streaming capabilities. We now have it implemented in a couple of our new products that we will be introducing at the IACP. It'll probably have more of a national or international impact than domestic get hit just because a lot of the international countries they own their cell networks and therefore it's not such a cost to those.

Anyways those products will be available and again I think we’ve done a good job of staying ahead of the curve in regards to our competition and continue to be a leader out there as far as innovative new products. Rocco, I think we will go ahead and open this up our Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bill Sutherland of Emerging Growth Equities.

Bill Sutherland – Emerging Growth Equities

I may have missed something, it was – hasn’t stepped out just perhaps a second but the revenue shortfall – a bit of it was just capacity constraints on the DVM 800, and just kind of wondering about the order of magnitude on that, how much of this got [ph] in this quarter?

Stanton Ross

I don't know that it was so heavily -- because of the restraints although it did play a role, it was probably more of – an example being one state that we know for sure just bought well over $4 million worth of products for us and we know that they’ve gotten a contract to do as much as another $5 million over the next three years. The DVM 800 was not a product that had been approved for them to be purchasing. So they held off on buying any more of the DVM 500 pluses to get the 800 qualified and approved to be on their approved purchasing list. So that's where we’ve seen more of a slow-up or setback in regards to the top line versus out so much of the production. Tom, that probably that’s 300,000, 400,000 maybe –

Thomas Heckman

Yes, our backlog is generally running between 200,000 and 300,000 it goes up a down everyday obviously and most of that backlog is in the form of VuLink and DVM.

Bill Sutherland – Emerging Growth Equities

So, it’s basically they held a lot on the yield products and they didn’t have approvals in for the new products?

Stanton Ross

Correct. A lot of this grant money is pretty well identified and what they can do and can’t do with it. But, this one if you take as a state money and they just have DVM-800 approved and it’s been approved and we’re optimistic that we will see something from them even this quarter.

Bill Sutherland – Emerging Growth Equities

Did you guys mention commercial sales, were they --?

Stanton Ross

That’s a good point, we did not really touch on that and we should have. They continue to like great strides in the markets that we are, and again as you know they’re absolutely the leaders when it comes to in-car video systems for ambulance companies and lot of the first responders along those lines, they’ve made some real strides in getting into the what’s called the more traditional fleet markets that are out there and the reason they’ve been able to do that is they’ve actually implemented some asset tracking capabilities along with the video and also some data points that they’re actually monitoring reference since we had one vehicle that we got a identification that they had to tell like go out. So, even get the lot of meditated analysis and alerts that are put in there. So they have really gotten a product that I would say for the first time because we’ve always sort of had to have them back there in the back in regards to waiting on engineering to get them with some law enforcement products.

The product now is I would say we’re 90% there with all the features that has been asked throughout the industry and we’ve some great things in the works in the second half of this year as well.

Bill Sutherland – Emerging Growth Equities

So far as the second quarter, the growth about like you have been seeing, which has been pretty dramatic?

Stanton Ross

It was pretty flat, that with pretty consistent to what first quarter was. I think, the quotes and the pilots that they have got going out there are quite large, I know some of the pilots are the size of 50 units and these guys are looking for eventually 500 units or more. So, it appears that all the cultivating has continued and grow. The big orders just haven’t fell in the place yet, but I do anticipate that here in the second half.

Bill Sutherland – Emerging Growth Equities

And then just one last one on the government market again, I’m wondering, I’m real confused about is your body camera, just looking at stages latest press on new orders which are very strong, can you – up there for 6 and 9 months I don’t know, it’s just a limitation on that but, what you think that mean, I realize they had cloud storage capability for a while and that’s something that you’re trying to add, has that made a reference that you have seen or anything like that?

Stanton Ross

So, we’ve now in cloud solution available that we can’t quote and are happy to and have that in place. So that is an option that is now available to the customers as we go and we call upon them. The biggest thing and I guess, one of the things like San Diego signed a big contract and (inaudible) was gracious enough to put all the numbers in one of the press releases in 10-Q that laid out what kind of money of that. And we did just a little bit of that for comparison, what kind of money they would have spent if they would have did, and appropriate serves to meet the demands that they were looking at. And San Diego has been spending over that five year period almost an extra million dollars by going the route that they have went. That’s truly goes forward, one is the cloud is a quite a bit more expensive given our cloud solution and secondly, again if you had your own server and willing to manage your own staff it is a lot cheaper than the cloud solutions, I mean, it’s just not there yet. So, we’ve got to do a better job of going out there and showing the comparisons, we’ve even talked to a few oncologists – doing the white paper to share the comparisons, going with the system and managing that yourself with the proper service storage even if you have to hire IT guy, it’s stupid that an extra million bucks you’re going to be throwing out.

So, we recognize that we have some work to do there in regards to the marketing, but again, as far as gadgets, our gadgets will be all day long on its capabilities, whether be video quality, audio quality and go with you sensitivity at night. We’ve no problems on that as we get down to price and people are getting separate into that five year contract and that realize on how much they’re really paying it at the end of the day. So, be rest affirmed that if someone from the San Diego newspaper fix up that and there is a little article on the extra million bucks that city is spending that they really need to fit themselves.

Bill Sutherland – Emerging Growth Equities

Alright, thanks a lot.

Stanton Ross

Thank you.

Operator

(Operator Instructions) Our next question comes from (inaudible) please go ahead.

Unidentified Analyst

Good morning, gentlemen. I had two questions, one is I see your inventory figure at the end of the quarter and I’m wondering what percentage of that is legacy products in the likelihood of having to write down some of that?

Thomas Heckman

Well, this is Tom. A good majority of that is the DVM 5,750 and all 500 repair and service parts as well as a number of new units to sell. We have increased our reserve for absolute nexus inventory, in fact we almost doubled with 180 some thousand additional to the reserve to a recognition of the switch over to the DVM-800. So, yes that’s always an issue, we believe we’ve provided adequate reserves and our auditors have looked at it as well. So, we’re insulated from that.

Stanton Ross

I would say, Mark, we’ve got a couple of things going on, we’re working with some of our older customers that have quite a bit of the DVM-500s and 750 and have proposed them packages that very attractive to them and also would do a very good job of pretty much clear now on inventory of those legacy products.

Thomas Heckman

And also we’ve got a number of very large customers, international customers as a matter of fact that are looking at repair and service staff for their inventory level by new which will hopefully hit in the near term and with that allow the inventory will be liquidated through that that way. As long as there is activity we have got almost 20,000 DVM500 plus systems out there and all 500s, as long as those things are still in services there is going to be need for repair parts and service in that.

Unidentified Analyst

Okay, great. Next question is when do you anticipate being EBITDA positive? We are talking one more quarter out two quarters how it was?

Thomas Heckman

Mark, this is Tom, and I talked to the board about virtually a recorder on this quarter especially have an sort of what appears to be pretty good insight to what is going to can transpire but the board hasn’t allowed us as of yet to give any real guidance there even maybe we could look further down the road here we can liaise that with the board and be able to give some guidance here in the next 30 days or so.

Unidentified Analyst

Okay. And final question at this point in time do you anticipate having to go to the public markets to raise anymore equity and in order to rollout the new products as you see there you should be?

Thomas Heckman

I think we are doing pretty good there, we got new products coming out called micro view which is really our very first in-car system that is not encapsulated in the rear view mirror that it has HD capabilities, it’s quite unique in its design, very sleek looking, that can go also into interrogation room on and on and on. So in that essence we will be talking about quite a bit of the ICP, it won’t really have much of the impact this year on the financial. And there is couple of other products that we are still working on and I think we are going to be in good shape as far as our needs for capital for us to rollouts and the rate is coming around well. So I don’t us to need to get back into that.

Stanton Ross

I would add that we have launched the FirstVU HD, we have launched the VuLink and DVM-800 all within the last year. So I think you are seeing highest level of R&D spend that you will see for quite some time. I don’t anticipate 2014 R&D spend to be anywhere near what it was in 2013 and then 2015 it should be lower than 2014.

Thomas Heckman

We are on the commercial side.

Stanton Ross

Yes exactly. We spend our money in the last year and half, 18 month whatever on those new products. They are our flagship products right now. We believe those will periods for quite some time.

Operator

Thank you. Our next question comes from Jeffrey Scott of Scott Asset Management. Please go ahead.

Jeffrey Scott – Scott Asset Management

Good morning. Tom, the dollar value of the legacy 500 to 750 in inventory?

Thomas Heckman

I don’t have any exact figure, Jeffery but it’s got to be probably around, including new and finished goods as well as repair and service, that probably around 4 million to 4.5 million would be my guess at this time. Jeffery, I haven’t have that exact figure in front me.

Jeffrey Scott – Scott Asset Management

That's alright. That's close enough. How about LIDAR?

Thomas Heckman

LIDAR is 1.3 million at the end of the quarter.

Jeffrey Scott – Scott Asset Management

And what was revenue for LIDAR?

Thomas Heckman

LIDAR value, I don’t have that in front of me but it was probably 350,000 to 400,000 for the quarter.

Jeffrey Scott – Scott Asset Management

Okay, so we are looking at something like six quarters worth of inventory there?

Thomas Heckman

We have got more inventory than we need on the LIDAR. We continue to the sale above cost and have no reason or need to reduce that to move it. It’s very reasonably priced compared to the competitor’s models and we don’t see any reason that we need any additional reserves or anything on that.

Jeffrey Scott – Scott Asset Management

Okay. LIDAR first for a second and you sold something like what 300 units during the quarter, right?

Thomas Heckman

That sounds approximately right, yes.

Jeffrey Scott – Scott Asset Management

And in the one press release that came out of date was August 6th, that press release, eight or ten customers and the total number of units and that was 450 or 500 plus a lot of other customers. I mean Winston-Salem was 194 units, flag staff there and we are talking about Los Angeles and New York and Detroit and major metropolitan centers. There is a major discrepancy between what Taser’s able to accomplish and what Digital Ally has been able to accomplish. I mean we have been talking about first view for, how many years which is may be 3.5 years, 4 years...

Stanton Ross

We started shipment in December.

Jeffrey Scott – Scott Asset Management

You get the first batch that was a disaster.

Thomas Heckman

Yes. That was a real ruggedized unit was more for SWAT team and stuff along those lines. And this is quite note more slick day-to-day type of the unit that we have now.

Jeffrey Scott – Scott Asset Management

So what you said about San Diego really points out the problem. The process has been – the only reaction we have has been the horribly mismanaged or undermanaged or whatever adjective you want to lean there. If San Diego is making that kind of purchase and you are not on their radar screen then the business process is not working. And I can’t believe that the board doesn’t have a greater sense of urgency, you are basically going bankrupt. You can’t lose high six figures a quarter and in respect of sand business on 3.4 million a quarter on revenue or whatever is not going to do it for you. So there has to be a much greater sense of urgency in here than being anything I am hearing.

Stanton Ross

We agree that the top line needs to be addressed and fixed and we have – we feel like we are doing the things to make that happen. In regards to the San Diego, that everyone out even for a bit and to also to point out Albuquerque, New Mexico which we know about that little discrepancy in regards to higher right after and make up the contract down there. So anyway we point out lot of different things and again things are as a real foot hole in the industry because they sale that particular product or teaser to virtually every department in the United States. So they get their equipment to door everyday while we still have challenges getting in there but again it’s real nice to see that we are seeing one out of five these orders now coming through our new customers and we do have our – Evans in New Indiana that about 200 units from us. We are getting equipment order and we are getting to have a major contracts as well to compare to the Taser's.

Jeffrey Scott – Scott Asset Management

Last three years, we have heard about tomorrow, everything is going to happen tomorrow and at some point tomorrow arrives and we are losing a lot of money and we are not seem to be making any fast progress here. So there is no – I guess there is no question here, it’s just an external comment that from the outside it looks like you will have to be doing, you need to do a much better job of commercializing this product and I don’t know how you go about it, what you are doing hasn’t worked and if hasn’t worked then you have got to change it. The board has to start getting hard on somebody to get this done. Okay, thanks.

Operator

Thank you. And this concludes our question and answer sessions. I will now like to return the conference back over to Mr. Ross for any closing remarks.

Stanton Ross

Thanks everybody for listening in. We really do believe that we have got things going in the right company with the company. We agree with Jeffery that the numbers haven’t supported that as of yet so we would be encouraged and hope that everyone can continue to monitor us and watch the successes that we are having out there and also hopefully see how that can extrapolate to the bottom line over the next remainder of this year. Tom, do you any additional order to get.

Thomas Heckman

The second half of the years is always the stronger half for us and we see no reason that that would change this year. In fact, we have got some pretty good insight as to some upcoming possibilities for larger sales that we believe will happen and you will likely hear that in the former press release.

Stanton Ross

Thanks everybody.

Operator

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