Digital Ally (DGLY) Posts Surprise Q3 Loss

Digital Ally (NASDAQ: DGLY) reported Q3 EPS of ($0.32), $0.37 worse than the analyst estimate of $0.05. Revenue for the quarter came in at $5.1 million versus the consensus estimate of $6.75 million.

The Company shipped seven orders in excess of $100,000 each during the most recent quarter, for a total of $1.3 million, compared with two individual orders exceeding $100,000 each in the year-earlier quarter. The Company's average order size increased to approximately $3,185 for in the third quarter of 2015, from $2,760 in the prior-year quarter.

Management Comments

"Although third quarter revenues were higher than in the prior-year period, we believe recent challenges by a competitor to our VULink patent (specifically the automatic triggers covered by the patent) caused confusion and concern within our marketplace, our customer base and among potential customers," stated Stanton E. Ross, Chief Executive Officer of Digital Ally, Inc. "These events resulted in delays among customers and potential customers who were considering the purchase of our product, thereby reducing sales that otherwise would have occurred in the third quarter of 2015."

"We continue to believe that material aspects of the technology disclosed in the VULink patent will ultimately be found patentable and that new patents may be issued covering other aspects of our VULink product. We expect our revenues to continue to be negatively impacted until such time as the reexamination process is completed and the final results become known."

"We have noted a trend in many current bids in which the prospective customers have been requesting information and/or quotes regarding 'automatic triggers' that we believe rely upon technology covered by our VULink patent. This demonstrates the popularity of this technology, which may become a 'standard feature' for agencies considering body-worn cameras and in-car video systems in the future. Many of our competitors are announcing the release of products that include the 'automatic trigger' technology, which we believe is covered by our VULink patent, in order to capitalize on this trend. Therefore, we believe that the results of the current reexamination of the VULink patent and potential allowance of related patents may dictate the competitive landscape of the body-worn camera and in-car video system segments of the entire law enforcement market."

"We also believe that our decline in revenues in the third quarter 2015 compared with the second quarter 2015 was attributable to a competitor stating in one of its press releases that all the claims in one of our patents were determined to be unpatentable," continued Ross. "We consider this press release to be misleading and incorrect, causing confusion and concern in our marketplace, customer base and among potential customers. Our competitor commenced an action in the United States Patent & Trademark Office ("USPTO") for a reexamination of our U.S. Patent No. 8,781,292 (the '292 Patent'). A reexamination is essentially a request that the Patent Office review whether the patent should have issued in its present form in view of 'prior art,' (e.g., other patents in the same technology field). The '292 Patent relates to the 'automatic trigger" that allows our body cameras and our in-car systems to automatically begin recording without the need for law enforcement officers to manually turn them on. The automatic trigger covered by our '292 Patent is incorporated into our VuLink product. Such product has been popular, and consequently the confusion and misinformation caused by our competitor has impacted sales of our VuLink product and body-worn and in-car systems. The reexamination is currently in process. We believe that material aspects of the technology disclosed in the '292 Patent will ultimately be found patentable, although we can offer no assurances in this regard. We expect that our revenues will continue to be negatively impacted until such time as the reexamination process is completed and the final results become known."

"Our commercial fleet revenues have more than doubled during 2015 compared with prior-year levels, thereby continuing the trend that began when we introduced the FleetVU driver management, monitoring and training web-based system. We believe this trend will continue and possibly accelerate in future quarters as existing and potential customers understand the outstanding features of our event recorder coupled with FleetVU and asset tracking/telematics solutions."

"Our gross margin percentage decreased to 40.0% of revenue in the third quarter of 2015, from 54.9% in the second quarter 2015. This gross margin decline was primarily attributable to the camera cable connector upgrade to our FirstVU HD implemented in the third quarter of 2015 to improve the functionality and reliability of our body-worn cameras. The upgrade caused us to rework our entire installed base of FirstVU HD's numbering well over 10,000 systems and to scrap a portion of the original cable assembly. This upgrade contributed to total scrap costs approximating $850,000 that affected our third quarter 2015 gross margins. We believe that the FirstVU HD connector upgrade will reduce future warranty and non-warranty repairs and that gross margins should return to more normal levels in future quarters."

"We do not expect that our total 2015 revenues will reach our original goal of $25 million due to weakness in our international revenues and the current and anticipated adverse impact on our law enforcement revenues resulting from the reexamination of the '292 Patent by the USPTO. Revenues from international customers were substantially less than expected, with revenues of only $114,413 for the nine months ended September 30, 2015. The strong dollar has the negative affect of creating extremely unfavorable changes in foreign exchange rates and has adversely impacted our international sales, particularly in Mexico, which has been our largest international customer in recent years. Our distributor in Mexico has delayed purchases under a refurbishment program that it previously announced primarily due to changes in the currency exchange rates during 2015," concluded Ross

For earnings history and earnings-related data on Digital Ally (DGLY) click here.

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