Digital Ally, Inc. (NASDAQ: DGLY) 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. The Company is headquartered in Lenexa, Kansas. For more information, see www.digitalallyinc.com or follow DGLY on Twitter (@digitalallyinc) and Facebook (www.facebook.com/DigitalAllyInc).

DGLY’s patented VuLink® auto-activation technology is the first product on the market to fully integrate in-car cameras and body-worn video. The Company has deployed more than 93,000 units worldwide in more than 40 countries. More than 8,000 law-enforcement officers in the United States use DGLY products. The Company generated $2.8 million in revenue for 3Q18.

DGLY’s litigation against Axon Enterprises, Inc. (NASDAQ: AAXN; formerly known as TASER) and WatchGuard is advancing. The Company can claim monetary damages from Axon and WatchGuard if the Company has a favorable outcome to its patent-infringement suit. In a recent press release, the Company announced that the Company had beaten AAXN’s last-minute attempt to add a new invalidity theory to the case, and on January 23, 2019, the U.S. District Court for the District of Kansas issued the pretrial order in Digital Ally’s litigation against Axon.

The pretrial order further notes that Digital Ally is seeking reasonable royalty damages of $68,456,524 as a result of TASER’s infringement of the ’452 Patent from February 2, 2016 through August 17, 2018 and that prior to trial in this matter, Digital Ally will supplement its calculations of damages.

With competitors dominated by smaller non-public entities and small divisions of large public companies, DGLY provides investors an opportunity to invest in a pure-play in a fast-growing market. A Wall Street analyst has a buy rating on DGLY with a target price of $5.00.

  • Digital Ally beats Axon’s last-minute attempt to add a new theory of invalidity to the patent infringement case
    • Pretrial order further notes that Digital Ally is seeking reasonable royalty damages of $68,456,524 as a result of TASER’s infringement of the ’452 Patent from February 2, 2016 through August 17, 2018

  • Company’s patented VuLink® auto-activation technology is the first product on the market to fully integrate in-car cameras and body-worn video
    • Enables auto-activation of in-car cameras, wireless microphones, and body-worn video cameras

  • NASCAR and Digital Ally in multi-year partnership

  • DGLY has deployed 93,500 units worldwide (30 countries); 40+ international distributors
    • More than 8,000 law-enforcement officers in the U.S. use DGLY products




Digital Ally (DGLY) has deployed 93,500 units worldwide in 30+ countries. Digital Ally produces digital video imaging and storage products for law enforcement and for security and commercial applications. The Company has deployed its products in 30+ countries worldwide, and more than 8,000 law-enforcement officers in the United States use DGLY products. The company has extensive operations with 40+ international distributors and 20 domestic sales representatives.


Figure 1: DGLY Product Deployment

 

Digital Ally’s sources of revenue generation:

  1. In-car Video System
  2. Body Cameras
  3. Cloud-Based Servers and other Software Services

Company’s product lines consist of body-cameras, in-car video systems, and cloud-based or local server software. Company generates majority of its revenue from law enforcement, which makes up 87% of the Company’s business operations, which includes in-car video (88% of U.S. law-enforcement officers) and body-worn cameras (12% of U.S. law-enforcement officers). In addition, the Company sells its products to other security organizations and consumer and commercial fleet operators through direct sales domestically and third-party distributors internationally.

Going forward, the Company expects to concentrate on expanding recurring service revenue and pursue several new commercial markets channels, and several of its new and derivative products that are in research and development are expected to be in commercial production in 2018.

 

DGLY’s litigation against Axon (NASDAQ: AAXN) and WatchGuard is advancing. The Company has taken steps to safeguard its patents and has been in patent-infringement suits against Axon (NASDAQ: AAXN), formerly TASER International, and WatchGuard.

In a recent press release, the Company announced that its patent-infringement case against WatchGuard had been lifted and the case is now moving towards trial.

Most importantly, in May, Axon Enterprises (NASDAQ: AAXN) lost its final appeal at the U.S. Patent & Trademark Office (USPTO) and can’t file further IPRs against DGLY’s patents and the federal court indicated a ruling on claim construction is imminent in the Axon litigation.

In addition, a publicly-available RFP from the City of Phoenix for their upcoming purchase of body cams, special terms and conditions are included related to intellectual property:

Figure 2: Phoenix RFP for Body-Worn Cameras, pg. 42 (Source)

 

Based on this term alone, having lost its final appeal with the USPTO, it is unlikely Axon can bid on this potentially lucrative contract. And it is likely this consideration is not unique to Phoenix. Other police departments in major urban markets contemplating multi-million-dollar purchases are likely to take similar precautions.

DGLY’s Axon litigation is related to the DGLY’s ’452 patent for hands-free video activation that has been implemented by Axon. The Company is seeking monetary damages and a permanent judgment against infringement of the ’452 patent.

Regarding the WatchGuard litigation, DGLY alleges that WatchGuard incorporated its patented technology into its VISTA Wi-Fi and 4Re In-Car product lines. The Company is seeking monetary damages, as well as seeking a permanent injunction preventing WatchGuard from continuing to sell its VISTA Wi-Fi and 4RE In-Car product lines using the Company’s technology. On December 4, 2017, the Patent Trial and Appeal Board (“PTAB”) rejected WatchGuard Video’s request to institute an IPR on the ’950 patent and barred from filing any more IPRs.

Merits of the above patent-infringement by both Axon and WatchGuard are similar to a patent infringement by Phazzer Electronic, Inc. for its willful infringement of Axon's patent and trademark rights concerning its sale of the PhaZZer Enforcer CEW (conducted electrical weapon) and probe cartridges.

As the case unfolded, a federal judge in Florida found that Phazzer had engaged in a pattern of bad-faith behavior and ruled in favor of Axon. Based on the information found on Axon’s 10Q, on April 4, 2018, the court entered a judgment against Phazzer in an amount exceeding $7.8 million which included an award to the Company of compensatory and triple damages for willful infringement, and also an award of reasonable attorney’s fees and costs.


Revenue1
FY16
FY17
Axon Enterprises Inc
$268.2M
$343.8M
WatchGuard, Inc2
$77.0M
$70.8M3

Table 1: Axon and WatchGuard Revenue (Source: SEC filings)

 

1 These figures represent the total revenue of the company in the period indicated. Some component of that revenue, the amount of which is currently unknown, may be attributable to what DGLY maintains is the willful infringement of its patents

2 Based on form S-1 registration statement filed with SEC on October 19, 2017

3 Nine month ended September 30, 2017


Looking at the Phazzer patent-infringement case, if DGLY wins the case against Axon and WatchGuard, the Company can potentially receive triple damages from both Axon and WatchGuard. In our view, depending on the outcome of the litigation, DGLY’s patent portfolio could be worth much more than its current market value.

Body-worn camera market is expected to reach $990 million by 2023, growing at a 17% CAGR between 2017 and 2023 (Market Research Future). The body-worn camera market has seen substantial market growth since the civil unrest in Baltimore and Ferguson related to police conduct. Counties across the United States have started to implement procedures that require each law-enforcement officer to have a body-worn camera mounted on the officer’s body.

 

Figure 3: Body Camera Market

 

While competition in the body-worn market continues to increase, Digital Ally’s patented VuLink® auto-activation technology provides the company an added advantage in the body-worn camera market with a potential opportunity to license their technology to big players in the body-cam market and generate royalty and license fees.

 

According to Market Research Future, major factors driving the growth for the body-worn camera is the increasing need for accountability and maintenance of a transparent approach during police conduct.

 

Key players prominent in the body-worn camera market are Pinnacle Response Ltd. (U.K.), PRO-VISION (U.S.), Shenzhen AEE Technology Co. Ltd. (China), Safety Vision LLC (U.S.), GoPro-Intrensic (U.S.), Transcend Information, Inc. (Taiwan), Wolfcom Enterprises (U.S.), Veho (MUVI) (U.K.), 10-8 Video Systems LLC (U.S.), Shenzhen Eeyelog Technology Co. Ltd. (China), and Pannin Technologies (U.S.).

 

Company provides a broad range of products used in both law enforcement and commercial applications

Figure 4: DGLY Products

 

Digital Ally’s (DGLY) has developed an impressive auto-activation technology, VuLink®, that provides hands-free activation for in-car video systems and body-worn cameras for law enforcement. DGLY was one of the first companies to launch auto-activation camera technology for law-enforcement in 2014, and the Company was granted three patents in 2016. Auto-activation technology consists of a miniature digital-video system to be worn on an individual’s body and an in-car video system that simultaneously records on both systems.

Digital Ally revolutionized connectivity with its VuLink® technology, which allows body-cam and in-car video systems to automatically turn on cameras and record when the system detects triggers such as police light bar, speed, G-force, and weapon deployment.

 

Figure 5: DGLY's VuLink® technology

 

VuLink® technology provides law enforcement a much-needed system that mitigates user errors and provides unbiased evidence in times of a police action. By continuously recording on both systems, with data stored on a cloud server, DGLY provides the best product for law-enforcement in the body-cam market.

 

NASCAR and Digital Ally formed a multi-year partnership. In February 2018, the Company announced a multi-year partnership with NASCAR. Digital Ally was branded as “A Preferred Technology Provider of NASCAR.”  As a part of the partnership, DGLY provides cameras that are mounted in the Monster Energy NASCAR Cup Series garage throughout the season, providing necessary safety commitment to every racetrack.

This new business opportunity with a world-renowned organization adds significant value to the Company’s brand and demonstrates the Company’s ability to meet new customer needs, which may add potential new business opportunities with other leading organizations. Shortly after the announcement of the partnership, DGLY stock surged over 44%.

 

Received significant FleetVu.com/DVM-250 order from zTrip, a provider of taxi and rideshare services in 18 US cities. Kansas City-based zTrip, a provider of taxi and rideshare services in 18 US cities, upgraded its first 450 vehicles with DGLY’s FleetVu Manager cloud-based system. FleetVu enables commercial operators to easily monitor their fleet of vehicles and driver performance.

The cloud-based service adds powerful real-time options for zTrip and other commercial customers, including asset tracking and mapping, as well as customizable real-time alerts, such as collisions, geo fences and speeding.Users can store and manage video, remotely update firmware and wireless configurations, while using features such as mapping, reporting and creating driver score cards.

A mobile application mobile allows drivers to perform pre- and post-inspections of their vehicle, and instantly sends alerts via SMS or email to fleet managers if there is a breakdown, maintenance request, or any issue with that vehicle. As a result, the system may be instrumental in reducing accident, fraud, and litigation risks.

While the initial order under the deal covered 450 vehicles, zTrip currently manages a fleet of 5,000 vehicles across the US and has plans to expand to 30 US and 16 international cities by the end of 2018.

Commenting on the relationship, zTrip CEO Bill George stated, “Digital Ally has been a good partner, and we're looking forward to a significant expansion of our long-term relationship. Our passengers and drivers can be assured that their safety is our number one priority and with the adoption of the FleetVu cloud-based manager we are taking substantial steps to demonstrate the same.”

 

Digital Ally's revenue decreased in 1Q18 to $2.4 million. Total revenue declined to $2.4 million in 1Q18, down by 14.1% from $2.8 million in 4Q17. The primary reason for the decline in 1Q18 revenue compared to previous quarters was due to stiff price competition in the market for body camera and in-car systems due to established competitors in the market like Axon and WatchGuard. Management believes that its law enforcement product and services revenue declined due to willful infringement from Axon and WatchGuard.

In addition to stiff competition in the market, 1Q18 revenues were adversely affected by a supply chain issue which prevented the Company from shipping over $705,000 in order backlog. Also, management have taken steps to substantially reduce selling, general and administrative ("SG&A") expenses through headcount reductions and other SG&A cost reduction measures.

We believe that the Company has significant potential to increase sales going forward with the patent office validating DGLY's autoactivation technology patent and the Company can increase its revenue generation with royalty and licenses fees.

 

Digital Ally is exploring strategic alternatives to best position the company, including monetizing its patent portfolio and related patent-infringement litigations. In November 2017, Company’s Board of Directors initiated strategic alternatives to best position the company. These alternatives included monetizing its patent portfolio and related patent-infringement litigations, sale of the company as a whole, or the sale of select properties, or groups of properties, or individual businesses.

Management is concentrating on expanding recurring service revenue to help stabilize revenue generation in subsequent quarters and is focusing to compete with their competitors by advancing product technology. These new product systems are specifically developed for in-car systems for law enforcement and commercial customers that the company expects to be in production by 3Q18.

Also, as a part of its strategic business plan, the company completed a private placement of $6.05 million via 8% senior secured convertible debentures that closed on April 3, 2018 to address its near-term liquidity needs by repaying debt and providing working capital.

In our view, the Company can add substantial shareholder value if the litigation against Axon Enterprises, Inc. and WatchGuard is moved in favor of the Company as its patent portfolio could be worth much more than its current market value.

 

Valuation

We are valuing DGLY using a 2.85x EV/Sales multiple applied to our 2019 EV estimate of $20.7 million. This generates a target price of $6.00. A 2.85 EV/S multiple values DGLY at a steep discount to Axon, which is a much bigger and established company. We believe a discount is appropriate given that DGLY is a smaller company and is not currently generating net profits.

We believe DGLY has strong potential for revenue growth going forward. In May, Axon Enterprises (NASDAQ: AAXN) lost its final appeal at the U.S. Patent & Trademark Office (USPTO). Not only does this set the stage for DGLY to move forward toward damage awards in its litigation against Axon and others from a position of strength, but it also may impede the competition's ability to secure lucrative major contracts. Also, the Company announced that its patent-infringement case against WatchGuard had been lifted and the case is now moving toward trial.

In addition, the partnership with NASCAR and its recent contract with rideshare operator zTrip will drive the appeal of DGLY's products and services to new commercial markets and open potential business opportunities in the near-term.

 

Figure 6: DGLY Financial Projections

 

Some notes on our model:

  • We are projecting DGLY to earn revenues of $15.85 million in FY18 and $20.7 million in FY18 and FY19. We are projecting gross margins to reach 45% by FY19
  • We believe that our FY18 and FY19 revenue estimate is conservative. If DGLY has a favorable litigation outcome against Axon Enterprises, Inc. and WatchGuard Video, DGLY will be able to claim monetary damages and increase its revenue generation
  • Our model estimates future licensing and royalty revenue generation with private and public companies using DGLY products
  • We are only projecting slight increase in SG&A and R&D expenses in FY18 and FY19. Recent management activities and previous results have indicated that management is committed to keeping costs under control
  • Our model does not expect DGLY to generate any income in the near future
  • We project full diluted shares outstanding of 9.1 million as of FY19, as compared to full diluted shares outstanding of 7.0 million. We assume that the Company will raise additional capital through dilutive financing and equity raises

 

Risks

There are other established major players in the body-camera and in-card video systems market. Some of these companies may be better capitalized than DGLY and thus could spend more capital on research, sales, and marketing. This could impact the company to get business contracts and revenue generation will be impacted.

Company’s litigation outcome against Axon (NASDAQ: AAXN) and WatchGuard may not be favorable to DGLY. There can be no assurance that the federal judge will rule in favor of DGLY in its patent-infringement suit against Axon and WatchGuard.

There are substantial doubts about DGLY’s ability to continue to run its business operations. The Company has an operating history of net losses, negative working capital and insufficient cash flows, and lack of liquidity to pay its current obligations

Company has substantial doubts about its long-term liquidity and operational issues. There can be no assurance that any further financing transactions can be achieved by the company.

Company’s revenue has constantly declined in the last financial year. DGLY may incur net losses in the foreseeable future and may never achieve or sustain profitability.

The Company is subject to various legal proceedings arising from normal business operations. There can be no assurances, based on the information currently available, that the ultimate outcome of each of the actions will not have a material adverse effect on the consolidated financial statement of the Company. However, an adverse outcome in some of the actions could have a materially adverse effect on the financial results of the Company in the period in which it is recorded.

The Company has convertible debt instruments related to its financing structure. The Company entered a private placement of $6.05 million in convertible debentures on April 3 to repay debts and address near-term liquidity needs.

 

Management Team

Stanton Ross, Chief Executive Officer

Stanton E. Ross has served as Chairman and Chief Executive Officer since September 1, 2005. From March 1992 to June 2005, Mr. Ross was the Chairman and President of Infinity, Inc., a publicly held oil and gas production and service company (IFNY) and served as an officer and director of each of Infinity's subsidiaries. He resigned all of his positions with Infinity Energy Resources, Inc. in June 2005, except Chairman, and then resumed his position in December 2006 at the request of the board.

From 1991 until March 1992, he founded and served as President of Midwest Financial, a financial services corporation involved in mergers, acquisitions and financing for corporations in the Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc., an investment banking firm in Overland Park, Kansas, where he primarily worked in corporate finance. From 1989 to 1990, he was employed by Stifel, Nicolaus & Co., a member of the New York Stock Exchange, where he was an investment executive. From 1987 to 1989, Mr. Ross was self-employed as a business consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas Microwave, Inc. From 1981 to 1985, he was employed by Birdview Satellite Communications, Inc., which manufactured and marketed home satellite television systems, initially as a salesman and later as national sales manager.

 

Tom Heckman, Chief Financial Officer

During the years 2001-2007, Mr. Heckman provided consulting and business investment services to publicly traded and private companies. He has been involved in the successful completion of a number of initial public offerings (IPOs), reverse mergers and other transactions; drafted, filed and achieved SEC effectiveness for Form SB-2 filings; assisted in the raising of capital for private companies in a variety of industries; and developed multiple private placement memorandums. From 1983 until 2001, Mr. Heckman was employed by Deloitte and Touche, LLP, a subsidiary of Deloitte Touche Tohmatsu, one of the largest auditing, consulting, and financial advisory, risk management, and tax services organizations in the world.

During his 18 years with Deloitte and Touche, LLP, including six years as Accounting and Auditing Partner in the Kansas City office, Mr. Heckman specialized in IPOs and public reporting entities. He served as partner in charge of a high-technology and emerging/high-growth company market segment for cross-discipline marketing efforts, assisted companies in preparing for public offerings and other liquidity events, and was involved in numerous initial/secondary financings and merger/acquisition transactions for public and private companies. He is experienced in all facets of SEC financial reporting and compliance matters. Mr. Heckman earned his Bachelor of Arts degree in Accounting at the University of Missouri-Columbia.

 

Greg Dyer, VP of National Sales, Law Enforcement

Greg Dyer, VP of National Sales, manages a team of 18 outside sales managers, a team of 10 inside sales coordinators, and 5 tele-sales specialists. Mr. Dyer began his career as Operations Manager for Specialty Moving Systems, first managing its 80,000 square foot distribution operation in Glendale Heights, Illinois, and then managing all startup operations for its Olathe, Kansas business. From 1997 to 2010, Mr. Dyer worked at A. Arnold World Class Relocation, first as National Account Sales Director at its Olathe, Kansas offices, then as Vice President of Sales and Operations and finally as Vice President of Sales and Operations at Carrollton, Texas. Mr. Dyer majored in business at Oakton Community College.

 

John Rumage, VP of National Sales, Commercial

As VP of Commercial Sales, John Rumage brings 30 years of experience in aviation and fleet safety to Digital Ally, Inc. Mr. Rumage emphasizes leadership, quality, and productivity while maintaining a safe environment. Mr. Rumage's devotion to safety is coupled with a strong sense of community that began as a young adult serving on Colorado's Disaster Preparedness Team. Mr. Rumage has 24 years of experience as a Senior Manager with the United States Marine Corps, Lockheed Martin establishing a strong record in Aviation and Fleet Quality Assurance. After retiring from the Marine Corps, Mr. Rumage continued his career in safety and fleet management as a Safety and Quality Assurance Manager for Class I Railroads. His goals have always been safety first, to prevent injuries and save lives.

 

Rafael Polo, International Sales Manager

Rafael Polo joined Digital Ally in 2013. Mr. Polo brings over 10 years of international and technical experience to his position as International Sales Manager. He served as the International Projects Manager travelling abroad to increase Digital Ally's international presence in the market. Prior to his managerial positions, Mr. Polo served as an International Technical Sales Specialist. Mr. Polo oversees the international sales as well as the technical part of product deployment, installation of systems and software, and the training for the use and management of Digital Ally's products.

 

Mark Gordon, Director of Technical Services

Mark Gordon joined Digital Ally in 2007. Mr. Gordon brings over ten years of technical experience to his position of Technical Services Manager. Mr. Gordon strives to maintain a team that provides an incredibly high level of customer support. He and his team work directly with the Engineering Department and Sales to aid in product development. Mr. Gordon's team performs site surveys and designs the technology infrastructure that supports all of the products that Digital Ally manufactures. Prior to his managerial position, Mr. Gordon served as both a Product Support Specialist and Senior Product Support.

 

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