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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Digital Ally, Inc.    DGLY

DIGITAL ALLY, INC.

(DGLY)
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DIGITAL ALLY : Management's Discussion and Analysis of Financial Condition and Results of Operation. (form 10-Q)

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08/13/2020 | 01:03pm EDT
This quarterly report on Form 10-Q of Digital Ally, Inc. (the "Company", "we",
"us", or "our") contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The words "believe,"
"expect," "anticipate," "intend," "estimate," "may," "should," "could," "will,"
"plan," "future," "continue," and other expressions that are predictions of or
indicate future events and trends and that do not relate to historical matters
identify forward-looking statements. These forward-looking statements are based
largely on our 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 our control. Therefore,
actual results could differ materially from the forward-looking statements
contained in this document, and readers are cautioned not to place undue
reliance on such forward-looking statements.



We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
A wide variety of factors could cause or contribute to such differences and
could adversely impact revenues, profitability, cash flows and capital needs.
There can be no assurance that the forward-looking statements contained in this
document will, in fact, transpire or prove to be accurate.



Factors that could cause or contribute to our actual results differing
materially from those discussed herein or for our stock price to be adversely
affected include, but are not limited to: (1) our losses in recent years,
including during the six months ended June 30, 2020 and the 2019 fiscal year;
(2) economic and other risks for our business from the effects of the COVID-19
pandemic, including the impacts on our law-enforcement and commercial customers,
suppliers and employees and on our ability to raise capital as required; (3) our
ability to increase revenues, increase our margins and return to consistent
profitability in the current economic and competitive environment; (4) our
operation in developing markets and uncertainty as to market acceptance of our
technology and new products; (5) the availability of funding from federal, state
and local governments to facilitate the budgets of law enforcement agencies,
including the timing, amount and restrictions on such funding; (6) our ability
to deliver our new product offerings as scheduled in 2020, such as the Shield™
disinfectant/sanitizers products and ThermoVU™ temperature screening systems,
whether such new products perform as planned or advertised and whether they will
help increase our revenues; (7) whether we will be able to increase the sales,
domestically and internationally, for our products in the future; (8) our
ability to maintain or expand our share of the market for our products in the
domestic and international markets in which we compete, including increasing our
international revenues; (9) our ability to produce our products in a
cost-effective manner; (10) competition from larger, more established companies
with far greater economic and human resources; (11) our ability to attract and
retain quality employees; (12) risks related to dealing with governmental
entities as customers; (13) our expenditure of significant resources in
anticipation of sales due to our lengthy sales cycle and the potential to
receive no revenue in return; (14) characterization of our market by new
products and rapid technological change; (15) our dependence on sales of our
EVO-HD, DVM-800, FirstVU HD and DVM-250 products; (16) potential that
stockholders may lose all or part of their investment if we are unable to
compete in our markets and return to profitability; (17) defects in our products
that could impair our ability to sell our products or could result in litigation
and other significant costs; (18) our dependence on key personnel; (19) our
reliance on third-party distributors and sales representatives for part of our
marketing capability; (20) our dependence on a few manufacturers and suppliers
for components of our products and our dependence on domestic and foreign
manufacturers for certain of our products; (21) our ability to protect
technology through patents and to protect our proprietary technology and
information as trade secrets and through other similar means; (22) our ability
to generate more recurring cloud and service revenues; (23) risks related to our
license arrangements; (24) our revenues and operating results may fluctuate
unexpectedly from quarter to quarter; (25) sufficient voting power by coalitions
of a few of our larger stockholders, including directors and officers, to make
corporate governance decisions that could have significant effect on us and the
other stockholders; (26) sale of substantial amounts of our common stock, par
value $0.001 per share that may have a depressive effect on the market price of
the outstanding shares of our common stock; (27) possible issuance of common
stock subject to options and warrants that may dilute the interest of
stockholders; (28) our nonpayment of dividends and lack of plans to pay
dividends in the future; (29) future sale of a substantial number of shares of
our common stock that could depress the trading price of our common stock, lower
our value and make it more difficult for us to raise capital; (30) our
additional securities available for issuance, which, if issued, could adversely
affect the rights of the holders of our common stock; (31) the likely high
volatility of our stock price due to a number of factors, including a relatively
limited public float; (32) whether the litigation against Axon will achieve its
intended objectives and result in monetary recoveries for us; (33) whether the
USPTO rulings will curtail, eliminate or otherwise have an effect on the actions
of Axon and other competitors respecting us, our products and customers; (34)
whether our patented VuLink technology will become the de-facto "standard" for
agencies engaged in deploying state-of-the-art body-worn and in-car camera
systems and will increase our revenues; (35) whether such technology will have a
significant impact on our revenues in the long-term and (36) indemnification of
our officers and directors.


Current Trends and Recent Developments for the Company



Overview



We produce digital video imaging, storage products and disinfectant and related
safety products for use in law enforcement, security and commercial
applications. Our current products include in-car digital video/audio recorders
contained in a rear-view mirror for use in law enforcement and commercial
fleets; a system that provides its law enforcement customers with audio/video
surveillance from multiple vantage points and hands-free automatic activation of
body-worn cameras and in-car video systems; a miniature digital video system
designed to be worn on an individual's body; and cloud storage solutions. We
have active research and development programs to adapt our technologies to other
applications. We sell our products to law enforcement agencies, private security
customers and organizations and consumer and commercial fleet operators through
direct sales domestically and third-party distributors internationally.



  30







We supply technology-based products utilizing our portable digital video and
audio recording capabilities, for the law enforcement and security industries
and for the commercial fleet and mass transit markets. We have the ability to
integrate electronic, radio, computer, mechanical, and multi-media technologies
to create unique solutions to address needs in a variety of other industries and
markets, including mass transit, school bus, taxicab and the military. Our
products include the DVM-800 in-car digital video mirror systems for use by law
enforcement; the FirstVU and the FirstVU HD which are body-worn cameras, our
patented VuLink product, which integrates our body-worn cameras with our in-car
systems by providing hands-free automatic activation and which we supply to both
law enforcement and commercial markets; the DVM-250 and DVM-250 Plus, a
commercial line of digital video mirrors that serve as "event recorders" for the
commercial fleet and mass transit markets; and FleetVU and VuLink, which are
cloud-based evidence management systems. We introduced the EVO-HD product in
late June 2019 and began full-scale deliveries in the third quarter 2019. It is
designed and built on a new and highly advanced technology platform that we
expect to become the platform for a new family of our in-car video solution
products for the law enforcement and commercial markets. We believe that the
launch of these new products will help to reinvigorate our in-car and body-worn
systems revenues while diversifying and broadening the market for our product
offerings as circumstances normalize in a post-COVID-19 economy, although we can
offer no assurance in this regard. The Company has recently added two new lines
of branded products: (1) the ThermoVu™ which is a line of self-contained
temperature monitoring stations that provides alerts and controls facility
access when an individual's temperature exceeds a pre-set threshold and (2) our
Shield™ disinfectants and cleansers which are for use against viruses and
bacteria and began offering such products to its law enforcement and commercials
customers beginning late in the second quarter 2020. We are ramping up our
supply chain for both of these new product lines, which are manufactured by
third-parties.



We experienced operating losses for all of our fiscal quarters during 2020 and
2019 except for the second quarter of 2019, as a result of a patent litigation
settlement. The following is a summary of our recent operating results on a
quarterly basis:



                             June 30,         March 31,        December 31,        September 30,         June 30,
                               2020              2020              2019                2019                2019
Total revenue              $  1,732,192$  2,425,745$   2,420,437$     2,923,148$  2,546,983
Gross profit (loss)             392,758         1,265,028            (88,185 )          1,188,262           950,812
Gross profit margin %              22.7 %            52.2 %             (3.6 )%              40.7 %            37.3 %
Total selling, general
and administrative
expenses                      2,535,912         3,192,396          3,145,633            3,468,709        (1,616,830 )
Operating income (loss)      (2,143,154 )      (1,927,368 )       (3,233,819 )         (2,280,447 )       2,567,642
Operating income (loss)
%                                (123.7 )%          (79.5 )%          (133.6 )%             (78.0 )%          100.8 %
Net loss                   $   (497,894 )$ (2,334,110 )$  (3,426,984 )$    (2,985,825 )$   (387,730 )
Our business is subject to substantial fluctuations on a quarterly basis as
reflected in the significant variations in revenues and operating results in the
above table. These variations result from various factors, including but not
limited to: (1) the timing of large individual orders; (2) the traction gained
by newer products, such as the recently released EVO-HD, the ThermoVU™ and the
Shield™ line; (3) production, quality and other supply chain issues affecting
our cost of goods sold; (4) unusual increases in operating expenses, such as the
timing of trade shows and bonus compensation; (5) the timing of patent
infringement litigation settlements, such as the $6.0 settlement we obtained
from WatchGuard during the second quarter of 2019 and (5) the impact of patent
infringement and other litigation including all related obligations and expenses
respecting such litigation and (6) most recently, the impact of COVID-19 on
the
economy and our business.



  31






Off-Balance Sheet Arrangements




We do not have any off-balance sheet debt, nor did we have any transactions,
arrangements, obligations (including contingent obligations) or other
relationships with any unconsolidated entities or other persons that may have
material current or future effect on our financial conditions, changes in the
financial conditions, results of operations, liquidity, capital expenditures,
capital resources, or significant components of revenue or expenses.



For the Three Months Ended June 30, 2020 and 2019



Results of Operations


Summarized immediately below and discussed in more detail in the subsequent
sub-sections is an analysis of our operating results for the three months ended
June 30, 2020 and 2019, represented as a percentage of total revenues for each
respective year:



                                                             Three months ended
                                                                  June 30,
                                                             2020           2019
   Revenue                                                       100 %         100 %
   Cost of revenue                                                77 %          63 %

   Gross profit                                                   23 %          37 %

Selling, general and administrative expenses:

   Research and development expense                               21 %      

23 %

   Selling, advertising and promotional expense                   28 %      

48 %

   Stock-based compensation expense                               22 %      

23 %

   General and administrative expense                             76 %      

78 %

   Patent litigation settlement                                    - %      

(236 )%


   Total selling, general and administrative expenses            147 %         (64 )%

   Operating income (loss)                                      (124 )%        101 %

Change in fair value of proceeds investment agreement 149 %

(116 )%

   Change in fair value of secured convertible notes             (51 )%     

- %

   Other income and interest expense, net                         (3 )%     

- %


   Loss before income tax benefit                                (29 )%        (15 )%
   Income tax (provision)                                          - %           - %

   Net loss                                                      (29 )%        (15 )%

Net loss per share information:

   Basic                                                   $   (0.03 )$ (0.03 )
   Diluted                                                 $   (0.03 )$ (0.03 )




Revenues


We sell our products and services to law enforcement and commercial customers in the following manner:

? Sales to domestic customers are made directly to the end customer (typically a

law enforcement agency or a commercial customer) through our sales force,

comprised of our employees. Revenue is recorded when the product is shipped to

    the end customer.




  32






? Sales to international customers are made through independent distributors who

purchase products from us at a wholesale price and sell to the end user

(typically law enforcement agencies or a commercial customer) at a retail

price. The distributor retains the margin as its compensation for its role in

the transaction. The distributor generally maintains product inventory,

customer receivables and all related risks and rewards of ownership. Revenue

is recorded when the product is shipped to the distributor consistent with the

    terms of the distribution agreement.

  ? Repair parts and services for domestic and international customers are
    generally handled by our inside customer service employees. Revenue is

recognized upon shipment of the repair parts and acceptance of the service or

    materials by the end customer.



We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.




Revenues for each of the second quarters of 2020 and 2019 were derived from the
following sources:



                                              Three months ended June 30,
                                              2020                  2019
         DVM-800                                     21 %                  35 %
         Repair and service                          23 %                  15 %
         DVM-250 Plus                                 6 %                   9 %
         FirstVu HD                                  13 %                  12 %
         Cloud service revenue                       16 %                   7 %
         EVO-HD                                       9 %                   3 %
         VuLink                                       1 %                   1 %
         Accessories and other revenues              11 %                  18 %

                                                    100 %                 100 %



The COVID-19 pandemic had a negative impact on our revenues in the second quarter 2020 and we expect it to adversely affect our revenues during the remainder of 2020.

Product revenues for the three months ended June 30, 2020 and 2019 were $1,053,581 and $1,945,724 respectively, a decrease of $892,143 (46%), due to the following factors:

? In general, we have experienced pressure on our revenues as our in-car and

body-worn systems are facing increased competition because our competitors

have released new products with advanced features. Additionally, our law

enforcement revenues declined over the prior period due to price-cutting and

competitive actions by our competitors, adverse marketplace effects related to

our patent litigation proceedings and supply chain issues. We introduced our

EVO-HD late in the second quarter of 2019 with the goal of enhancing our

product line features to meet these competitive challenges and we started to

see traction in late 2019. We expect customers and potential customers to

review and test the EVO-HD prior to committing to this new product platform,

all of which has been delayed due to the COVID-19 pandemic.

? The COVID-19 pandemic delayed the shipment of orders in the second quarter

2020 as police forces and governments dealt with its impact. In addition, our

salesmen were generally unable to meet with and demonstrate our products to

our law enforcement and commercial customers because of travel and other

restrictions imposed by cities and states due to the COVID-19 pandemic. In

person demonstration of our products to potential customers is generally

required in order to obtain new customers or upgrade existing customers. Our

product sales decreased substantially in the second quarter 2020 compared to

    2019 primarily due to the impact of the COVID-19 pandemic.




  33






? Management has been focusing on migrating customers, in particular commercial

customers, from a "hardware sale" to a service fee model. Therefore, we expect

a reduction in commercial hardware sales (principally DVM-250's and FirstVU's)

as we convert these customers to a service model under which we provide the

hardware as part of a recurring monthly service fee. In that respect, we

introduced a monthly subscription agreement plan for our body worn cameras and

related equipment during the second quarter 2020 that allowed law enforcement

agencies to pay a monthly service fee to obtain body worn cameras without

incurring a significant upfront capital outlay. This program has gained some

traction, resulting in decreased product revenues and increasing our service

revenues.

? Our international revenues decreased to $6,073 (1% of total product revenues)

during the three months ended June 30, 2020, compared to $69,266 (4% of total

product revenues) during the three months ended June 30, 2019. The COVID-19

pandemic delayed the shipment of orders in the second quarter 2020 as police

forces and governments dealt with its impact. In addition, our salesmen were

generally unable to meet with and demonstrate our products to our

international law enforcement and commercial customers because of travel and

other restrictions imposed by the various countries. In person demonstration

of our products to potential customers is generally required in order to

obtain new customers or upgrade existing customers. Our international sales

decreased substantially in the second quarter 2020 compared to 2019 primarily

due to the impact of the COVID-19 pandemic. We believe that would have seen an

uptick in our international sales activity in 2020 as a result of the recent

award of a contract for our FirstVU HD by a sovereign nation's national police

force which was suspended because of the COVID-19 pandemic. The status of this

large international contract is unsettled at present.

? During the second quarter of 2020, the Company launched two product lines in

direct response to the increased safety precautions that organizations and

individuals are taking due to the COVID-19 pandemic. ThermoVu™ was launched as

a non-contact temperature-screening instrument that measures temperature

through the wrist and controls entry to facilities when temperature

measurements exceed pre-determined parameters. ThermoVu™ has optional features

such as facial recognition to improve facility security by restricting access

based on temperature and/or facial recognition reasons. ThermoVu™ provides an

instant pass/fail audible tone with its temperature display and controls

access to facilities based on such results. We believe that it can be widely

applied in schools, office buildings, subway stations, airports and other

public venues. The Company also launched its Shield™ disinfectant/sanitizer

product lines to fulfill demand by current customers and others for a

disinfectant and sanitizer that is less harsh than many of the traditional

products now widely distributed. The Shield™ Cleanser product line contains a

cleanser with no harsh chemicals or fumes.

The Company began offering the Shield™ line of disinfecting products to its

first responder customers including police, fire and paramedics during the

second quarter 2020. Commercial customers such as cruise lines, taxi-cab and

para transit may also be good candidates for the products. The Company is

considering enhancing the line of disinfectant products for additional related

products including hardware to efficiently and effectively dispense the

disinfectants. The Company is hopeful that its law enforcement and commercial

customers will adopt this new product offering to combat the spread of the

    COVID-19 virus as well as other bacteria and viruses.




Service and other revenues for the three months ended June 30, 2020 and 2019
were $678,611 and $601,259, respectively, an increase of $77,352 (13%), due
to
the following factors:


? Cloud revenues were $281,008 and $169,874 for the three months ended

              June 30, 2020 and 2019, respectively, an increase of $111,134 (65%).
              We have experienced increased interest in our cloud solutions for
              law enforcement primarily due to the deployment of our new
              cloud-based EVO-HD in-car system; however, the fallout from the
              COVID-19 pandemic and related business shut-downs adversely affected
              our commercial customers usage of cloud services and offset
              increases in cloud revenues.




  34






? Revenues from extended warranty services were $334,705 and $343,119 for the

three months ended June 30, 2020 and 2019, respectively, a decrease of $8,414

(3%). We have a number of customers that have purchased extended warranty

packages, primarily in our DVM-800 premium service program.

? Installation service revenues were $49,776 and $31,791 for the three months

ended June 30, 2020 and 2019, respectively, an increase of $17,985 (57%).

Installation revenues tend to vary more than other service revenue types and

are dependent on larger customer implementations. The decrease in installation

revenues in 2020 compared to 2019 was attributable to the COVID-19 pandemic

lock-down, which prevented our technicians from completing on-site

installations during the 2020 period.

? Software revenue, non-warranty repair and other revenues were $13,122 and

$56,475 for the three months ended June 30, 2020 and 2019, respectively, a

decrease of $43,353 (77%). Software revenues were $10,996 for the three months

ended June 30, 2020 compared to $20,011 for the three months ended June 30,

2019 and non-warranty repairs were $8,904 for the three months ended June 30,

2020 compared to $32,833 for the three months ended June 30, 2019. Situational

security event fees were $10,800 during the three months ended June 30,2020

    compared to $-0- during the three months ended June 30, 2019.




Total revenues for the three months ended June 30, 2020 and 2019 were $1,732,192
and $2,546,983, respectively, a decrease of $814,791 (32%), due to the reasons
noted above.



Cost of Revenue



Cost of product revenue on units sold for the three months ended June 30, 2020
and 2019 was $1,165,528 and $1,468,828, respectively, a decrease of $303,300
(21%). The decrease in cost of goods sold for products is primarily due to the
46% decrease in product revenues offset by an increase in the cost of goods sold
for products as a percentage of product revenues to 111% for the three months
ended June 30, 2020 compared to 75% for the three months ended June 30, 2019.
During the second quarter of 2020 the Company moved to new and smaller warehouse
facilities and during the move sorted through its entire inventory and disposed
of all excess and obsolete inventory rather than moving it to the new location,
which contributed to the increase in the cost of goods sold for products as a
percentage of product revenues to 111% for the three months ended June 30, 2020.
In addition, the move to a new facility coupled with the manufacturing slow down
caused by the COVID-19 pandemic caused significant unfavorable overhead and
labor variances for production in the second quarter of 2020, which management
decided to expense as a period cost rather than apply to finished good and
work
in process inventory.


Cost of service and other revenues for the three months ended June 30, 2020 and
2019 was $173,906 and $127,343, respectively, an increase of $46,563 (37%). The
increase in service and other cost of goods sold is primarily due to the 13%
increase in service and other revenues coupled with an increase in the cost of
service and other revenues sold for products as a percentage of service and
other revenues to 26% for the three months ended June 30, 2020 compared to 21%
for the three months ended June 30, 2019.



Total cost of sales as a percentage of revenues was 77% for the three months
ended June 30, 2020 compared to 63% for the three months ended June 30, 2019. We
believe our gross margins will improve during the remainder of 2020 if we can
increase revenues (in particular service and other revenues) in light of the
COVID-19 pandemic and continue to reduce product warranty issues.



We had $2,000,412 and $4,144,013 in reserves for obsolete and excess inventories
at June 30, 2020 and December 31, 2019, respectively. Total raw materials and
component parts were $2,575,710 and $4,481,611 at June 30, 2020 and December 31,
2019, respectively, a decrease of $1,905,901 (43%). During June 2020 the Company
moved to a new and smaller warehouse facilities and during the move sorted
through its entire inventory and disposed of all excess and obsolete inventory
rather than moving it to the new location which contributed to the significant
decrease in the cost. We scrapped older version inventory component parts that
were mostly or fully reserved during the three months ended June 30, 2020, which
was the primary cause for the decrease in total raw materials and component
parts. Finished goods balances were $4,146,308 and $4,906,956 at June 30, 2020
and December 31, 2019, respectively, a decrease of $760,648 (16%). The decrease
in the inventory reserve is primarily due to the scrapping of older version
legacy products that were mostly or fully reserved during the three months ended
June 30, 2020 as a result of moving our warehouse and office location. The
remaining reserve for inventory obsolescence is generally provided for the level
of component parts of the older versions of our printed circuit boards and the
phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products. We believe
that the reserves are appropriate given our inventory levels at June 30, 2020.



  35







Gross Profit


Gross profit for the three months ended June 30, 2020 and 2019 was $392,758 and
$950,812, respectively, a decrease of $558,054 (59%). The decrease is
commensurate with the 32% decrease in total revenues and the gross margin
percentage decline to 23% during the three months ended June 30, 2020, from 37%
during the three months ended June 30, 2019. Our goal is to improve our margins
to 60% over the longer-term based on the expected margins of our EVO-HD,
DVM-800, VuLink, FirstVU HD, ThermoVU™, Shield™ disinfectants and our cloud
evidence storage and management offering, if they gain traction in the
marketplace and subject to a normalizing economy in the wake of the COVID-19
pandemic. In addition, if revenues from these products increase, we will seek to
further improve our margins from them through economies of scale and more
efficiently utilizing fixed manufacturing overhead components. We plan to
continue our initiative to more efficiently manage our supply chain through
outsourcing production, quantity purchases and more effective purchasing
practices.



Selling, General and Administrative Expenses




Selling, general and administrative expenses were $2,535,912 and $(1,616,830)
for the three months ended June 30, 2020 and 2019, respectively, an increase of
$4,152,742 (257%). The significant increase was attributable to the patent
litigation settlement of $6.0 million that we received in the second quarter of
2019. Exclusive of the patent litigation settlement, overall selling, general
and administrative expenses would have decreased by 42% in the second quarter
2020 compared to the same period in 2019. The significant components of selling,
general and administrative expenses are as follows:



                                                          Three months ended
                                                               June 30,
                                                        2020             2019
Research and development expense                     $   359,697     $    

582,905

Selling, advertising and promotional expense             486,649        

1,237,947

Stock-based compensation expense                         376,738          

585,195

Professional fees and expense                            217,726          

228,476

Executive, sales, and administrative staff payroll       510,872        1,090,868
Other                                                    584,230          657,779
Patent litigation proceeds                                     -       (6,000,000 )

Total                                                $ 2,535,912$ (1,616,830 )




Research and development expense. We continue to focus on bringing new products
to market, including updates and improvements to current products. Our research
and development expenses totaled $359,697 and $582,905 for the three months
ended June 30, 2020 and 2019, respectively, a decrease of $223,208 (38%). Most
of our engineers are dedicated to research and development activities for new
products primarily the EVO-HD, which was launched in late second quarter of 2019
and a non-mirror based DVM-250 that can be located in multiple places in a
vehicle. We expect our research and development activities will decrease in
future quarters as we reduce our engineering headcount to reflect lower activity
on our EVO-HD product platform. We consider our research and development
capabilities and new product focus to be a competitive advantage and will
continue to invest in this area on a prudent basis and consistent with our
financial resources.



Selling, advertising and promotional expenses. Selling, advertising and
promotional expense totaled $486,649 and $1,237,847 for the three months ended
June 30, 2020 and 2019, respectively, a decrease of $751,198 (61%). The
significant decrease was primarily attributable to our sponsorship of a NASCAR
race in May 2019 and other related sponsorship opportunities that did not recur
in 2020. Salesman salaries and commissions represent the primary components of
these costs and were $374,882 and $727,155 for the three months ended June 30,
2020 and 2019, respectively, a decrease of $352,273 (48%). The effective
commission rate was 21.6% for the three months ended June 30, 2020 compared to
28.5% for the three months ended June 30, 2019. We reduced the number of
salesmen in our law enforcement and commercial channels beginning in the first
quarter of 2020, which had a full effect on the second quarter 2020.



  36







Promotional and advertising expenses totaled $111,767 during the three months
ended June 30, 2020 compared to $510,792 during the three months ended June 30,
2019, a decrease of $399,025 (78%). The decrease is primarily attributable to
our sponsorship of the NASCAR race in May 2019, the suspension of the 2020
NASCAR season late in the first quarter 2020 and a reduction in attendance at
trade shows as a result of the COVID-19 pandemic.



Stock-based compensation expense. Stock based compensation expense totaled
$376,738 and $585,195 for the three months ended June 30, 2020 and 2019,
respectively, a decrease of $208,457 (36%). The decrease is primarily due to the
decreased amortization during the three months ended June 30, 2020 related to
the restricted stock granted at a lower market price per share during 2020 and
2019 to our officers, directors, and other employees. We relied more on
stock-based compensation during 2020 and 2019 as we reduced cash expenses for
liquidity reasons.



Professional fees and expense. Professional fees and expenses totaled $217,726
and $228,476 for the three months ended June 30, 2020 and 2019, respectively, a
decrease of $10,750 (5%). The decrease in professional fees is primarily
attributable to legal fees and expenses related to the Axon lawsuit and the
resolution of the WatchGuard and PGA lawsuits. We resolved the PGA lawsuit on
April 17, 2019 and the WatchGuard lawsuit was settled on May13, 2019. On June
17, 2019, the U.S. District Court granted Axon's Motion for Summary Judgment and
accepted Axon's position that it did not infringe on our U.S. Patent No.
9,253,452 and dismissed the lawsuit in its entirety. We appealed the U.S.
District Court's ruling and on April 22, 2020, a three-judge panel of the United
States Court of Appeals for the Tenth Circuit denied our appeal and affirmed the
U.S. District Court's previous decision to grant Axon summary judgment. The
Company filed a motion requesting a rehearing in front of the Court of Appeals
which motion was also denied on June 9, 2020.



The Company has until November 7, 2020 to decide whether it will appeal the U.S.
District Court's and Court of Appeals' decisions to the United States Supreme
Court. Our spending on legal fees on the Axon case has slowed during 2020 as we
waited for the appeal to be heard. The Company's decision on whether it will
appeal the decisions to the United States Supreme Court will impact the trend of
legal expenses for the balance of 2020.



Executive, sales and administrative staff payroll. Executive, sales and
administrative staff payroll expenses totaled $510,872 and $1,090,868 for the
three months ended June 30, 2020 and 2019, respectively, a decrease of $579,996
(53%). The primary reason for the decrease in executive, sales and
administrative staff payroll was a reduction in our technical support staffing
in response to the COVID-19 pandemic and the Company expects such reductions to
continue to reduce related staff expenses during the balance of 2020. The
COVID-19 pandemic has significantly impacted the Company's new event security
business channel in the second quarter of 2020 as many sporting venues were
closed including those served by these service technicians.



Other. Other selling, general and administrative expenses totaled $584,230 and
$657,779 for the three months ended June 30, 2020 and 2019, respectively, a
decrease of $73,549 (11%). The decrease in other expenses during the three
months ended June 30, 2020 compared to the same period in 2019 is primarily
attributable to lower contract employee expenses and travel costs resulting
from
the COVID-19 pandemic.



Patent litigation settlement. The income attributable to our patent litigation
settlement was $-0- and $6,000,000 for the three months ended June 30, 2020 and
2019, respectively. On May 13, 2019 we reached a resolution of the pending
patent infringement litigation with WatchGuard and executed a settlement
agreement that resulted in the dismissal of this case. As part of such
agreement, we received a one-time $6,000,000 payment and granted WatchGuard a
perpetual covenant to not sue WatchGuard if its products incorporate agreed-upon
modified recording functionality. Additionally, we granted WatchGuard a license
to the '292 Patent and '452 Patent through December 31, 2023. As part of the
settlement, we and WatchGuard agreed that WatchGuard was making no admission
that it had infringed any of our patents. See Note 9 - "Commitments and
Contingencies" to the Company's condensed consolidated financial statements,
included in Part I, Item 1 of this quarterly report on Form 10-Q (the "June 30,
2020 Financial Statements"), for the details respecting the settlement.



  37







Operating Loss


For the reasons stated above, our operating loss was $2,143,154 and our operating income was $2,567,642 for the three months ended June 30, 2020 and 2019, respectively, a deterioration of $4,710,796 (183%).



Interest Income



Interest income increased to $15,609 for the three months ended June 30, 2020
from $5,628 in 2019, which reflected our higher cash and cash equivalent levels
in the second quarter of 2020 compared to the second quarter of 2019. The
Company raised significant amounts of cash through the closing of two
underwritten public offerings and the exercise of outstanding common stock
purchase warrants during June 2020, which will generate interest income in
future quarters.



Interest Expense


We incurred interest expense of $25,636 and $-0- during the three months ended June 30, 2020 and 2019, respectively.




The Company issued an aggregate of $1.667 million principal amount of secured
convertible notes on April 17, 2020 which bore interest at 8% per annum on the
outstanding principal balance. During the three months ended June 30, 2020, the
holders of the secured convertible notes exercised their right to convert
principal balances aggregating $1.666 million into equity. In addition, the
Company exercised its right to prepay in cash the remaining outstanding
principal balance aggregating $1,000. Such secured convertible notes are no
longer outstanding as of June 30, 2020 as a result of these conversions and
prepayments.



The Company issued an unsecured promissory note in an aggregate principal
amountof $300,000 payable on December 23, 2019 which bore interest at 8% per
annum on the outstanding principal balance which has been repaid in full as of
June 30, 2020. In addition, during 2020 we issued an unsecured note payable with
a related party in the principal amount of $319,000 which bore interest at 6%
per annum, which has been repaid in full as of June 30, 2020.



On April 4, 2020, the Company entered into a promissory note providing for a PPP
Loan of $1,418,900. The PPP Loan has a two-year term and bears interest at a
rate of 1.0% per annum. Monthly principal and interest payments are deferred for
six months after the date of disbursement and total $79,850.57 per month
thereafter. On May 12, 2020 the Company received $150,000 in additional loan
funding under the EIDL program administered by the SBA. Under the terms of the
EIDL promissory note, interest accrues on the outstanding principal at the rate
of 3.75% per annum. The term of the EIDL promissory note is thirty years and
monthly principal and interest payments are deferred for twelve months after the
date of disbursement and total $731.00 per month thereafter.



Secured Convertible Notes Issuance Expenses

We elected to account for and record our $1.667 million principal amount of the
2020 Convertible Notes issued in April 2020 on a fair value basis. Accordingly,
we were required to expense the related issuance costs to other expense in the
condensed consolidated statements of operations. Such costs totaled $34,906 for
the three months ended June 30, 2020. The issuance costs primarily included
related legal and accounting fees. No similar debt issuances occurred during the
three months ended June 30, 2019.



Change in Fair Value of Proceeds Investment Agreement

We elected to account for the PIA that we entered into with BKI in July of 2018
on its fair value basis. Therefore, we determined the fair value of the 2018 PIA
as of June 30, 2020, and March 31, 2020 to be $3,615,000 and $6,193,000,
respectively. The change in fair value from March 31, 2020 to June 30, 2020 was
$2,578,000, which was recognized as a gain in the Condensed Consolidated
Statement of Operations for the three months ended June 30, 2020. The change in
fair value from March 31, 2019 to June 30, 2019 was $(2,961,000), which was
recognized as a loss in the Condensed Consolidated Statement of Operations for
the three months ended June 30, 2019.



  38






Change in Fair Value of Secured Convertible Notes

We elected to account for the secured convertible notes that were issued on
April 17, 2020 on their fair value basis. Therefore, we determined the fair
value of the secured convertible notes as of their issuance date of April 17,
2020 and through June 12, 2020, when they were paid in full. The change in fair
value from their issuance date of April 17, 2020 to their pay-off date was
$887,807, which was recognized as a charge in the Condensed Consolidated
Statement of Operations for the three months ended June 30, 2020.



Loss before Income Tax Benefit

As a result of the above, we reported a loss before income tax benefit of $497,894 and $387,730 for the three months ended June 30, 2020 and 2019, respectively, a deterioration of $110,164 (28%).



Income Tax Benefit


We did not record an income tax related to our losses for the three months ended
June 30, 2020 due to our overall net operating loss carryforwards available. We
have further determined to continue providing a full valuation reserve on our
net deferred tax assets as of June 30, 2020. We had approximately $66,925,000 of
net operating loss carryforwards and $1,795,000 of research and development tax
credit carryforwards as determined on December 31, 2019 available to offset
future net taxable income.



Net Loss



As a result of the above, we reported net losses of $497,894 and $387,730 for
the three months ended June 30, 2020 and 2019, respectively, a deterioration of
$110,164 (28%).


Basic and Diluted Loss per Share

The basic and diluted loss per share was ($0.03) and ($0.03) for the three
months ended June 30, 2020 and 2019, respectively, for the reasons previously
noted. All outstanding stock options, warrants and convertible securities were
considered antidilutive and therefore excluded from the calculation of diluted
loss per share for the three months ended June 30, 2020 and 2019 because of the
net loss reported for each of such period.



For the Six months ended June 30, 2020 and 2019



Results of Operations


Summarized immediately below and discussed in more detail in the subsequent
sub-sections is an analysis of our operating results for the six months ended
June 30, 2020 and 2019, represented as a percentage of total revenues for each
respective year:



                                                              Six months ended
                                                                  June 30,
                                                              2020         2019
    Revenue                                                      100 %        100 %
    Cost of revenue                                               60 %         58 %

    Gross profit                                                  40 %         42 %

Selling, general and administrative expenses:

    Research and development expense                              20 %      

21 %

    Selling, advertising and promotional expense                  28 %      

39 %

    Stock-based compensation expense                              17 %      

26 %

    General and administrative expense                            73 %      

84 %

    Patent litigation settlement                                   - %      

(118 )%


    Total selling, general and administrative expenses           138 %         52 %

    Operating income (loss)                                      (98 )%       (10 )%

Change in fair value of proceeds investment agreement 69 %

(60 )%

    Change in fair value of secured convertible notes            (31 )%         - %
    Other income and interest expense, net                        (8 )%         - %

    Loss before income tax benefit                               (68 )%    
  (70 )%
    Income tax (provision)                                         - %          - %

    Net loss                                                     (68 )%       (70 )%

Net loss per share information:

    Basic                                                   $  (0.17 )$ (0.32 )
    Diluted                                                 $  (0.17 )$ (0.32 )




  39







Revenues


We sell our products and services to law enforcement and commercial customers as noted earlier in this quarterly report on Form 10-Q.

We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.




Revenues for each of the six months ended June 30, 2020 and 2019 were derived
from the following sources:



                                               Six months ended June 30,
                                               2020                 2019
          DVM-800                                    29 %                 39 %
          Repair and service                         19 %                 14 %
          DVM-250 Plus                                5 %                  8 %
          FirstVu HD                                 14 %                 15 %
          Cloud service revenue                      13 %                  7 %
          EVO-HD                                      8 %                  1 %
          VuLink                                      2 %                  2 %
          Accessories and other revenues             10 %                 14 %

                                                    100 %                100 %




  40






The COVID-19 pandemic had a negative impact on our revenues during the six months ended June 30, 2020 and we expect it to adversely affect our revenues during the remainder of 2020.

Product revenues for the six months ended June 30, 2020 and 2019 were $2,820,116 and $3,866,188 respectively, a decrease of $1,046,072 (27%), due to the following factors:

? In general, we have experienced pressure on our revenues as our in-car and

body-worn systems are facing increased competition because our competitors

have released new products with advanced features. Additionally, our law

enforcement revenues declined over the prior period due to price-cutting and

competitive actions by our competitors, adverse marketplace effects related to

our patent litigation proceedings and supply chain issues. We introduced our

EVO-HD late in second quarter of 2019 with the goal of enhancing our product

line features to meet these competitive challenges and we started to see

traction in late 2019. We expect customers and potential customers to review

and test the EVO-HD prior to committing to this new product platform, all of

which has been delayed due to the COVID-19 pandemic.

? Our salesmen were generally unable to meet with and demonstrate our products

to our law enforcement and commercial customers because of travel and other

restrictions imposed by cities and states due to the COVID-19 pandemic. In

person demonstration of our products to potential customers is generally

required in order to obtain new customers or upgrade existing customers. Our

product sales decreased substantially in the first half of 2020 compared to

2019 primarily due to the impact of the COVID-19 pandemic.

? In addition, the COVID-19 pandemic delayed the shipment of orders late in the

first quarter of 2020 as police forces and governments dealt with its impact.

Specifically, we were unable to ship the initial purchase orders under a

substantial contract awarded by a foreign country for the expected deployment

of body cameras to its entire national police force. The contract was expected

to include up to 5,000 body cameras with our web-based software infrastructure

service over a three-year period. The contract was suspended pending the

government's decision to freeze the planned deployment until such time as the

pandemic is contained within its population. The initial purchase order was

expected to ship during the first quarter 2020 and we believed that it would

have made a substantial impact on our product revenues for such quarter. At

this point, we are unable to forecast if and when this major project will be

restarted or how it may be modified as a result of the pandemic. Upon

completion, the original contract would have been the largest body camera

deployment in our history and the largest contract for recurring service

revenues for our web-based software related to the Company's body cameras.

? Management has been focusing on migrating customers, in particular commercial

customers from a "hardware sale" to a service fee model. Therefore, we expect

a reduction in commercial hardware sales (principally DVM-250's and FirstVU's)

as we convert these customers to a service model under which we provide the

hardware as part of a recurring monthly service fee. In that respect, we

introduced a monthly subscription agreement plan for our body worn cameras and

related equipment during the second quarter 2020 which allowed law enforcement

agencies to pay a monthly service fee to obtain body worn cameras without

incurring a significant upfront capital outlay. This program has gained some

traction which is resulting in decreased product revenues and increasing our

service revenues.

? Our international revenues decreased to $60,121 (3% of total product revenues)

during the six months ended June 30, 2020, compared to $105,720 (4% of total

product revenues) during the six months ended June 30, 2019. The COVID-19

pandemic delayed the shipment of orders in the second quarter 2020 as police

forces and governments dealt with its impact. In addition, our salesmen were

generally unable to meet with and demonstrate our products to our

international law enforcement and commercial customers because of travel and

other restrictions imposed by the various countries. In person demonstration

of our products to potential customers is generally required in order to

obtain new customers or upgrade existing customers. Our international sales

decreased substantially in the second quarter of 2020 compared to 2019

primarily due to the impact of the COVID-19 pandemic. We believe that we would

have seen an uptick in our international sales activity in 2020 as a result of

the recent award of a contract for our FirstVU HD by a sovereign nation's

national police force, which was suspended because of the COVID-19 pandemic as

    noted above.




  41






? During the second quarter 2020, the Company launched ThermoVuä and Shieldä

Disinfectant/Sanitizer products, two product lines in direct response to the

increased safety precautions that organizations and individuals are taking due

    to the COVID-19 pandemic, as discussed earlier in this quarterly report on
    Form 10-Q.



Service and other revenues for the six months ended June 30, 2020 and 2019 were
$1,337,820 and $1,231,591, respectively, an increase of $106,229 (9%), due
to
the following factors:


? Cloud revenues were $508,132 and $349,337 for the six months ended June 30,

2020 and 2019, respectively, an increase of $158,795 (45%). We have

experienced increased interest in our cloud solutions for law enforcement

primarily due to the deployment of our new cloud-based EVO-HD in-car system;

however, the fallout from the COVID-19 pandemic and related business

shut-downs adversely affected our commercial customers usage of cloud services

and offset increases in cloud revenues.

? Revenues from extended warranty services were $668,073 and $670,689 for the

six months ended June 30, 2020 and 2019, respectively, a decrease of $2,616

(0%). We have a number of customers that have purchased extended warranty

packages, primarily in our DVM-800 premium service program.

? Installation service revenues were $86,432 and $82,827 for the six months

ended June 30, 2020 and 2019, respectively, an increase of $3,605 (4%).

Installation revenues tend to vary more than other service revenue types and

are dependent on larger customer implementations. The decrease in installation

revenues in 2020 compared to 2019 was attributable to the COVID-19 pandemic

lock-down, which prevented our technicians from completing on-site

installations during the 2020 period.

? Software revenue, non-warranty repair and other revenues were $75,182 and

$128,738 for the six months ended June 30, 2020 and 2019, respectively, a

decrease of $53,556 (42%). Software revenues were $28,851 during the six

months ended June 30, 2020 compared to $58,975 in the 2019 period and

non-warranty repairs were $27,489 during the six months ended June 30, 2020

compared to $63,134 in the 2019 period. Situational security event fees were

$10,800 during the six months ended June 30, 2020 compared to $-0- in the 2019

    period.




Total revenues for the six months ended June 30, 2020 and 2019 were $4,157,936
and $5,097,779, respectively, a decrease of $939,843 (18%), due to the reasons
noted above.



  42







Cost of Revenue



Cost of product revenue on units sold for the six months ended June 30, 2020 and
2019 was $2,154,774 and $2,731,899, respectively, a decrease of $577,125 (21%).
The decrease in cost of goods sold for products is primarily due to the 27%
decrease in product revenues coupled with an increase in the cost of goods sold
for products as a percentage of product revenues to 76% for the six months ended
June 30, 2020 compared to 71% for the six months ended June 30, 2019. During
June 2020 the Company moved to new and smaller warehouse facilities and during
the move sorted through its entire inventory and disposed of all excess and
obsolete inventory rather than moving it to the new location, which contributed
to the increase in the cost of goods sold for products as a percentage of
product revenues to 76% for the six months ended June 30, 2020. In addition, the
move to a new facility coupled with the manufacturing slow down caused by the
COVID-19 pandemic caused significant unfavorable overhead and labor variances
for production in the first half of 2020, which management decided to expense as
a period cost rather than apply to finished good and work in process inventory.



Cost of service and other revenues for the six months ended June 30, 2020 and
2019 was $345,374 and $233,328, respectively, an increase of $112,046 (48%). The
increase in service and other cost of goods sold is primarily due to the 9%
increase in service and other revenues coupled with an increase in the cost of
service and other revenues sold for products as a percentage of service and
other revenues to 26% for the six months ended June 30, 2020 compared to 19% for
the six months ended June 30, 2019.



Total cost of sales as a percentage of revenues was 60% for the six months ended
June 30, 2020 compared to 58% for the six months ended June 30, 2019. We believe
our gross margins will improve during the remainder of 2020 if we can increase
revenues (in particular service and other revenues) and continue to reduce
product warranty issues.



We had $2,000,412 and $4,144,013 in reserves for obsolete and excess inventories
at June 30, 2020 and December 31, 2019, respectively. Total raw materials and
component parts were $2,575,710 and $4,481,611 at June 30, 2020 and December 31,
2019, respectively, a decrease of $1,905,901 (43%). During the six months ended
June 30, 2020 the Company moved to a new and smaller warehouse facilities and
during the move sorted through its entire inventory and disposed of all excess
and obsolete inventory rather than moving it to the new location which
contributed to the significant decrease in the cost. We scrapped older version
inventory component parts that were mostly or fully reserved during the six
months ended June 30, 2020, which was the primary cause for the decrease in
total raw materials and component parts. Finished goods balances were $4,146,308
and $4,906,956 at June 30, 2020 and December 31, 2019, respectively, a decrease
of $760,648 (16%). The decrease in the inventory reserve is primarily due to the
scrapping of older version legacy products that were mostly or fully reserved
during the six months ended June 30, 2020, as a result of moving our warehouse
and office location. The remaining reserve for inventory obsolescence is
generally provided for the level of component parts of the older versions of our
PCB boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy
products. We believe the reserves are appropriate given our inventory levels at
June 30, 2020.



Gross Profit


Gross profit for the six months ended June 30, 2020 and 2019 was $1,657,788 and
$2,132,552, respectively, a decrease of $474,764 (22%). The decrease is
commensurate with the 18% decrease in total revenues and the gross margin
percentage decrease to 40% during the six months ended June 30, 2020, from 42%
during the six months ended June 30, 2019. Our goal is to improve our margins to
60% over the longer-term based on the expected margins of our EVO-HD, DVM-800,
VuLink and FirstVU HD ThermoVuä products, Shieldä disinfectant/sanitizer
products and our cloud evidence storage and management offering, if they gain
traction in the marketplace and subject to a normalizing economy in the wake of
the COVID-19 pandemic. In addition, if revenues from these products increase, we
will seek to further improve our margins from them through economies of scale
and more efficiently utilizing fixed manufacturing overhead components. We plan
to continue our initiative to more efficiently manage of our supply chain
through outsourcing production, quantity purchases and more effective purchasing
practices.



  43






Selling, General and Administrative Expenses

Selling, general and administrative expenses were $5,728,307 and $2,651,068 for
the six months ended June 30, 2020 and 2019, respectively, an increase of
$3,077,239 (116%). The significant increase was attributable to the patent
litigation settlement of $6.0 million that we received in 2019. Exclusive of the
patent litigation settlement, overall selling, general and administrative
expenses would have decreased by $922,761 (11%) in the first half of 2020
compared to the same period in 2019. The significant components of selling,
general and administrative expenses are as follows:



                                                           Six months ended
                                                               June 30,
                                                        2020             2019
Research and development expense                     $   845,445     $  

1,045,076

Selling, advertising and promotional expense           1,169,030        

1,993,936

Stock-based compensation expense                         688,415        

1,310,393

Professional fees and expense                            557,318        

1,169,452

Executive, sales, and administrative staff payroll     1,231,650        1,705,289
Other                                                  1,236,449        1,426,922
Patent litigation proceeds                                     -       (6,000,000 )

Total                                                $ 5,728,307$  2,651,068




Research and development expense. We continue to focus on bringing new products
to market, including updates and improvements to current products. Our research
and development expenses totaled $845,445 and $1,045,076 for the six months
ended June 30, 2020 and 2019, respectively, a decrease of $199,631 (19%). Most
of our engineers are dedicated to research and development activities for new
products primarily the EVO-HD, which was launched late in the second quarter of
2019 and a non-mirror based DVM-250 that can be located in multiple places in a
vehicle. We expect our research and development activities will decrease in
future quarters as we reduce our engineering headcount to reflect lower activity
on our EVO-HD product platform. We consider our research and development
capabilities and new product focus to be a competitive advantage and will
continue to invest in this area on a prudent basis and consistent with our
financial resources.



Selling, advertising and promotional expenses. Selling, advertising and
promotional expense totaled $1,169,030 and $1,993,936 for the six months ended
June 30, 2020 and 2019, respectively, a decrease of $824,906 (41%). Salesman
salaries and commissions represent the primary components of these costs and
were $952,832 and $1,359,129 for the six months ended June 30, 2020 and 2019,
respectively, a decrease of $406,297 (30%). The effective commission rate was
22.9% for the six months ended June 30, 2020 compared to 26.7% for the six
months ended June 30, 2019. We reduced the number of salesmen in our law
enforcement and commercial channels in 2020. We expect continued reductions in
salesman commissions and travel for the balance of 2020 while the effects of the
COVID-19 pandemic continue.


Promotional and advertising expenses totaled $216,198 during the six months
ended June 30, 2020 compared to $634,807 during the six months ended June 30,
2019, a decrease of $19,584 (16%). The decrease is primarily attributable to our
sponsorship of the 2019 NASCAR race in Kansas City and the suspension of the
2020 NASCAR season in 2020 and a reduction in attendance at trade shows as a
result of the COVID-19 pandemic.



Stock-based compensation expense. Stock based compensation expense totaled
$688,415 and $1,310,393 for the six months ended June 30, 2020 and 2019,
respectively, a decrease of $621,978 (47%). The decrease is primarily due to the
decreased amortization during the six months ended June 30, 2020 related to the
restricted stock granted at a lower market price per share during 2020 and 2019
to our officers, directors, and other employees. We relied more on stock-based
compensation during 2020 and 2019 as we attempted to reduce cash expenses for
liquidity reasons.



  44







Professional fees and expense. Professional fees and expenses totaled $557,318
and $1,169,452 for the six months ended June 30, 2020 and 2019, respectively, a
decrease of $612,134 (52%). The decrease in professional fees is primarily
attributable to legal fees and expenses related to the Axon lawsuit and the
resolution of the WatchGuard and PGA lawsuits. We resolved the PGA lawsuit on
April 17, 2019 and the WatchGuard lawsuit was settled on May13, 2019. On June
17, 2019, the U.S. District Court granted Axon's motion for summary judgment and
accepted Axon's position that it did not infringe on our '452 Patent and
dismissed the lawsuit in its entirety. We appealed the U.S District Court's
ruling and on April 22, 2020, a three-judge panel of the United States Court of
Appeals denied our appeal and affirmed the U.S. District Court's previous
decision to grant Axon summary judgment. The Company filed a motion requesting a
rehearing in front of the Court of Appeals which was denied on June 9, 2020.



The Company has until November 7, 2020 to decide whether it will appeal the U.S.
District Court's and Court of Appeals' decisions to the United States Supreme
Court. Our spending on legal fees on the Axon case has slowed during 2020 as we
waited for the appeal to be heard. The Company's decision on whether it will
appeal the decisions to the United States Supreme Court will impact the trend of
legal expenses for the balance of 2020.



Executive, sales and administrative staff payroll. Executive, sales and
administrative staff payroll expenses totaled $1,231,650 and $1,705,289 for the
six months ended June 30, 2020 and 2019, respectively, a decrease of $473,639
(28%). The primary reason for the decrease in executive, sales and
administrative staff payroll was a reduction in our technical support staffing
in response to the COVID-19 pandemic and we expect such reductions to continue
to reduce related staff expenses during the balance of 2020. The COVID-19
pandemic has significantly impacted the Company's new event security business
channel in 2020 as many sporting venues were closed including those served
by
these service technicians.



Other. Other selling, general and administrative expenses totaled $1,236,449 and
$1,426,922 for the six months ended June 30, 2020 and 2019, respectively, a
decrease of $190,473 (13%). The decrease in other expenses during the six months
ended June 30, 2020 compared to the 2019 period is primarily attributable to
lower contract employee expenses and travel costs, a result of the COVID-19
pandemic.



Patent litigation settlement. The income attributable to our patent litigation
settlement was $-0- and $6,000,000 for the six months ended June 30, 2020 and
2019, respectively. On May 13, 2019 we reached a resolution of the pending
patent infringement litigation with WatchGuard and executed a settlement
agreement that resulted in the dismissal of this case. As part of such
agreement, we received a one-time $6,000,000 payment and granted WatchGuard a
perpetual covenant to not sue WatchGuard if its products incorporate agreed-upon
modified recording functionality. Additionally, we granted WatchGuard a license
to the '292 Patent and '452 Patent through December 31, 2023. As part of the
settlement, we and WatchGuard agreed that WatchGuard was making no admission
that it had infringed any of our patents. See Note 9 -- "Commitments and
Contingencies" to the June 30, 2020 Financial Statements, for the details
respecting the settlement.



Operating Loss



For the reasons stated above, our operating loss was $4,070,519 and $518,516 for
the six months ended June 30, 2020 and 2019, respectively, a deterioration of
$3,552,003 (685%). Operating loss as a percentage of revenues improved to 82% in
2020, from 121% in 2019.



Interest Income


Interest income increased to $21,869 for the six months ended June 30, 2020 from
$23,612 in the 2019 period, which reflected our lower cash and cash equivalent
levels in 2020 compared to first quarter 2019. The Company raised significant
amounts of cash through the closing of two underwritten public offerings and the
exercise of outstanding common stock purchase warrants during June 2020, which
will generate interest income in future quarters.



  45







Interest Expense


We incurred interest expense of $333,196 and $-0- during the six months ended June 30, 2020 and 2019, respectively.




The Company issued an aggregate of $1.667 million principal amount of secured
convertible notes on April 20, 2020 which bore interest at 8% per annum on the
outstanding principal balance. During the six months ended June 30, 2020, the
holders of the secured convertible notes exercised their right to convert
principal balances aggregating $1.666 million into equity. In addition, the
Company exercised its right to prepay in cash the remaining outstanding
principal balance aggregating $1,000. Such secured convertible notes are no
longer outstanding as of June 30, 2020, as a result of these conversions and
prepayments.



The Company issued an aggregate of $2.778 million principal amount of secured
convertible notes on August 5, 2019 which bore interest at 8% per annum on the
outstanding principal balance. During the six months ended June 30, 2020, the
holders of the secured convertible notes exercised their right to convert
principal balances aggregating $1,259,074 into equity. In addition, the Company
paid regular monthly principal payments totaling $172,839 during the six months
ended June 30, 2020 and on March 3, 2020, the Company exercised its right to
prepay in cash the remaining outstanding principal balance aggregating $574,341.
Such secured convertible notes are no longer outstanding as of June 30, 2020, as
a result of these conversions and prepayments.



The Company issued an unsecured promissory note in an aggregate principal
amountof $300,000 on December 23, 2019 which bore interest at 8% per annum on
the outstanding principal balance and which has been repaid in full as of June
30, 2020. In addition, during 2020 we issued an unsecured note payable with a
related party in the principal amount of $319,000 which bore interest at 6% per
annum and which has been repaid in full as of June 30, 2020 and we issued an
aggregate of $100,000 principal amount of unsecured promissory note payable
which bore interest at 8% per annum on the outstanding principal balance which
remained outstanding until it was paid in full as of June 30, 2020.



On April 4, 2020, the Company entered into a promissory note providing for a PPP
Loan of $1,418,900. The PPP Loan has a two-year term and bears interest at a
rate of 1.0% per annum. Monthly principal and interest payments are deferred for
six months after the date of disbursement and total $79,850.57 per month
thereafter. On May 12, 2020 the Company received $150,000 in additional
loan funding under the EIDL program administered by the SBA. Under the terms of
the EIDL promissory note, interest accrues on the outstanding principal at the
rate of 3.75% per annum. The term of the EIDL promissory note is thirty years
and monthly principal and interest payments are deferred for twelve months after
the date of disbursement and total $731.00 per month thereafter.



Secured Convertible Notes Issuance Expenses

We elected to account for and record our $1.667 million principal amount of the
2020 Convertible Notes issued in April 2020 on a fair value basis. Accordingly,
we were required to expense the related issuance costs to other expense in the
condensed consolidated statements of operations. Such costs totaled $34,906 for
the six months ended June 30, 2020. The issuance costs primarily included
related legal and accounting fees. No similar debt issuances occurred during the
six months ended June 30, 2019.



Change in Fair Value of Proceeds Investment Agreement




We elected to account for the PIA on its fair value basis. Therefore, we
determined the fair value of the 2018 PIA as of June 30, 2020 and December 31,
2020 to be $3,615,000 and $6,500,000, respectively. The change in fair value
from December 31, 2020 to June 30, 2020 was $2,885,000, which was recognized as
a gain in the Condensed Consolidated Statement of Operations for the six months
ended June 30, 2020. The change in fair value from December 31, 2018 to June 30,
2019 was $(3,098,000), which was recognized as a loss in the Condensed
Consolidated Statement of Operations for the six months ended June 30, 2019.



  46






Change in Fair Value of Secured Convertible Notes

We elected to account for the secured convertible notes that were issued on
April 17, 2020 on their fair value basis. Therefore, we determined the fair
value of the secured convertible notes as of their issuance date of April 17,
2020 and through June 12, 2020, when they were paid in full. The change in fair
value from their issuance date of April 17, 2020 to their pay-off date was
$887,807, which was recognized as a charge in the Condensed Consolidated
Statement of Operations for the six months ended June 30, 2020.



We elected to account for the secured convertible notes that were issued in
August of 2019 on their fair value basis. Therefore, we determined the fair
value of the secured convertible notes as of their issuance date on December 31,
2019 until they were paid in full on March 3, 2020. The change in fair value
from December 31, 2019 to their pay-off date was $412,445, which was recognized
as a charge in the Condensed Consolidated Statement of Operations for the six
months ended June 30, 2020.



Loss before Income Tax Benefit

As a result of the above, we reported a loss before income tax benefit of $2,832,004 and $3,592,904 for the six months ended June 30, 2020 and 2019, respectively, an improvement of $760,900 (21%).



Income Tax Benefit



We did not record an income tax related to our losses for the six months ended
June 30, 2020 due to our overall net operating loss carryforwards available. We
have further determined to continue providing a full valuation reserve on our
net deferred tax assets as of June 30, 2020. We had approximately $66,925,000 of
net operating loss carryforwards and $1,795,000 of research and development tax
credit carryforwards as determined on December 31, 2019 available to offset
future net taxable income.



Net Loss



As a result of the above, we reported net losses of $2,832,004 and $3,592,904
for the six months ended June 30, 2020 and 2019, respectively, an improvement of
$760,900 (21%).


Basic and Diluted Loss per Share




The basic and diluted loss per share was ($0.17) and ($0.32) for the six months
ended June 30, 2020 and 2019, respectively, for the reasons previously noted.
All outstanding stock options, warrants and convertible securities were
considered antidilutive and therefore excluded from the calculation of diluted
loss per share for the six months ended June 30, 2020 and 2019 because of the
net loss reported for such periods.



Liquidity and Capital Resources and Going Concern



Overall:


Management's Liquidity Plan and Going Concern. The June 30, 2020 Financial
Statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company incurred operating losses for the six months ended June
30, 2020 and for the year ended December 31, 2019 primarily due to reduced
revenues and gross margins caused by a variety of factors, including the
COVID-19 pandemic and its related effects on our customers and our supply chain,
and by competitors' introduction of newer products with more advanced features
together with significant price cutting of their products. The Company incurred
net losses of approximately $2.8 million during the six months ended June 30,
2020 and $10.0 million for the year ended December 31, 2019 and it had an
accumulated deficit of $90.2 million as of June 30, 2020. During 2019, the
Company settled one of its patent infringement cases and received a lump sum
payment of $6.0 million, which was used to pay its obligations under its
Proceeds Investment Agreement, as more fully described in Note 4 - "Proceeds
Investment Agreement Obligation" to the June 30, 2020 Financial Statements. In
recent years the Company has accessed the public and private capital markets to
raise funding through the issuance of debt and equity. In that regard, the
Company raised $12.8 million in underwritten public offerings of common stock,
$5.2 million through the exercise of common stock purchase warrants and options,
$1.6 million through the issuance of promissory notes under the SBA's PPP and
EIDL programs, raised $1.5 million through the issuance of secured convertible
notes and $419,000 in unsecured promissory notes and detachable warrants during
the six months ended June 30, 2020. In addition, the Company raised $1,564,000
in the year ended December 31, 2019 from the exercise of warrants, borrowed
$300,000 pursuant to a short-term promissory note payable on December 23, 2019
with detachable warrants to purchase 107,000 shares of common stock and on
August 5, 2019, and raised funds from the issuance of $2.78 million principal
balance of secured convertible notes with detachable warrants to purchase
571,248 shares of common stock with the net proceeds used for working capital
purposes as more fully described in Note 3-"Debt Obligations" to the June 30,
2020 Financial Statements. These debt and equity raises were utilized to fund
the Company's operations and management expects to continue this pattern until
the Company achieves positive cash flows from operations, although it can offer
no assurance in this regard.



  47







On April 4, 2020, the Company issued a promissory note in connection with the
receipt of a loan of $1,418,900 (the "PPP Loan") under the SBA's PPP under the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The PPP
Loan has a two-year term and bears interest at a rate of 1% per annum. Monthly
principal and interest payments are deferred for six months after the date of
disbursement. The PPP Loan may be prepaid at any time prior to maturity with no
prepayment penalties. Such promissory note contains events of default and other
provisions customary for a loan of this type. The PPP provides that the PPP Loan
may be partially or wholly forgiven if the funds are used for certain qualifying
expenses as described in the CARES Act. The Company intends to use the majority
of the PPP Loan amount for qualifying expenses and to apply for forgiveness of
the loan in accordance with the terms of the CARES Act. As of June 30, 2020, the
Company has used the entirety of the PPP Loan proceeds for purposes consistent
with the PPP and has not taken any actions that it believes will reduce the
amount eligible for forgiveness. As such, the Company believes that the entire
amount of the PPP Loan will be forgiven. However, to the extent any portion of
the PPP Loan is determined to be ineligible for forgiveness, we will be required
to repay any portion of the outstanding principal that is not forgiven, along
with accrued interest, and we cannot provide any assurance that we will be
eligible for loan forgiveness or that any amount of the PPP Loan will ultimately
be forgiven by the SBA. On April 23, 2020, the SBA issued guidance stating that
it is unlikely that a public company with substantial market value and access to
capital markets will be able to make the certification required to obtain a PPP
loan in good faith. The lack of clarity regarding loan eligibility under the
CARES Act PPP has resulted in significant media coverage and controversy with
respect to public companies applying for and receiving loans. If, despite our
good-faith belief that we satisfied all eligible requirements for the PPP Loan,
we are later determined to have violated any of the laws or governmental
regulations that apply to us in connection with the PPP Loan, such as the False
Claims Act, or it is otherwise determined that we were ineligible to receive the
PPP Loan, we may be subject to penalties, including significant civil, criminal
and administrative penalties, and could be required to repay the PPP Loan in its
entirety. In addition, our receipt of the PPP Loan may result in adverse
publicity and damage to our reputation, and a review or audit by the SBA or
other government entity or claims under the False Claims Act could consume
significant financial and management resources.



On July 2, 2020 the SEC declared the Company's Shelf Registration Statement
effective. The Shelf Registration Statement will provide the Company with access
to liquidity from the public markets should it decide to utilize it for such
purposes. The Shelf Registration Statement allows the Company to offer and sell,
from time to time in one or more offerings, any combination of our common stock,
debt securities, debt securities convertible into common stock or other
securities in any combination thereof, rights to purchase shares of common stock
or other securities in any combination thereof, warrants to purchase shares of
common stock or other securities in any combination thereof or units consisting
of common stock or other securities in any combination thereof having an
aggregate initial offering price not exceeding $125,000,000.



The Company will have to restore positive operating cash flows and profitability
over the next year and/or raise additional capital to fund its operational
plans, meet its customary payment obligations and otherwise execute its business
plan. There can be no assurance that it will be successful in restoring positive
cash flows and profitability, or that it can raise additional financing when
needed, and obtain it on terms acceptable or favorable to the Company.



The Company has increased its addressable market to non-law enforcement
customers and obtained new non-law enforcement contracts in 2020 and 2019, which
contracts include recurring revenue during the period from 2020 to 2023. The
Company believes that its quality control and cost cutting initiatives,
expansion to non-law enforcement sales channels and new product introduction
will eventually restore positive operating cash flows and profitability,
although it can offer no assurances in this regard. The extent to which our
future operating results are affected by COVID-19 will largely depend on future
developments which cannot be accurately predicted, including the duration and
scope of the pandemic, governmental and business responses to the pandemic and
the impact on the global economy, our customers' demand for our products and
services, and our ability to provide our products and services, particularly as
result of our employees working remotely and/or the closure of certain offices
and facilities. While these factors are uncertain, we believe that the COVID-19
pandemic or the perception of its effects will have a material adverse effect on
our business, financial condition, results of operations and cash flows.



  48







Based on the uncertainties described above, the Company believes its business
plan does not alleviate the existence of substantial doubt about its ability to
continue as a going concern within one year from the date of the issuance of
these unaudited condensed consolidated financial statements. The accompanying
unaudited condensed consolidated financial statements do not include any
adjustments related to the recoverability and classification of asset amounts or
the classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.



Cash, cash equivalents: As of June 30, 2020, we had cash and cash equivalents
with an aggregate balance of $16,165,550, an increase from a balance of $359,685
at December 31, 2019. Summarized immediately below and discussed in more detail
in the subsequent subsections are the main elements of the $15,805,865 net
increase in cash during the six months ended June 30, 2020:



? Operating $4,057,003 of net cash used in operating activities. Net cash used

activities: in operating activities was $4,057,003 the six months ended June

                 30, 2020 and net cash provided by operations of $1,269,447

for the

                 six months ended June 30, 2019, a deterioration of 

$5,326,450. The

                 deterioration was attributable to the net loss incurred for 2020
                 and the usage of cash to decrease accounts payable during the six
                 months ended June 30, 2020 compared to 2019.

  ? Investing    $163,109 of net cash used in investing activities. Cash used in
    activities:  investing activities was $163,109 and $100,589 for the six months
                 ended June 30, 2020 and 2019 respectively. In 2020, we incurred
                 costs for the build out of the new office and warehouse space, for
                 the tooling of new products, an integrated display system and for
                 patent applications on our proprietary technology utilized in our
                 new products and included in intangible assets.

  ? Financing    $20,025,977 of net cash provided by financing activities. Cash
    activities:  provided by financing activities was $20,025,977 for the six
                 months ended June 30, 2020 and net cash used in financing
                 activities was $4,436,000 for the six months ended June 30, 2019.
                 We closed several underwritten public offerings of our common
                 stock in 2020 which generated $12.8 million of cash, we received
                 total proceeds of $5.2 million from the exercise of common stock
                 purchase warrants and we received a total of $1.6 million in
                 borrowings under the PPP and EIDL programs administered by the SBA
                 in 2020. In April 2020, we received net proceeds of $1,500,000
                 from the issuance of the convertible notes with detachable common
                 stock purchase warrants. In addition, we received $419,000 in
                 proceeds from the issuance of unsecured promissory notes payable
                 during the six months ended June 30, 2020. These 2020 financing
                 cash inflows were offset by the repayment of principal on the
                 secured convertible notes and unsecured promissory notes. During
                 2019 we also received $1,564,000 of proceeds from the exercise of
                 common stock purchase warrants offset by the $6 million payment on
                 the PIA.



The net result of these activities was an increase in cash of $15,805,865 for the six months ended June 30, 2020 to $16,165,550 as of June 30, 2020.



Commitments:



We had $16,165,550 of cash and cash equivalents and net positive working capital
$14,777,559 as of June 30, 2020. Accounts receivable balances represented
$1,619,234 of our net working capital at June 30, 2020. We intend to collect our
outstanding receivables on a timely basis and reduce the overall level during
the balance of 2020, which would help to provide cash to support our operations
during 2020. Inventory represented $4,752,285 of our net working capital at June
30, 2020 and finished goods represented $4,146,308 of total inventory at June
30, 2020. We are actively managing the level of inventory and our goal is to
reduce such level during the balance of 2020 by our sales activities.



  49






Capital Expenditures. We had no material commitments for capital expenditures at June 30, 2020.




Lease commitments.



On May 13, 2020, the Company entered into a lease agreement for new warehouse
and office space which will serve as the company's new principal executive
office and primary business location. The terms of the lease include no base
rent for the first six months and monthly payments ranging from $12,398 to
$13,693 thereafter, with a termination date of December 2026. The Company is
responsible for property taxes, utilities, insurance and its proportionate share
of common area costs related to its new location. The Company took possession of
the leased facilities on June 15, 2020. The remaining lease term for the
Company's office and warehouse operating lease as of June 30, 2020 was
seventy-eight months. The Company's previous office and warehouse space lease
expired in April 2020 and the Company paid holdover rent for the time period
until it moved to and commenced occupying the new space on June 15, 2020.



The Company entered into an operating lease with a third party in October 2019
for copiers used for office and warehouse purposes. The terms of the lease
include 48 monthly payments of $1,598 with a maturity date of October 2023. The
Company has the option to Purchase the equipment at maturity for its estimated
fair market value at that point in time. The remaining lease term for the
Company's copier operating lease as of June 30, 2020 was 40 months.



Lease expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease terms. Total lease expense was $252,290 for the six months ended June 30, 2020.

The discount rate implicit within the Company's operating leases was not generally determinable and therefore the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8%.

The following sets forth the operating lease right of use assets and liabilities as of June 30, 2020:



            Assets:
            Operating lease right of use assets             $ 769,635

            Liabilities:
            Operating lease obligations-Long-term portion   $ 731,334
            Operating lease obligations-Current portion     $  44,308
            Total operating lease obligations               $ 775,642




The components of lease expense were as follows for the six months ended June
30, 2020:



             Selling, general and administrative expenses   $ 252,290

Following are the minimum lease payments for each year and in total.



          Year ending December 31:
          2020 (July 1, to December 31, 2020)                $    21,986
          2021                                                   169,691
          2022                                                   172,666
          2023                                                   172,542
          2024                                                   159,703
          Thereafter                                             310,259
          Total undiscounted minimum future lease payments     1,006,847
          Imputed interest                                      (231,205 )
          Total operating lease liability                    $   775,642




  50






Debt obligations is comprised of the following:



                                                      June 30,
                                                        2020           December 31, 2019
PPP Loan                                           $    1,418,900     $                 -
EIDL Loan                                                 150,000                       -
2019 secured convertible notes, at fair value                   -          

1,593,809

Unsecured promissory notes payable, less
unamortized discount of $-0- and $66,061 at June
30, 2020 and December 31, 2019, respectively                    -          

233,939

Debt obligations                                        1,568,900          

1,827,748

Less: current maturities of debt obligations              552,258          
    1,827,748
Debt obligations, long-term                        $    1,016,642     $                 -



Debt obligations mature as follows as of June 30, 2020:



                                                          June 30,
                                                            2020
              2020 (July 1, 2020 to December 31, 2020)   $    68,241
              2021                                           948,391
              2022                                           401,321
              2023                                             3,166
              2024                                             3,286
              2025 and thereafter                            144,495

              Total                                      $ 1,568,900

The PIA obligation comprises of the following:



                                                      June 30,
                                                        2020December 31, 2019
Proceeds investment agreement, at fair value       $    3,615,000     $    

6,500,000

Less: Current portion                                  (3,615,000 )                     -

Proceeds investment agreement, at fair value -
Long-term                                          $            -     $         6,500,000



On July 20, 2020, the Company and BKI executed a Termination Agreement and
Mutual Release. Under the terms of the Termination Agreement the parties agreed
to terminate the PIA and to release one another from any further liability under
the PIA's obligation. See Note 4 -- Proceeds Investment Agreement Obligation to
the June 30, 2020 Financial Statements.



Under the terms of the Agreement, upon payment of $1,250,000 by the Company to
BKI both parties agreed to terminate the PIA and to release each other from any
further liability thereunder. Such $1,250,000 payment was made on July 22, 2020.
In addition to the $1,250,000 payment, the Company further agreed to pay BKI the
following: (a) a contingent payment in the amount of $2,750,000 following the
closing of an asset purchase, membership interest purchase, or similar
transaction between the Company and a specified third-party (the "Purchase
Transaction") and (b) any and all future proceeds received from WatchGuard and
its successors and assigns by the Company for WatchGuard's use of the '292 and
'452 patents. For clarity, the parties further agreed that the payment of the
contingent payment would only be due and payable upon the closing of the
specified Purchase Transaction and the relevant contingent payment portion of
the Agreement, and any obligations stemming therefrom, would automatically
terminate if the specified Purchase Transaction is abandoned prior to its
closing, including its failure to close within three years from the date of the
Agreement. The specified Purchase Transaction has not yet occurred and there is
no binding agreement to complete such Purchase Transaction.



  51







Inflation and Seasonality


Inflation has not materially affected us during the past fiscal year. We do not
believe that our business is seasonal in nature; however, we usually generate
higher revenues during the second half of the calendar year than in the first
half.


Potential Impacts of the COVID-19 Pandemic on Our Business and Operations




The COVID-19 pandemic represents a fluid situation that presents a wide range of
potential impacts of varying durations for different global geographies,
including locations where we have offices, employees, customers, vendors and
other suppliers and business partners.



Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the
same began to have impacts on our business in March 2020. By that time, much of
our first fiscal quarter was completed. During the quarter ended June 30, 2020,
we have observed recent decreases in demand from certain customers, primarily
our law-enforcement and commercial customers.



Given the fact that our products are sold through a variety of distribution
channels, we expect our sales will experience more volatility as a result of the
changing and less predictable operational needs of many customers as a result of
the COVID-19 pandemic. We are aware that many companies, including many of our
suppliers and customers, are reporting or predicting negative impacts from
COVID-19 on future operating results. Although we observed significant declines
in demand for our products from certain customers during the three months ended
June 30, 2020, we believe that it remains too early for us to know the exact
impact COVID-19 will have on the long-term demand for our products. We also
cannot be certain how demand may shift over time as the impacts of the COVID-19
pandemic may go through several phases of varying severity and duration.



In light of broader macro-economic risks and already known impacts on certain
industries that use our products and services, we have taken and are taking
targeted steps to lower our operating expenses because of the COVID-19 pandemic.
We continue to monitor the impacts of COVID-19 on our operations closely and
this situation could change based on a significant number of factors that are
not entirely within our control and are discussed in this and other sections of
this quarterly report on Form 10-Q. We do not expect there to be material
changes to our assets on our balance sheet or our ability to timely account for
those assets. Further, in connection with the preparation of this quarterly
report on Form 10-Q and the interim financial statements contained herein, we
reviewed the potential impacts of the COVID-19 pandemic on goodwill and
intangible assets and have determined there to be no material impact at this
time. We have also reviewed the potential impacts on future risks to the
business as it relates to collections, returns and other business-related items.



To date, travel restrictions and border closures have not materially impacted
our ability to obtain inventory or manufacture or deliver products or services
to customers. However, if such restrictions become more severe, they could
negatively impact those activities in a way that would harm our business over
the long term. Travel restrictions impacting people can restrain our ability to
assist our customers and distributors as well as impact our ability to develop
new distribution channels, but at present we do not expect these restrictions on
personal travel to be material to our business operations or financial results.
We have taken steps to restrain and monitor our operating expenses and therefore
we do not expect any such impacts to materially change the relationship between
costs and revenues.



Like most companies, we have taken a range of actions with respect to how we
operate to assure we comply with government restrictions and guidelines as well
as best practices to protect the health and well-being of our employees and our
ability to continue operating our business effectively. To date, we have been
able to operate our business effectively using these measures and to maintain
all internal controls as documented and posted. We also have not experienced
challenges in maintaining business continuity and do not expect to incur
material expenditures to do so. However, the impacts of COVID-19 and efforts to
mitigate the same have remained unpredictable and it remains possible that
challenges may arise in the future.



  52






The actions we have taken so far during the COVID-19 pandemic include, but are not limited to:



  ? requiring all employees who can work from home to work from home;

? increasing our IT networking capability to best assure employees can work

effectively outside the office; and

? for employees who must perform essential functions in one of our offices:

? Having employees maintain a distance of at least six feet from other employees

whenever possible;

? Having employees work in dedicated shifts to lower the risk all employees who

perform similar tasks might become infected by COVID-19;

? Having employees stay segregated from other employees in the office with whom

    they require no interaction; and

  ? Requiring employees to wear masks while they are in the office whenever
    possible.



We currently believe revenue for the three months ended September 30, 2020 may
decline year over year due to the conditions noted. In April 2020, we
implemented a COVID-19 mitigation plan designed to further reduce our operating
expenses for the three months ending June 30, 2020. Actions taken to date
include work hour and salary reductions for senior management. These cost
reductions are in addition to the significant restructuring actions we initiated
in the first quarter of 2020. Based on our current cash position, our projected
cash flow from operations and our cost reduction and cost containment efforts to
date, we believe that we will have sufficient capital and or have access to
sufficient capital through public and private equity and debt offerings to
sustain operations for a period of one year following the date of this filing.
If business interruptions resulting from COVID-19 were to be prolonged or
expanded in scope, our business, financial condition, results of operations and
cash flows would be negatively impacted. We will continue to actively monitor
this situation and will implement actions necessary to maintain business
continuity.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 9,21 M - -
Net income 2020 -7,50 M - -
Net Debt 2020 - - -
P/E ratio 2020 -6,19x
Yield 2020 -
Capitalization 59,3 M 59,3 M -
Capi. / Sales 2020 6,44x
Capi. / Sales 2021 5,41x
Nbr of Employees 119
Free-Float 85,4%
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Mean consensus BUY
Number of Analysts 1
Average target price 5,00 $
Last Close Price 2,23 $
Spread / Highest target 124%
Spread / Average Target 124%
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Managers
NameTitle
Stanton E. Ross Chairman, President & Chief Executive Officer
Christa Johnson Vice President-Operations
Thomas J. Heckman CFO, Secretary, Treasurer, & Vice President
Mark Gordon Director-Technical Services
Daniel F. Hutchins Independent Director
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