DIGITAL ALLY, INC. This quarterly report on Form 10-Q ofDigital 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 nine months endedSeptember 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 (the "Common Stock"), 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 our technology will have a significant impact on our revenues in the long-term; and (33) indemnification of our officers
and directors. 32
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. 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 lateJune 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 of 2020. Total revenues for these two new products for the third quarter 2020 approximated$1.1 million . We are ramping up our supply chain for both of these new product lines, which are manufactured by third-parties. We experienced operating losses for all of our fiscal quarters during 2020 and 2019 and for the first three quarters of 2020. We generated net income during the three months endedSeptember 30, 2020 primarily due to a gain from the extinguishment of the Proceeds Investment Obligation. The following is a summary of our recent operating results on a quarterly basis: September 30, June 30, March 31, December 31, September 30, 2020 2020 2020 2019 2019 Total revenue$ 3,588,640 $ 1,732,192 $ 2,425,745 $ 2,420,437 $ 2,923,148 Gross profit (loss) 1,222,648 392,758 1,265,028 (88,185 ) 1,188,262 Gross profit margin % 34.1 % 22.7 % 52.2 % (3.6 )% 40.7 % Total selling, general and administrative expenses 3,066,606 2,535,912 3,192,396 3,145,633 3,468,709 Operating income (loss) (1,843,958 ) (2,143,154 )
(1,927,368 ) (3,233,819 ) (2,280,447 ) Operating income (loss) %
(51.4 )% (123.7 )% (79.5 )% (133.6 )% (78.0 )%
Net income (loss) $ 527,442 $ (497,894 ) $ (2,334,110 ) $ (3,426,984 ) $ (2,985,825 ) 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$6.0 million settlement we obtained from WatchGuard during the second quarter of 2019 and (5) the impact of patent infringement and other litigation including all related obligations and expenses respecting such litigation and (6) most recently, the impact of COVID-19 on the economy and our business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on our financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses. 33
For the Three Months Ended
Results of Operations
Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the three months endedSeptember 30, 2020 and 2019, represented as a percentage of total revenues
for
each respective year:
Three months ended
September 30,
2020 2019
Revenue 100 % 100 %
Cost of revenue 66 % 59 %
Gross profit 34 % 41 %Selling, general and administrative expenses:
Research and development expense 11 %
18 %
Selling, advertising and promotional expense 22 %
30 %
Stock-based compensation expense 14 %
14 %
General and administrative expense 38 %
57 %
Total selling, general and administrative expenses 85 % 119 % Operating loss (51 )% (78 )%
Change in fair value of proceeds investment agreement 66 %
(6 )%
Change in fair value of secured convertible notes - %
(14 )%
Other income and interest expense, net - %
(4 )%
Income (loss) before income tax benefit 15 % (102 )% Income tax (provision) - % - % Net income (loss) 15 % (102 )%
Net loss per share information:
Basic$ 0.02 $ (0.26 ) Diluted$ 0.02 $ (0.26 ) 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.
? 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 isrecognized 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.
The COVID-19 pandemic had an impact on our revenues in the third quarter 2020
and we expect it to adversely affect our revenues during the remainder of 2020.
The COVID-19 pandemic had a negative impact generally on our legacy products
and, in particular our commercial event recorder hardware (DVM-250 Plus) and
in-car hardware for law enforcement (DVM-800) during the quarter. The COVID-19
pandemic had a positive impact generally on our new Shield
disinfectant/sanitizer and ThermoVU product lines.
34
Revenues for each of the third quarters of 2020 and 2019 were derived from the
following sources:
Three months ended September 30,
2020 2019
DVM-800 21 % 34 %
Repair and service 10 % 19 %
ThermoVU 30 % - %
Shield disinfectants/sanitizers 1 % - %
DVM-250 Plus 1 % 14 %
FirstVu HD 11 % 10 %
Cloud service revenue 6 % 7 %
EVO-HD 6 % 4 %
VuLink 1 % 1 %
Accessories and other revenues 13 % 11 %
100 % 100 %
Product revenues for the three months ended September 30, 2020 and 2019 were
$2,958,579 and $2,173,257 respectively, an increase of $785,322 (36%), dueto the following factors:
? The Company generated revenues totaling over
months ended
from its new product lines. Late in 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 late in the
second quarter of 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.
? 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.
35
? The COVID-19 pandemic delayed the shipment of law enforcement orders in the
third 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 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 to law enforcement decreased substantially in the third quarter
2020 compared to 2019 primarily due to the impact of the COVID-19 pandemic.
? The COVID-19 pandemic impacted the shipment of commercial orders in the third
quarter 2020 as cruise lines, taxi cabs, paratransit and other commercial
customers dealt with its impact. In addition, our salesmen were generally
unable to meet with and demonstrate our products to our 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 to commercial customers decreased
substantially in the third quarter 2020 compared to 2019 primarily due to the
impact of the COVID-19 pandemic.
? 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 of 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.
Service and other revenues for the three months ended September 30, 2020 and
2019 were $630,061 and $749,891 , respectively, which is a decrease of $119,930
(16%), due to the following factors:
? Cloud revenues were
30, 2020 and 2019, respectively, an increase of
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
three months ended
decrease of
extended warranty packages, primarily in our DVM-800 premium service program.
However, the fallout from the COVID-19 pandemic and related restrictions on
travel adversely affected our sales of DVM-800 hardware systems resulting in a
decrease of 13% in the 2020 period compared to 2019 which resulted in reduced
extended warranty revenues.
? Installation service revenues were
ended
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.
36
? Software revenue, non-warranty repair and other revenues were
which is a decrease of
three months ended
ended
months ended
three months ended
ended
months ended
September 30, 2019 .
Total revenues for the three months ended
Cost of Revenue
Cost of product revenue on units sold for the three months endedSeptember 30, 2020 and 2019 was$2,177,676 and$1,601,913 , respectively, an increase of$575,763 (36%). The increase in cost of goods sold for products is due to the 36% increase in product revenues. Cost of goods sold for products as a percentage of product revenues remained at 74% for the three months endedSeptember 30, 2020 and 2019. Management believes that the cost of goods sold for products as a percentage of product revenues would have improved in the 2020 period compared to 2019 as the Company moved to new and smaller warehouse facilities duringJune 2020 that should have resulted in manufacturing efficiencies during the three months endedSeptember 30, 2020 . However, our manufacturing was adversely impacted by the COVID-19 pandemic which caused significant unfavorable overhead and labor variances for production in the third 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 endedSeptember 30, 2020 and 2019 was$188,316 and$132,973 , respectively, an increase of$55,343 (42%). The increase in service and other cost of goods sold is primarily due to an increase in the cost of service and other revenues sold as a percentage of service and other revenues to 30% for the three months endedSeptember 30, 2020 as compared to 18% for the three months endedSeptember 30, 2019 offset by the 16% decrease in service and other revenues for the 2020 period compared to the 2019 period. The increase in the cost of service and other revenues sold as a percentage of service and other revenues is attributable to inefficiencies and additional expenses related to service technicians performing installation and other software related services due to the effects of the COVID-19 pandemic. Total cost of sales as a percentage of revenues was 66% for the three months endedSeptember 30, 2020 compared to 59% for the three months endedSeptember 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 control/manage the inefficiencies and additional expenses due to the effects of the COVID-19 pandemic. We had$1,992,510 and$4,144,013 in reserves for obsolete and excess inventories atSeptember 30, 2020 andDecember 31, 2019 , respectively. Total raw materials and component parts were$2,450,244 and$4,481,611 atSeptember 30, 2020 andDecember 31, 2019 , respectively, which is a decrease of$2,031,367 (45%). DuringJune 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 such distressed products to the new location which contributed to the significant decrease in the cost of raw materials and component parts. We scrapped older version inventory component parts that were mostly or fully reserved in 2020, which was the primary cause for the decrease in total raw materials and component parts. Finished goods balances were$5,535,073 and$4,906,956 atSeptember 30, 2020 andDecember 31, 2019 , respectively, an increase of$628,117 (13%) which was attributable to accumulating inventory for the new Shield and ThermoVU product lines. 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 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 atSeptember 30, 2020 .
37 Gross Profit Gross profit for the three months endedSeptember 30, 2020 and 2019 was$1,222,648 and$1,118,262 , respectively, an increase of$104,386 (9%). The increase is commensurate with the 23% decrease in total revenues offset by the gross margin percentage decline to 34% during the three months endedSeptember 30, 2020 , from 41% during the three months endedSeptember 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$3,066,606 and$3,468,709 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$402,103 (12%). The significant components of selling, general and administrative expenses are as follows: Three months ended September 30, 2020 2019 Research and development expense$ 405,082 $
517,010
Selling, advertising and promotional expense 789,854
877,218
Stock-based compensation expense 498,356
405,579
Professional fees and expense 118,344
168,996
Executive, sales, and administrative staff payroll 506,219 735,637 Other 749,751 764,269 Total$ 3,066,606 $ 3,468,709 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$405,082 and$517,010 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$111,928 (22%). Most of our engineers are dedicated to research and development activities for our new products, which are primarily the ThermoVU, Shield, EVO-HD 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 and we outsource more development projects. 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 expenses totaled$789,854 and$877,218 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$87,364 (10%). The significant decrease was primarily attributable to our sponsorship of aNASCAR race inMay 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$336,867 and$627,841 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$290,974 (46%). The effective commission rate was 9.4% for the three months endedSeptember 30, 2020 compared to 21.5% for the three months endedSeptember 30, 2019 . We reduced the number of salesmen in our law enforcement and commercial channels beginning in the first and second quarters of 2020, which had a full effect on the third quarter 2020. In addition, we are utilizing third-party distributors as a major component of our new Shield and ThermoVU sales channel. Promotional and advertising expenses totaled$452,987 during the three months endedSeptember 30, 2020 compared to$249,377 during the three months endedSeptember 30, 2019 , which is an increase of$203,610 (82%). The increase is primarily attributable to our sponsorship of several events to promote our new Shield and ThermoVU product lines including theIndianapolis 500 race that
occurred inAugust 2020 . 38
Stock-based compensation expense. Stock based compensation expense totaled$498,356 and$405,579 for the three months endedSeptember 30, 2020 and 2019, respectively, which is an increase of$92,777 (23%). The increase is primarily due to the increased amortization during the three months endedSeptember 30, 2020 related to the restricted stock granted 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$118,344 and$168,996 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$50,652 (30%). 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 onApril 17, 2019 and the WatchGuard lawsuit was settled on May13, 2019. OnJune 17, 2019 , theU.S. District Court granted Axon's Motion for Summary Judgment and accepted Axon's position that it did not infringe on ourU.S. Patent No. 9,253,452 and dismissed the lawsuit in its entirety. We appealed theU.S. District Court's ruling and onApril 22, 2020 , a three-judge panel of theUnited States Court of Appeals for the Tenth Circuit denied our appeal and affirmed theU.S. District Court's previous decision to grant Axon summary judgment. The Company filed a motion requesting a rehearing in front of theCourt of Appeals which motion was also denied onJune 9, 2020 . The Company had untilNovember 7, 2020 to decide whether it would appeal theU.S. District Court's andCourt of Appeals' decisions to theUnited 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 has decided not to appeal the decisions to theUnited States Supreme Court and to abandon the lawsuit against Axon which impacts the trend of legal expenses for the balance of 2020. Executive, sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled$506,219 and$735,637 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$229,418 (31%). 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 third quarter of 2020 as many sporting venues were closed including those served by these service technicians. In addition, several members of the Company's management accepted reductions in their cash compensation in 2020 to help the Company's liquidity position in light of the COVID-19 pandemic.
Other. Other selling, general and administrative expenses totaled$749,751 and$764,269 for the three months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$14,518 (2%). The decrease in other expenses during the three months endedSeptember 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 offset by large increases in the Company's insurance costs. Operating Loss
For the reasons stated above, our operating loss was
Interest Income Interest income increased to$11,340 for the three months endedSeptember 30, 2020 from$6,667 for the three months endedSeptember 30, 2019 , which reflected our higher cash and cash equivalent levels in the third quarter 2020 compared to the third 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 2020, which will generate interest income in future quarters. Interest Expense
We incurred interest expense of
39
OnMay 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 nine months after the date of disbursement and total$79,850.57 per month thereafter. OnMay 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$2.778 million principal amount of secured convertible notes onAugust 5, 2019 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$89,148 for the three months endedSeptember 30, 2019 . The issuance costs primarily included related legal and accounting fees. No similar debt issuances occurred during the three months endedSeptember 30, 2020 .
Change in Fair Value of Proceeds Investment Agreement
We recorded a gain (loss) representing the change in fair value of proceeds
investment agreement of
We elected to account for the PIA on its fair value basis with the change in value recorded as a gain or loss in the accompanying condensed consolidated statements of operations. Therefore, we determined the fair value of the 2018 PIA as ofSeptember 30, 2020 andDecember 31, 2020 to be$-0 - and$6,500,000 , respectively. The change in fair value fromJuly 1, 2020 toSeptember 30, 2020 was$2,365,000 , which was recognized as a gain in the Condensed Consolidated Statement of Operations for the three months endedSeptember 30, 2020 . The change in fair value fromJuly 1, 2019 toSeptember 30, 2019 was$(177,000) , which was recognized as a loss in the Condensed Consolidated Statement of Operations for the three months endedSeptember 30, 2019 . OnJuly 20, 2020 , the Company and BKI executed a Termination Agreement and Mutual Release (the "Termination Agreement"). Under the terms of the Termination Agreement, the parties agreed to terminate the PIA and to release each other from any further liability under the PIA obligation. Under the terms of the Termination 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 onJuly 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 ofU.S. Patent Nos. 8,781,292 and 9,253,452. For clarity, the Company and BKI 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 Termination 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 Termination Agreement. The parties abandoned the Purchase Transaction during the quarter endedSeptember 30, 2020 and, therefore the contingent payment obligation automatically terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does not anticipate any future recoveries from Watchguard and its successors and assigns relative to WatchGuard's use ofU.S. Patent Nos. 8,781,292 and 9,253,452. As a result, the PIA obligation was extinguished upon the payment of the$1,250,000 required under the Termination Agreement. 40
Change in Fair Value of Secured Convertible Notes
We recorded a gain (loss) representing the change in fair value of secured
convertible notes of
We elected to account for the secured convertible notes that were issued onApril 17, 2020 on their fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date ofApril 17, 2020 and throughJune 12, 2020 , when they were paid in full. The change in fair value from their issuance date ofApril 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 endedSeptember 30, 2020 .
Income (Loss) before Income Tax Benefit
As a result of the above, we reported income before income tax benefit of$527,442 and a loss before income tax benefit of$2,985,825 for the three months endedSeptember 30, 2020 and 2019, respectively, an improvement of$3,513,267 (118%). Income Tax Expense (Benefit)
We did not record an income tax expense (benefit) related to our income for the three months endedSeptember 30, 2020 due to our overall net operating loss carryforwards available and the valuation allowance on deferred tax assets. We continue to maintain a full valuation reserve on our net deferred tax assets as ofSeptember 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 onDecember 31, 2019 available to offset future
net taxable income. Net Income (Loss)
As a result of the above, we reported net income of$527,442 and a net loss of$2,985,825 for the three months endedSeptember 30, 2020 and 2019, respectively, an improvement of$3,513,267 (118%).
Basic and Diluted Income (Loss) per Share
The basic and diluted income (loss) per share was$0.02 and ($0.26 ) for the three months endedSeptember 30, 2020 and 2019, respectively, for the reasons previously noted. For the three months endedSeptember 30, 2020 , certain shares issuable upon exercise of outstanding stock options were dilutive and such dilutive effect was determined under the treasury stock method and reflected in diluted average shares outstanding. For the three months endedSeptember 30, 2019 , all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted income (loss) per share. 41
For the Nine months ended
Results of Operations
Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the nine months endedSeptember 30, 2020 and 2019, represented as a percentage of total revenues for each respective year: Nine months ended September 30, 2020 2019 Revenue 100 % 100 % Cost of revenue 63 % 59 % Gross profit 37 % 41 % Selling, general and administrative expenses: Research and development expense 16 % 19 % Selling, advertising and promotional expense 25 % 36 % Stock-based compensation expense 15 % 21 % General and administrative expense 57 % 75 % Patent litigation settlement - % (75 )% Total selling, general and administrative expenses 113 % 76 % Operating loss (76 )% (35 )% Change in fair value of proceeds investment agreement 68 % (41 )% Change in fair value of secured convertible notes (17 )% (5 )% Other income and interest expense, net (5 )% (1 )% Loss before income tax benefit (30 )% (82 )% Income tax (provision) - % - % Net loss (30 )% (82 )% Net loss per share information: Basic$ (0.12 ) $ (0.58 ) Diluted$ (0.12 ) $ (0.58 ) 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 nine months ended
Nine months ended September 30,
2020 2019
DVM-800 25 % 37 %
Repair and service 14 % 18 %
ThermoVU 14 % - %
Shield disinfectants/sanitizers 2 % - %
DVM-250 Plus 3 % 11 %
FirstVu HD 12 % 13 %
Cloud service revenue 9 % 7 %
EVO-HD 7 % 2 %
VuLink 2 % 2 %
Accessories and other revenues 12 % 10 %
100 % 100 %
The COVID-19 pandemic had a negative impact on our revenues during the nine
months ended
42
Product revenues for the nine months ended
? The Company generated revenues totaling over
ended
new product lines. Late in 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 late in the
second quarter of 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.
? 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 nine months of 2020
compared to the 2019 period 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.
43 ? Management has been focusing on migrating customers, and 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 of 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.
Service and other revenues for the nine months endedSeptember 30, 2020 and 2019 were$1,967,881 and$1,981,482 , respectively, which is a decrease of$13,601 (1%), due to the following factors:
? Cloud revenues were
30, 2020 and 2019, respectively, which is an increase of
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
nine months ended
decrease of
extended warranty packages, primarily in our DVM-800 premium service program.
However the fallout from the COVID-19 pandemic and related restrictions on
travel adversely affected our sales of DVM-800 hardware systems resulting in a
decrease of 12% in the 2020 period compared to the 2019 period which resulted
in reduced extended warranty revenues.
? Installation service revenues were
ended
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
which is a decrease of
the nine months ended
period and non-warranty repairs were
security event fees were
2020 compared to
during the nine months ended
nine months ended September 30, 2019 .
Total revenues for the nine months ended
44 Cost of Revenue Cost of product revenue on units sold for the nine months endedSeptember 30, 2020 and 2019 was$4,332,450 and$4,333,812 , respectively, which is a decrease of$1,362 (0%). The decrease in cost of goods sold for products is primarily due to the 4% decrease in product revenues coupled with an increase in the cost of goods sold for products as a percentage of product revenues to 75% for the nine months endedSeptember 30, 2020 compared to 72% for the nine months endedSeptember 30, 2019 . DuringJune 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 such distressed products to the new location, which contributed to the increase in the cost of goods sold for products as a percentage of product revenues to 75% for the nine months endedSeptember 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 nine months endedSeptember 30, 2020 and 2019 was$533,690 and$366,301 , respectively, which is an increase of$167,389 (46%). The increase in service and other cost of goods sold is primarily due to an increase in the cost of service and other revenues sold as a percentage of service and other revenues to 27% for the nine months endedSeptember 30, 2020 compared to 18% for the nine months endedSeptember 30, 2019 . The increase in the cost of service and other revenues sold as a percentage of service and other revenues is attributable to inefficiencies and additional expenses related to service technicians performing installation and other software related services due to the effects of the COVID-19 pandemic. Total cost of sales as a percentage of revenues was 63% for the nine months endedSeptember 30, 2020 compared to 59% for the nine months endedSeptember 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 control/manage the inefficiencies and additional expenses due to the effects of the COVID-19 pandemic. We had$1,992,510 and$4,144,013 in reserves for obsolete and excess inventories atSeptember 30, 2020 andDecember 31, 2019 , respectively. Total raw materials and component parts were$2,450,244 and$4,481,611 atSeptember 30, 2020 andDecember 31, 2019 , respectively, which is a decrease of$2,031,367 (45%). DuringJune 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 such distressed products to the new location which contributed to the significant decrease in the cost of raw materials and component parts. We scrapped older version inventory component parts that were mostly or fully reserved in 2020, which was the primary cause for the decrease in total raw materials and component parts. Finished goods balances were$5,535,073 and$4,906,956 atSeptember 30, 2020 andDecember 31, 2019 , respectively, which is an increase of$628,117 (13%) that was attributable to accumulating inventory for the new Shield and ThermoVU product lines. 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 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 atSeptember 30, 2020 .
Gross Profit Gross profit for the nine months endedSeptember 30, 2020 and 2019 was$2,880,436 and$3,320,814 , respectively, which is a decrease of$440,378 (13%). The decrease is commensurate with the 3% decrease in total revenues and the gross margin percentage decrease to 37% during the nine months endedSeptember 30, 2020 , from 41% during the nine months endedSeptember 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 ThermoVu products, Shield 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 our supply chain through outsourcing production, quantity purchases and more effective purchasing practices. 45
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$8,794,912 and$6,119,777 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is an increase of$2,675,135 (44%). The significant increase was attributable to the patent litigation settlement of$6.0 million that we received in 2019 that did not recur in 2020. Exclusive of the patent litigation settlement, overall selling, general and administrative expenses would have decreased by$3,324,865 (27%) for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The significant components of selling, general and administrative
expenses are as follows:
Nine months ended
September 30,
2020 2019
Research and development expense $ 1,250,528 $ 1,562,086
Selling, advertising and promotional expense 1,958,884
2,871,154
Stock-based compensation expense 1,186,771
1,715,972
Professional fees and expense 675,662
1,338,447
Executive, sales, and administrative staff payroll 1,737,869 2,440,925 Other 1,985,198 2,191,193 Patent litigation proceeds - (6,000,000 ) Total$ 8,794,912 $ 6,119,777 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$1,250,528 and$1,562,086 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$311,558 (20%). Most of our engineers are dedicated to research and development activities for our new products which primarily include the ThermoVU, Shield, EVO-HD 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 and we outsource more development projects. 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$1,958,884 and$2,871,154 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$912,270 (32%). Salesman salaries and commissions represent the primary components of these costs and were$1,289,699 and$1,986,970 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$697,271 (35%). The effective commission rate was 16.6% for the nine months endedSeptember 30, 2020 compared to 24.8% for the nine months endedSeptember 30, 2019 . We reduced the number of salesmen in our law enforcement and commercial channels beginning in the first and second quarter of 2020, which had a full effect on the third quarter of 2020. In addition, we are utilizing third-party distributors as a major component of our new Shield and ThermoVU sales channel. Promotional and advertising expenses totaled$669,185 during the nine months endedSeptember 30, 2020 compared to$884,184 during the nine months endedSeptember 30, 2019 , which is a decrease of$214,999 (24%). The decrease is primarily attributable to our sponsorship of the 2019NASCAR race inKansas City and the suspension of the 2020NASCAR 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$1,186,771 and$1,715,972 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$529,201 (31%). The decrease is primarily due to the decreased amortization during the nine months endedSeptember 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. 46 Professional fees and expense. Professional fees and expenses totaled$675,662 and$1,338,447 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$662,785 (50%). 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 onApril 17, 2019 and the WatchGuard lawsuit was settled on May13, 2019. OnJune 17, 2019 , theU.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 onApril 22, 2020 , a three-judge panel of theUnited States Court of Appeals denied our appeal and affirmed theU.S. District Court's previous decision to grant Axon summary judgment. The Company filed a motion requesting a rehearing in front of theCourt of Appeals which was denied onJune 9, 2020 . The Company had untilNovember 7, 2020 to decide whether it would appeal theU.S. District Court's andCourt of Appeals' decisions to theUnited 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 has decided not to appeal the decisions to theUnited States Supreme Court and to abandon the lawsuit against Axon, which impacts the trend of legal expenses for the balance of 2020. Executive, sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled$1,737,869 and$2,440,925 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$703,056 (29%). 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 2020 as many sporting venues were closed including those served by these service technicians. In addition, several members of Company management accepted reductions in their cash compensation in 2020 to help the Company's liquidity position in light of the COVID-19 pandemic. Other. Other selling, general and administrative expenses totaled$1,985,198 and$2,191,193 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a decrease of$205,995 (9%). The decrease in other expenses during the nine months endedSeptember 30, 2020 compared to the same 2019 period is primarily attributable to lower contract employee expenses and travel costs, a result of the COVID-19 pandemic offset by large increases in the Company's insurance costs. Patent litigation settlement. The income attributable to our patent litigation settlement was$-0 - and$6,000,000 for the nine months endedSeptember 30, 2020 and 2019, respectively. OnMay 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 throughDecember 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 theSeptember 30, 2020 Financial Statements, for the details respecting the settlement. Operating Loss For the reasons stated above, our operating loss was$5,914,476 and$2,798,963 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is a deterioration of$3,115,513 (111%). Interest Income Interest income increased to$33,208 for the nine months endedSeptember 30, 2020 from$30,279 in the 2019 period, which reflected our higher cash and cash equivalent levels during the nine months endedSeptember 30, 2020 compared to the comparable period in 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 2020, which will continue to generate interest income in future quarters. Interest Expense
We incurred interest expense of
47 The Company issued an aggregate of$1.667 million principal amount of secured convertible notes onApril 20, 2020 which bore interest at 8% per annum on the outstanding principal balance. During the nine months endedSeptember 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 ofSeptember 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 onAugust 5, 2019 , which bore interest at 8% per annum on the outstanding principal balance. During the nine months endedSeptember 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 nine months endedSeptember 30, 2020 , and onMarch 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 ofSeptember 30, 2020 , as a result of these conversions and prepayments. The Company issued an unsecured promissory note in an aggregate principal amount of$300,000 onDecember 23, 2019 , which bore interest at 8% per annum on the outstanding principal balance and which has been repaid in full as ofSeptember 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 ofSeptember 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 ofSeptember 30, 2020 . OnMay 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 nine months after the date of disbursement and total$79,850.57 per month thereafter. OnMay 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 incurred secured convertible note issuance expenses of
We elected to account for and record our$1.667 million principal amount of the 2020 Convertible Notes issued inApril 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 nine months endedSeptember 30, 2020 . The issuance costs primarily included related legal and accounting fees. We elected to account for and record our$2.778 million principal amount of secured convertible notes onAugust 5, 2019 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$89,148 for the nine months endedSeptember 30, 2019 . The issuance costs primarily included related legal and accounting fees.
Change in Fair Value of Proceeds Investment Agreement
We recorded a gain (loss) representing the change in fair value of proceeds
investment agreement of
We elected to account for the PIA on its fair value basis with the change in value recorded as a gain or loss in the accompanying condensed consolidated statements of operations. Therefore, we determined the fair value of the 2018 PIA as ofSeptember 30, 2020 andDecember 31, 2020 to be$-0 - and$6,500,000 , respectively. The change in fair value fromDecember 31, 2020 toSeptember 30, 2020 was$5,250,000 , which was recognized as a gain in the Condensed Consolidated Statement of Operations for the nine months endedSeptember 30, 2020 . The change in fair value fromDecember 31, 2018 toSeptember 30, 2019 was$(3,275,000) , which was recognized as a loss in the Condensed Consolidated Statement of Operations for the nine months endedSeptember 30, 2019 . 48
OnJuly 20, 2020 , the Company and BKI executed a Termination Agreement and Mutual Release (the "Termination Agreement"). Under the terms of the Termination Agreement the parties agreed to terminate the PIA and to release each other from any further liability under the PIA obligation. Under the terms of the Termination 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 onJuly 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 ofU.S. Patent Nos. 8,781,292 and 9,253,452. For clarity, the Company and BKI 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 Termination 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 Termination Agreement. The parties abandoned the Purchase Transaction during the quarter endedSeptember 30, 2020 and, therefore the contingent payment obligation automatically terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does not anticipate any future recoveries from Watchguard and its successors and assigns relative to WatchGuard's use ofU.S. Patent Nos. 8,781,292 and 9,253,452. As a result the PIA obligation was extinguished upon the payment of the$1,250,000 required under the Termination Agreement.
Change in Fair Value of Secured Convertible Notes
We recorded a gain (loss) representing the change in fair value of secured
convertible notes of
We elected to account for the secured convertible notes that were issued onApril 17, 2020 on their fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date ofApril 17, 2020 and throughJune 12, 2020 , when they were paid in full. The change in fair value from their issuance date ofApril 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 nine months endedSeptember 30, 2020 . We elected to account for the secured convertible notes that were issued inAugust 2019 on their fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date onDecember 31, 2019 until they were paid in full onMarch 3, 2020 . The change in fair value fromDecember 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 nine months endedSeptember 30, 2020 . The change in fair value from the issuance date ofAugust 5, 2019 andSeptember 30, 2019 was$408,860 , which was recognized as a charge in the Condensed Consolidated Statement of Operations atSeptember 30, 2019 .
Loss before Income Tax Benefit
As a result of the above, we reported a loss before income tax benefit of
Income Tax Benefit
We did not record an income tax benefit related to our losses for the nine months endedSeptember 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 ofSeptember 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 onDecember 31, 2019 available to offset future net taxable income. 49 Net Loss As a result of the above, we reported net losses of$2,304,562 and$6,578,729 for the nine months endedSeptember 30, 2020 and 2019, respectively, which is an improvement of$4,274,167 (65%).
Basic and Diluted Loss per Share
The basic and diluted loss per share was ($0.12 ) and ($0.58 ) for the nine months endedSeptember 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 nine months endedSeptember 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. TheSeptember 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 nine months endedSeptember 30, 2020 and for the year endedDecember 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$2.3 million during the nine months endedSeptember 30, 2020 and$10.0 million for the year endedDecember 31, 2019 and it had an accumulated deficit of$89.7 million as ofSeptember 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 PIA Agreement, and onJuly 20, 2020 , the Company and BKI executed a Termination Agreement which terminated the PIA and released the parties from any further liability under the PIA obligation upon payment of$1,250,000 by the Company to BKI. Such$1,250,000 payment was made onJuly 22, 2020 and the PIA obligation was extinguished, as more fully described in Note 4 - "Proceeds Investment Agreement Obligation" to theSeptember 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 nine months endedSeptember 30, 2020 . In addition, the Company raised$1,564,000 in the year endedDecember 31, 2019 from the exercise of warrants, borrowed$300,000 pursuant to a short-term promissory note payable onDecember 23, 2019 with detachable warrants to purchase 107,000 shares of Common Stock and onAugust 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 theSeptember 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. OnMay 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 nine 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 ofSeptember 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. OnApril 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. 50
OnJuly 2, 2020 theSEC declared the Company's shelf registration statement on Form S-3 effective (the "Shelf Registration Statement"). 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 the COVID-19 pandemic 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 and/or the perception of its effects will have a material adverse effect on our business, financial condition, results of operations and cash flows. 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 ofSeptember 30, 2020 , we had cash and cash equivalents with an aggregate balance of$8,130,331 , which is an increase from a balance of$359,685 atDecember 31, 2019 . Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the$7,770,646 net increase in cash during the nine months ended September
30, 2020: 51 ? Operating$10,115,605 of net cash used in operating activities. Net cash activities: used in operating activities was$10,115,605 and$170,958 for the nine months endedSeptember 30, 2020 and 2019,
respectively which
is a deterioration of $10,194,647 . The deterioration was
attributable to the net loss incurred for 2020, the non-cash gain
attributable to the change in value of the PIA obligation, the
usage of cash to increase inventory, accounts receivable, other
operating assets and the reduction of accounts payable during the
nine months ended September 30, 2020 compared to the same period
in 2019.
? Investing $889,726 of net cash used in investing activities. Cash used in
activities: investing activities was $889,726 and $129,766 for the nine months
ended September 30, 2020 and 2019 respectively. In 2020, we
incurred costs for: (i) the purchase of a warehouse building; (ii)
the build out of the new leased office and warehouse space; (iii)
the tooling of new products; (iv) patent applications on our
proprietary technology utilized in our new products and included
in intangible assets, and, (v) a $250,000 equity investment the
Company made in a private company.
? Financing $18,775,977 of net cash provided by financing activities. Cash
activities: provided by financing activities was $18,775,977 for the nine
months ended September 30, 2020 and net cash used in financing
activities was $2,025,148 for the nine months ended September 30,
2019 . In 2020, we closed several underwritten public offerings of
our Common Stock, 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 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 nine months ended September 30, 2020 . These 2020
financing cash inflows were offset by the extinguishment of the
PIA obligation and the repayment of principal on the secured
convertible notes and unsecured promissory notes. During 2019, we
received $2,500,000 in proceeds from the issuance of convertible
debt and $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
Commitments: We had$8,130,331 of cash and cash equivalents and net positive working capital$14,851,249 as ofSeptember 30, 2020 . Accounts receivable balances represented$1,799,935 of our net working capital atSeptember 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$5,993,627 of our net working capital atSeptember 30, 2020 and finished goods represented$5,535,073 of total inventory atSeptember 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.
Capital Expenditures. We had no material commitments for capital expenditures at
Lease commitments. OnMay 13, 2020 , the Company entered into an operating lease for new warehouse and office space, which will serve as its new principal executive office and primary business location. The original lease agreement was amended onAugust 28, 2020 to correct the footage under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments ranging from$12,398 to$14,741 thereafter, with a termination date ofDecember 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 onJune 15, 2020 . The remaining lease term for the Company's office and warehouse operating lease as ofSeptember 30, 2020 was seventy-four months. The Company's previous office and warehouse space lease expired inApril 2020 and the Company paid holdover rent for the time period until it moved to and commenced occupying the new space onJune 15, 2020 . 52 The Company entered into an operating lease with a third party inOctober 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 ofOctober 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 ofSeptember 30, 2020 was 37 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
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
Assets:
Operating lease right of use assets $ 792,121
Liabilities:
Operating lease obligations-Long-term portion $ 754,031
Operating lease obligations-Current portion 83,094
Total operating lease obligations $ 837,125 The components of lease expense were as follows for the nine months ended
Selling, general and administrative expenses $ 302,836 Following are the minimum lease payments for each year and in total.
Year ending December 31 :
2020 (October 1, to December 31, 2020) $ 17,192
2021 176,465
2022 184,412
2023 184,523
2024 171,924
Thereafter 334,001
Total undiscounted minimum future lease payments 1,068,517
Imputed interest (231,392 )
Total operating lease liability $ 837,125
53
Debt Obligations.
Debt obligations is comprised of the following:
September 30, 2020 December 31, 2019
Payroll protection program loan (PPP)$ 1,418,900 $ - Economic injury disaster loan (EIDL) 150,000 - 2019 Secured convertible notes, at fair value -
1,593,809
Unsecured promissory notes payable, less unamortized discount of$-0 - and$66,061 atSeptember 30, 2020 andDecember 31, 2019 , respectively - 233,939 Debt obligations 1,568,900 1,827,748
Less: current maturities of debt obligations 791,521
1,827,748
Debt obligations, long-term $ 777,379 $ -
Debt obligations mature as follows as of
September 30, 2020
2020 (October 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
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 inMarch 2020 . By that time, much of our first fiscal quarter was completed. During the quarter endedSeptember 30, 2020 , we observed recent decreases in demand from certain customers, including 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 endedSeptember 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. 54 In light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have taken, and continue to take 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.
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 year ending December 31, 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
during the pandemic. 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
the COVID-19 pandemic 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.
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