Digital Ally, Inc. (NASDAQ: DGLY), which develops, manufactures and markets advanced video surveillance products for law enforcement, homeland security and commercial applications, announced its operating results for the quarter and full year ended December 31, 2016. An investor conference call is scheduled for 11:15 a.m. EDT tomorrow, March 28 2017.

Highlights for Year Ended December 31, 2016

We expanded our addressable market outside of law enforcement with the award of several large orders involving our in-car event recorder and body camera products to non-law enforcement customers during 2016. These orders demonstrate the importance of our solution to meet customer demands and our flexibility to adapt our hardware and software to handle unique requirements for a variety of industries and applications.

We introduced several new cloud-based and other recurring service offerings to our product suite, including our revamped VuVault.com cloud storage service to law enforcement customers and the FleetVU Manager, our driver management, training and asset tracking cloud systems for non-law enforcement customers. Our FleetVu Manager users are able to manage and monitor their fleet drivers using their own customized and defined feedback parameters, such as speed, hard braking, geo-fencing and erratic turns, all of which are automatically uploaded to FleetVuManager.com without having to manually sort through hours of recorded video events. These recurring revenue services generate more predictable and stable revenue streams for us. Service and other revenues increased 35% during 2016 compared with 2015.

We recently released our new DVM-800 HD in-car video system, which provides the first full HD quality in-car video system available on the market. The DVM-800 HD is the new standard in high definition 1080p in-car video systems for law enforcement and is gaining the attention of our customers and potential customers because of its advanced features at an attractive price point.

During 2016 we were awarded a contract for the sale of FirstVu HD body-worn cameras to a non-law enforcement international customer. The three-year supply contract includes our FirstVu HD body-worn cameras, storage systems and an extended service agreement. The revenue from the initial orders delivered in 2016 exceeded $760,000 with additional service revenues of $180,000 expected for 2017 through 2019. Our international revenues increased to $1,191,012, representing 7% of total revenues, during the year ended December 31, 2016 compared with $148,667, representing 1% of total revenues, during the year ended December 31, 2015.

In December 2016, we completed a private placement of $4.0 million in principal amount of 8% secured convertible debentures and warrants exercisable to purchase 800,000 shares of common stock at $5.00 per share to two institutional investors. This private placement resulted in gross proceeds of $4.0 million before placement agent fees and other expenses associated with the transaction which totaled $281,570. We are using the net proceeds for general working capital purposes and to continue to execute our business plan.

During 2016 we filed patent infringement lawsuits against two competitors, Taser International, Inc. and Enforcement Video, LLC d/b/a as WatchGuard Video. We have alleged that these competitors are infringing on our patented “auto-activation” feature embodied in our VuLink product. We believe that our patented auto activation feature is becoming an industry standard required in a majority of competitive bids to supply body cameras to law enforcement customers. Law enforcement agencies across the country have recognized the ground-breaking nature of our “auto-activation” patents and are demanding this technology. We believe that Taser and WatchGuard have grown their market shares on the back of our innovations because they were unable to develop their own solutions. We will continue to aggressively pursue our claims that Taser and WatchGuard have willfully infringed our patents. Further, we believe that the outcome of this litigation will generally set the competitive landscape for body-worn cameras utilized by law enforcement agencies for the foreseeable future.

During 2016, we encountered excessive rework costs for our products due to nonrecurring supply chain issues with certain of our contract manufacturers. The supply chain issues have been corrected; however, the effects of these issues impacted our revenues and gross margins for 2016. Total revenue decreased by 17% to approximately $16.6 million in 2016, compared with approximately $20.0 million in the year ended December 31, 2015. Gross profit margin decreased to 32% of total revenue in 2016, compared with 42% in 2015.

The Company reported an operating loss of ($12,486,188) for the full year of 2016 compared with an operating loss of ($7,621,471) in the previous year. Operating loss in the fourth quarter of 2016 was ($4,013,995) compared with ($2,700,529) in the prior-year period.

A net loss of ($12,710,688), or ($2.38) per share, was recorded in the year ended December 31, 2016, compared with a net loss of ($12,037,892), or ($2.77) per share, in 2015.

On a non-GAAP basis, the Company recorded an adjusted net loss of ($10,273,557), or ($1.92) per share, in 2016 compared with a non-GAAP adjusted net loss of ($5,448,791), or ($1.26) per share in the year ended December 31, 2015.

Management Comments:

“We were disappointed to report revenues for the year ended 2016 that decreased 17% from the year prior, even though we saw an increase in our service-based revenues in 2016,” stated Stanton E. Ross, Chief Executive Officer of Digital Ally Inc. “We are concentrating on expanding our recurring service-based revenue to help stabilize and grow our revenues on a quarterly basis. We are pursuing several new market channels that do not involve our traditional law enforcement and private security customers. If successful, we believe that these new market channels could yield increased recurring service revenues for us in 2017 and beyond. We are testing a new revenue model that bundles our product offerings, including the long-term lease of our body-worn and/or in-car audio/video hardware, together with a monthly subscription for our cloud storage, search and archiving services for the underlying audio and video material. We believe this revenue service model may appeal to our customers, in particular our commercial and other non-law enforcement customers because it reduces the capital outlay up front and eliminates repairs and maintenance in exchange for level monthly payments for the utilization of the equipment, data storage and management services.”

“We recently announced the launch of the DVM-800 HD in-car video system, which we believe will be disruptive in the market and will lead to an expansion of our overall market share in the law enforcement channel. The DVM-800 HD system provides full 1080P high definition video at a cost effective price point, which is a competitive market advantage for us.”

“Our international revenues increased to $1,191,012 in 2016 compared to $148,667 during 2015 and were aided by approximately $760,000 of revenue from the sale our FirstVU HD body worn cameras, storage systems and extended service agreement to a non-law enforcement international customer that will continue for three years. This order demonstrates the possibilities of deploying our FirstVU HD body cameras globally across various industries and applications in addition to the traditional law enforcement market.”

“We entered 2017 with a strong balance sheet and liquidity, which should be able to support a higher level of product sales and shipments if anticipated orders are forthcoming,” added Ross. “Unrestricted cash and equivalents totaled $3.9 million at December 31, 2016, and we had approximately $11.7 million in net working capital available at the end of 2016, including $2.5 million of accounts receivable and $9.6 million of inventory. Our goal is to reduce inventory levels during 2017 to provide additional funding for operations,” concluded Ross.

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