New York (TheStreet) -- President Obama's call last week to spend $75M to outfit America's police departments with body cameras has set the companies which make the body cameras on fire. In fact, their stocks have been on a tear ever since the Ferguson tragedy in mid-August. The parabolic rise is most glaring in shares of Digital Ally (DGLY) , which is up nearly 400% in the past six months alone, even though it is more than 22 times smaller than its largest competitor Taser International (TASR) . While I do believe police body cameras will in time become the new norm, Digital Ally is not positioned to capture this tailwind, and is already getting stomped out by its larger, more powerful competitors which have the scale, networks, distribution channels and customer relationships necessary to dominate the industry. This is a true house of cards situation, and I would not be surprised to see this company collapse under the weight of its own financial missteps.
Digital Ally isn't just in bad financial health. It's on its metaphorical death bed, propped up by an unmanageable debt load. The company has yet to turn an operating profit this year, let alone at any point in the last five years. It has been unable to convert recent publicity into sales, and only managed to grow revenue by 3.7% in the latest quarter. In the same quarter, the company lost over $6M while its long-term debt swelled over 280% sequentially. This imbalance is startling, and a deeper dive into its financials tell an even sadder story.
In 2011 the company borrowed $2.5M with a May 2012, which it was initially supposed to pay off by May 2012. It was unable to do so, and has since had to push the payment back three consecutive years. It simply does not have the money to pay off its most basic obligations. Even worse, each time it modifies the loan agreement, Digital Ally is forced to offer its lenders additional sweeteners that further compromise its financial health.
As Digital Ally keeps kicking this $2.5M can down the road, it is taking on additional debt to pay off its old debt and cover interest payments. It is, in the most classic sense, robbing Peter to pay Paul. The company raised an additional $4M this past quarter through a convertible debt offering just so it could cover its massive third quarter loss and stay afloat. This convertible raise is not only expensive for the company, it also has the potential to dilute shares by nearly 17%. Digital Ally is practically begging its lenders to fund them, and as a result of its mounting losses its capital suitors are fewer and farther between. The company directly admits in its filings that it is unable to secure a bank loan given its "recent operating losses, current banking environment and the Convertible Note, which may adversely affect our ability to finance our business, grow or be profitable".
As Taser, Veivu and other large players in the police protection market continue to sweep up deal after deal, Digital Ally hasn't picked up a new order in nearly a month and a half. Unfortunately for them, they don't have the luxury of time. Unless sales inflect over the coming months and the company somehow figures out a way to turn around its margins, it is doomed to collapse under its own weight.
-- Written by Jack Mohr in New York