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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended September 30, 2023.

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from ___________ to __________.
   
Commission File Number: 001-33899

 

Digital Ally, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   20-0064269

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

14001 Marshall Drive, Lenexa, KS 66215

(Address of principal executive offices) (Zip Code)

 

(913) 814-7774

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of exchange on which registered
Common stock, $0.001 par value per share   DGLY   The Nasdaq Capital Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class   Outstanding at November 14, 2023
Common Stock, $0.001 par value per share   2,800,752

 

 

 

 

 

 

FORM 10-Q

DIGITAL ALLY, INC.

SEPTEMBER 30, 2023

 

TABLE OF CONTENTS   Page(s)
PART I – FINANCIAL INFORMATION    
     
Item 1. Financial Statements.    
     
Condensed Consolidated Balance Sheets – September 30, 2023 (Unaudited) and December 31, 2022   3
     
Condensed Consolidated Statements of Operations for the Three and Nine months Ended September 30, 2023 and 2022 (Unaudited)   4
     
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine months Ended September 30, 2023 and 2022 (Unaudited)   5
     
Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2023 and 2022 (Unaudited)   6
     
Notes to the Condensed Consolidated Financial Statements (Unaudited)   7-39
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   40-65
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk.   66
     
Item 4. Controls and Procedures.   66
     
PART II - OTHER INFORMATION    
     
Item 1. Legal Proceedings.   66
     
Item 1A. Risk Factors.   66
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   66
     
Item 3. Defaults Upon Senior Securities   67
     
Item 4. Mine Safety Disclosures   67
     
Item 5. Other Information.   67
     
Item 6. Exhibits.   67
     
SIGNATURES   68

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements.

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

 

  

September 30, 2023

(Unaudited)

   December 31, 2022 
Assets          
Current assets:          
Cash and cash equivalents  $2,207,831   $3,532,199 
Accounts receivable – trade, net of $200,667 allowance – September 30, 2023 and $152,736 – December 31, 2022   2,022,730    2,044,056 
Other receivables, net of $5,000 allowance – September 30, 2023 and $0 – December 31, 2022 (including $0 due from related parties – September 30, 2023 and $138,384 – December 31, 2022, refer to Note 20)   2,617,812    4,076,522 
Inventories, net   5,194,779    6,839,406 
Prepaid expenses   7,323,615    8,466,413 
           
Total current assets   

19,366,767

    24,958,596 
           
Property, plant, and equipment, net   7,451,042    7,898,686 
Goodwill and other intangible assets, net   16,861,228    17,872,970 
Operating lease right of use assets, net   1,034,518    782,129 
Income tax receivable   9,447     
Other assets   6,633,072    5,155,681 
           
Total assets  $

51,356,074

   $56,668,062 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $12,589,610   $9,477,355 
Accrued expenses   2,808,068    1,090,967 
Current portion of operating lease obligations   264,958    294,617 
Contract liabilities – current portion   2,751,983    2,154,874 
Notes payable – related party – current portion   2,106,000     
Debt obligations, net – current portion   2,213,148    485,373 
Warrant derivative liabilities   1,412,820     
Income taxes payable       8,097 
           
Total current liabilities   24,146,587    13,511,283 
           
Long-term liabilities:          
Debt obligations – long term   147,721    442,467 
Operating lease obligation – long term   837,755    555,707 
Contract liabilities – long term   7,134,547    5,818,082 
Notes payable – related party – long term   

219,000

     
Lease Deposit   10,445     
           
Total liabilities   32,496,055    20,327,539 
           
Commitments and contingencies   -    - 
           
Stockholders’ Equity:          
Common stock, $0.001 par value per share; 200,000,000 shares authorized; shares issued: 2,800,752 shares issued – September 30, 2023 and 2,720,170 shares issued – December 31, 2022   2,801    2,721 
Additional paid in capital   128,367,929    127,869,342 
Noncontrolling interest in consolidated subsidiary   677,318    448,694 
Accumulated deficit   

(110,188,029

)   (91,980,234)
           
Total stockholders’ equity   18,860,019    36,340,523 
           
Total liabilities and stockholders’ equity  $51,356,074   $56,668,062 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

3
 

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2023 AND 2022

(unaudited)

 

   2023   2022   2023   2022 
  

For the three months ended
September 30,

  

For the nine months ended
September 30,

 
   2023   2022   2023   2022 
Revenue:                    
Product  $2,095,237   $3,062,373   $7,626,706   $7,682,614 
Service and other   4,242,462    5,421,780    14,687,813    20,447,778 
                     
Total revenue   6,337,699    8,484,153    22,314,519    28,130,392 
                     
Cost of revenue:                    
Product   2,587,750    3,262,457    7,108,366    8,154,984 
Service and other   2,523,800    4,626,196    9,698,175    15,721,210 
                     
Total cost of revenue   5,111,550    7,888,653    16,806,541    23,876,194 
                     
Gross profit   1,226,149    595,500    5,507,978    4,254,198 
                     
Selling, general and administrative expenses:                    
Research and development expense   564,146    616,174    2,039,361    1,654,395 
Selling, advertising and promotional expense   1,932,982    1,832,916    5,885,097    7,375,364 
General and administrative expense   3,877,064    4,713,433    13,845,074    15,256,049 
                     
Total selling, general and administrative expenses   6,374,192    7,162,523    21,769,532    24,285,808 
                     
Operating loss   (5,148,043)   (6,567,023)   (16,261,554)   (20,031,610)
                     
Other income (expense):                    
Interest income   12,986    13,333    84,071    116,928 
Interest expense   

(959,898

)   (14,255)   (2,480,947)   (39,766)
Other income (loss)   25,394    (1,892)   76,180    41,167 
Loss on accrual for legal settlement           (1,792,308)    
Loss on conversion of convertible note           (93,386)    
Change in fair value of contingent consideration promissory notes   19,888    (138,877)   177,909    347,169 
Change in fair value of short-term investments               (84,818)
Change in fair value of warrant derivative liabilities   1,863,326    1,164,849    1,803,560    6,726,638 
Gain on extinguishment of liabilities   507,304        507,304     
Gain on extinguishment of warrant derivative liabilities       3,624,794        3,624,794 
                     
Total other income (expense)   1,469,000    4,647,952    (1,717,617)   10,732,112 
                     
Loss before income tax benefit   (3,679,043)   (1,919,071)   (17,979,171)   (9,299,498)
Income tax benefit                
                     
Net loss   (3,679,043)   (1,919,071)   (17,979,171)   (9,299,498)
                     
Net (income) attributable to noncontrolling interests of consolidated subsidiary   (29,630)   16,596    (228,624)   (268,636)
                     
Net loss attributable to common stockholders  $(3,708,673)  $(1,902,475)  $(18,207,795)  $(9,568,134)
                     
Net loss per share information:                    
Basic  $(1.32)  $(0.76)  $(6.55)  $(3.83)
Diluted  $(1.32)  $(0.76)  $(6.55)  $(3.83)
                     
Weighted average shares outstanding:                    
Basic   2,800,752    2,518,261    2,779,530    2,498,681 
Diluted   2,800,752    2,518,261    2,779,530    2,498,681 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

4
 

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

 

                         
   Common Stock  

Additional

Paid In

  

Noncontrolling

interest in

consolidated

   Accumulated     
   Shares   Amount   Capital   subsidiary   deficit   Total 
Balance, December 31, 2021   2,545,220   $2,545   $124,476,447   $56,453   $(68,672,206)  $55,863,239 
                               
Stock-based compensation           394,749            394,749 
Restricted common stock grant   35,750    36    (36)            
Restricted common stock forfeitures   (750)   (1)   1             
Repurchase and cancellation of common stock   (93,802)   (94)           (2,063,674)   (2,063,768)
Distribution to noncontrolling interest in consolidated subsidiary               (15,692)       (15,692)
Net loss               (98,094)   (6,600,148)   (6,698,242)
                               
Balance, March 31, 2022   2,486,418   $2,486   $124,871,161   $(57,333)  $(77,336,028)  $47,480,286 
                               
Stock-based compensation           381,602            381,602 
Restricted common stock forfeitures   (2,500)   (3)   3             
Repurchase and cancellation of common stock   (92,498)   (92)           (1,962,663)   (1,962,755)
Net income (loss)               383,326    (1,065,513)   (682,187)
                               
Balance, June 30, 2022   2,391,420   $2,391   $125,252,766   $325,993   $(80,364,204)  $45,216,946 
                               
Issuance of common stock through warrant exchange agreement   303,750    304    4,495,196            4,495,500 
Stock-based compensation           251,733            251,733 
Net loss               (16,596)   (1,902,475)   (1,919,071)
                               
Balance, September 30, 2022   2,695,170   $2,695   $129,999,695   $309,397   $(82,266,679)  $48,045,108 
                               
Balance, December 31, 2022   2,720,170   $2,721   $127,869,342    448,694   $(91,980,234)  $36,340,523 
                               
Stock-based compensation           114,848            114,848 
Restricted common stock grant   35,000    35    (35)            
Issuance due to rounding from reverse stock split   54                      
Net Income (loss)               126,239    (6,105,818)   (5,979,579)
                               
Balance, March 31, 2023   2,755,224   $2,756   $127,984,155   $574,933   $(98,086,052)  $30,475,792 
                               
Stock-based compensation           179,483            179,483 
Restricted common stock forfeitures   (3,625)   (4)   4             
Issuance due to rounding from reverse stock split   24,154    24    (24)            
Conversion of convertible note into common stock   25,000    25    119,725            119,750 
Net Income (loss)               72,755    (8,393,304)   (8,320,549)
                               
Balance, June 30, 2023   2,800,753   $2,801   $128,283,343   $647,688   $(106,479,356)  $22,454,476 
                               
Stock-based compensation           84,586            84,586 
Net Income (loss)               29,630    (3,708,673)   (3,679,043)
                               
Balance, September 30, 2023   2,800,753   $2,801   $128,367,929   $

677,318

   $(110,188,029)  $18,860,019 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

5
 

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

 

   2023   2022 
   For the nine months ended September 30, 
   2023   2022 
Cash Flows From Operating Activities:          
Net loss  $(17,979,171)  $(9,299,498)
Adjustments to reconcile net loss to net cash flows used in operating activities:          
Depreciation and amortization   1,656,627    1,646,207 
Stock-based compensation   378,917    1,028,084 
Non-cash interest expense   576,380     
Change in fair value of warrant derivative liabilities   (1,803,560)   (6,726,638)
Gain on extinguishment of liabilities   

(507,304

)   

 
Gain on extinguishment of warrant derivative liabilities       (3,624,794)
Convertible debt discount amortization   

1,887,273

     
Loss on conversion of debt   93,386     
Provision for inventory obsolescence   

(918,571

)   143,664 
Provision for doubtful accounts receivable   47,931    (161,239)
Allowance for doubtful lease reserve   5,000     
Change in fair value of contingent consideration promissory note   (177,909)   (347,169)
           
Change in operating assets and liabilities:          
(Increase) decrease in:          
Accounts receivable – trade   (26,605)   143,937 
Accounts receivable – other   1,453,710    (3,426,732)
Inventories   2,563,198    (1,448,044)
Prepaid expenses   1,142,798    531,508 
Operating lease right of use assets   285,667   306,783 
Other assets   (1,477,391)   (4,125,776)
Increase (decrease) in:          
Accounts payable   

3,619,557

    5,133,934 
Accrued expenses   

1,717,101

    (106,800)
Income taxes payable   

(17,544

)   9,969 
Lease deposit   10,445     
Operating lease obligations   

(285,667

)   (306,782)
Contract liabilities   

1,913,574

    2,831,394 
           
Net cash used in operating activities   

(5,842,158

)   (17,797,992)
           
Cash Flows from Investing Activities:          
Purchases of property, plant and equipment   

(86,348

)   (1,947,127)
Additions to intangible assets   (110,893)   (158,218)
Cash paid for acquisition of Medical Billing Company       (1,153,627)
Cash paid for asset acquisition of Medical Billing Company       (230,000)
           
Net cash used in investing activities   

(197,241

)   (3,488,972)
           
Cash Flows from Financing Activities:          
Repurchase and cancellation of common stock       (4,026,523)
Distribution to noncontrolling interest in consolidated subsidiary       (15,692)
Net proceeds of convertible debt with detachable warrants   2,640,000     
Net proceeds of related party note payable   

2,325,000

    

 
Proceeds – Commercial Extension of Credit – Entertainment Segment   1,224,577     
Payments on Commercial Extension of Credit – Entertainment Segment   (1,156,441)    
Principal payment on contingent consideration promissory notes   

(318,105

)   (383,222)
           
Net cash (used in) provided by financing activities   

4,715,031

    (4,425,437)
           
Net decrease in cash and cash equivalents   

(1,324,368

)   (25,712,401)
Cash, cash equivalents, beginning of period   3,532,199    32,007,792 
           
Cash, cash equivalents, end of period  $

2,207,831

   $6,295,391 
           
Supplemental disclosures of cash flow information:          
Cash payments for interest  $

26,220

   $44,783 
           
Cash payments for income taxes  $

9,447

   $9,969 
           
Supplemental disclosures of non-cash investing and financing activities:          
ROU and lease liability recorded on extension of lease  $538,056   $ 
           
Conversion of convertible notes payable into common stock  $119,750   $ 
           
Issuance of common stock through warrant exchange agreement  $   $4,495,500 
           
Issuance of contingent consideration promissory note for business acquired  $   $855,000 
           
Assets acquired in business acquisitions  $   $190,631 
           
Liabilities assumed in the business acquisition  $   $387,005 
           
Goodwill acquired in business acquisitions  $   $2,100,000 
           
Restricted common stock grant  $35   $715 
           
Reverse stock split rounding issuances  $24   $ 
           
Restricted common stock forfeitures  $4   $65 
           
Debt discount on convertible note  $3,000,000   $ 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

6
 

 

DIGITAL ALLY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations:

 

Digital Ally, Inc. was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November 30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital Ally, Inc. (such merged entity, the “Predecessor Registrant”).

 

On August 23, 2022 (the “Effective Time”), the Predecessor Registrant merged with and into its wholly owned subsidiary, DGLY Subsidiary Inc., a Nevada corporation (the “Registrant”), pursuant to an agreement and plan of merger, dated as of August 23, 2022 (the “Merger Agreement”), between the Predecessor Registrant and the Registrant, with the Registrant as the surviving corporation in the merger (such transaction, the “Merger”). At the Effective Time, Articles of Merger were filed with the Secretary of State of the State of Nevada, pursuant to which the Registrant was renamed “Digital Ally, Inc.” and, by operation of law, succeeded to the assets, continued the business and assumed the rights and obligations of the Predecessor Registrant immediately prior to the Merger. Under the Nevada Revised Statutes, shareholder approval was not required in connection with the Merger Agreement or the transactions contemplated thereby.

 

At the Effective Time, pursuant to the Merger Agreement, (i) each outstanding share of Predecessor Registrant’s common stock, par value $0.001 per share (the “Predecessor Common Stock”) automatically converted into one share of common stock, par value $0.001 per share, of the Registrant (“Registrant Common Stock”), (ii) each outstanding option, right or warrant to acquire shares of Predecessor Common Stock converted into an option, right or warrant, as applicable, to acquire an equal number of shares of Registrant Common Stock under the same terms and conditions as the original options, rights or warrants, and (iii) the directors and executive officers of the Predecessor Registrant were appointed as directors and executive officers, as applicable, of the Registrant, each to serve in the same capacity and for the same term as such person served with the Predecessor Registrant immediately before the Merger.

 

The business of the Registrant, Digital Ally, Inc. (with its wholly owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare, LLC (“Digital Ally Healthcare”), TicketSmarter, Inc. (“TicketSmarter”), Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc. (“Kustom 440”), Kustom Entertainment, Inc., and its majority-owned subsidiary Nobility Healthcare, LLC, collectively, “Digital Ally,” “Digital,” and the “Company”), is divided into three reportable operating segments: 1) the Video Solutions Segment, 2) the Revenue Cycle Management Segment and 3) the Entertainment Segment. The Video Solutions Segment is our legacy business that produces digital video imaging, storage products, disinfectant and related safety products for use in law enforcement, security and commercial applications. This segment includes both service and product revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides working capital and back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Entertainment Segment acts as an intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms. The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Such required segment information is included in Note 19.

 

7
 

 

Business Combination

 

In June 2023, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp., a Delaware corporation (Nasdaq: CLOE) (“Clover Leaf”), CL Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf in accordance with the terms and conditions of the Merger Agreement, and Kustom Entertainment, Inc., a Nevada corporation, a wholly owned subsidiary of the Company, with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies (“Kustom”). Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with and into Kustom, with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Clover Leaf. Upon the Closing which is subject to the approval of Clover Leaf’s shareholders and the satisfaction or waiver of certain other customary closing conditions, the common stock of the combined company is expected to be listed on the Nasdaq under a mutually agreed new ticker symbol that reflects the name “Kustom Entertainment”.

 

Basis of Presentation:

 

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

 

The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.

 

For further information, refer to the audited financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2022.

 

Uncertainty Due to Geopolitical Events

 

Due to the Hamas-Israel and Russia-Ukraine conflicts, there has been uncertainty and disruption in the global economy. Although these events did not have a direct material adverse impact on the Company’s financial results for the three and nine months ended September 30, 2023, at this time the Company is unable to fully assess the aggregate impact the Hamas-Israel and Russia-Ukraine conflicts will have on its business due to various uncertainties, which include, but are not limited to, the duration of the conflicts, the conflicts’ effect on the economy, the impact on the Company’s businesses and actions that may be taken by governmental authorities related to the conflicts.

 

Liquidity and Going Concern

 

During the second quarter of 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provided U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. Under this standard, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within 12 months after the Company’s financial statements were issued (November 14, 2023). Management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s obligations due before November 14, 2024.

 

The Company has experienced net losses and cash outflows from operating activities since inception. For the nine months ended September 30, 2023, the Company had a net loss attributable to common stockholders of $18,207,795 net cash used in operating activities of $5,842,158, $197,241 used in investing activities and $4,715,031 provided by financing activities. 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 implemented an enhanced quality control program to detect and correct product issues before they result in significant rework expenditures affecting its gross margins and has seen progress in that regard. The Company has also implemented a marketing and advertisement reduction plan for its entertainment segment, which will focus on reducing and alleviating current obligations from its media marketing agreements and place a hold on entering into any new agreements. The Company believes that its quality control, cost-cutting initiatives, and new product introduction will eventually restore positive operating cash flows and profitability, although it can offer no assurances in this regard.

 

Management has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year from the date the unaudited condensed consolidated financial statements were issued. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance of these unaudited condensed financial statements. The accompanying unaudited condensed 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.

 

8
 

 

Basis of Consolidation:

 

The accompanying financial statements include the consolidated accounts of Digital Ally, its wholly owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare, LLC, TicketSmarter, Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Kustom, and its majority-owned subsidiary Nobility Healthcare, LLC. All intercompany balances and transactions have been eliminated during consolidation.

 

The Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products. The Company formed Shield Products, LLC in May 2020 to facilitate the sales of its Shield™ line of disinfectant/cleanser products and ThermoVu® line of temperature monitoring equipment. The Company formed Nobility Healthcare, LLC in June 2021 to facilitate the operations of its revenue cycle management solutions and back-office services for healthcare organizations. The Company formed TicketSmarter, Inc. on September 1, 2021, upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its global entertainment operations. The Company formed Worldwide Reinsurance Ltd. in December 2021, which is a captive insurance company domiciled in Bermuda, the Company is in the process of unwinding these operations. The Company formed Digital Connect, Inc. and BirdVu Jets, Inc. for travel and transportation purposes in 2022. The company formed Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for consumers.

 

Fair Value of Financial Instruments:

 

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated notes payable approximate fair value because of the short-term nature of these items.

 

Revenue Recognition:

 

The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

 

The Company has two different revenue streams, product and service, represented through its three segments. The Company reports all revenues on a gross basis, other than service revenues from the Company’s entertainment and revenue cycle management segments. Revenues generated by all segments are reported net of sales taxes.

 

Video Solutions

 

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be customer contracts. In situations where sales are to a distributor, the Company has concluded that such contracts are with the distributor as in such cases the Company holds contract bearing enforceable rights and obligations only with the distributor. As part of its consideration for the contract, the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled. As the Company’s standard payment terms are less than one year, it has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e. when the Company’s performance obligations are satisfied), which typically occurs at shipment. Further in determining whether control has been transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer. Customers do not have a right to return the product other than for warranty reasons for which they would only receive repair services or replacement product. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for product sales when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.

 

9
 

 

Service and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue is recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services. Revenue for extended warranty, cloud service or other software-based products is over the term of the contract warranty or service period. A time-elapsed method is used to measure progress because the Company transfers control evenly over the contractual period. Accordingly, the fixed consideration related to these revenues is generally recognized on a straight-line basis over the contract term, as long as the other revenue recognition criteria have been met.

 

The Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price.

 

Revenue Cycle Management

 

The Company reports revenue cycle management revenues on a net basis, as its primary source of revenue is its end-to-end service fees which is generally determined as a percentage of the invoice amounts collected. These service fees are reported as revenue monthly upon completion of the Company’s performance obligation to provide the agreed upon service.

 

Entertainment

 

The Company reports entertainment revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.

 

The Company sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of sale, therefore controlling the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.

 

The Company also acts as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from entertainment operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As the Company does not control the ticket prior to the transfer, the Company acts as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed. The seller is then obligated to deliver the tickets to the buyer per the seller’s listing, and payment is due at the time of sale.

 

10
 

 

Other

 

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. During the nine months ended September 30, 2023, the Company recognized revenue of $2.2 million related to its contract liabilities. Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. Total contract liabilities consist of the following:

 

   September 30, 2023 
  

December 31,

2022

  

Additions/

Reclass

  

Recognized

Revenue

  

September 30,

2023

 
Contract liabilities, current  $2,154,874   $2,133,969   $1,536,860   $2,751,983 
Contract liabilities, non-current   5,818,082    1,943,313    626,848    7,134,547 
                     
   $7,972,956   $4,077,282   $2,163,708   $9,886,530 

 

   September 30, 2022 
  

December 31,

2021

  

Additions/

Reclass

  

Recognized

Revenue

  

September 30,

2022

 
Contract liabilities, current  $1,665,519   $1,228,395   $844,210   $2,049,704 
Contract liabilities, non-current   2,687,786    3,384,487    937,278    5,134,995 
                     
   $4,353,305   $4,612,882   $1,781,488   $7,184,699 

 

Sales returns and allowances aggregated $116,543 and $118,029 for the nine months ended September 30, 2023 and December 31, 2022, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting these return rates.

 

Use of Estimates:

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair value of warrants, options, the recognition of revenue, inventory valuation reserve, fair value of assets and liabilities acquired in a business combination, incremental borrowing rate on leases, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.

 

Cash and cash equivalents:

 

Cash and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less.

 

   September 30, 2023 
   Adjusted
Cost
   Realized
Gains
   Realized
Losses
   Fair
Value
 
Demand deposits  $2,136,573   $   $   $2,136,573 
Short-term investments with original maturities of 90 days or less (Level 1):                    
Money market funds   71,258            71,258 
                     
   $2,207,831   $   $   $2,207,831 

 

   December 31, 2022 
   Adjusted
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value
 
Demand deposits  $897,745   $   $   $897,745 
Short-term investments with original maturities of 90 days or less (Level 1):                    
Money market funds   2,634,454            2,634,454 
                     
   $3,532,199   $   $   $3,532,199 

 

11
 

 

The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At September 30, 2023 and December 31, 2022, the uninsured balance amounted to $1,652,978 and $2,495,189, respectively.

 

Accounts Receivable:

 

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions.

 

Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade receivables.

 

Goodwill and Other Intangibles:

 

Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired.

 

Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.

 

Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. The Company has adopted ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and recognized an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value.

 

The Company determines the fair value of its reporting units using the market approach. Under the market approach, we estimate the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.

 

Long-lived and Other Intangible Assets - The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the operating segment level.

 

12
 

 

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company last assessed potential impairments of its long-lived assets as of September 30, 2023 and concluded that there was no impairment.

 

Intangible assets include deferred patent costs, license agreements, and intangibles related to acquisitions. Legal expenses incurred in preparation of patent application have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will be charged to expense at that time. The Company has entered into several sublicense agreements under which it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements generally require upfront payments to obtain the exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and amortizes such costs over their estimated useful life on a straight-line method.

 

Segment Reporting

 

The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s three operating segments are Video Solutions, Revenue Cycle Management, and Entertainment, each of which has specific personnel responsible for that business and reports to the CODM. Corporate expenses capture the Company’s corporate administrative activities and are also to be reported in the segment information.

 

Contingent Consideration

 

In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value through the consolidated statement of operations.

 

Repurchase and Cancellation of Shares

 

From time to time, the Board may authorize share repurchases of common stock. Shares repurchased under Board authorizations are held in treasury for general corporate purposes and cancelled when it is determined appropriate by management. The Company accounts for repurchases of common stock under the cost method. Shares repurchased and cancelled during the period were recorded as a reduction to stockholders’ (deficit) equity. See further discussion of the Company’s share repurchase program in Note 15 –Stockholders’ Equity.

 

Non-Controlling Interests

 

Non-controlling interests in the Company’s Consolidated Financial Statements represent the interest in subsidiaries held by our venture partner. The venture partner holds a noncontrolling interest in the Company’s consolidated subsidiary Nobility Healthcare, LLC. Since the Company consolidates the financial statements of all wholly owned and majority owned subsidiaries, the noncontrolling owners’ share of each subsidiary’s results of operations are deducted and reported as net income or loss attributable to noncontrolling interest in the Consolidated Statements of Operations.

 

13
 

 

New Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019 and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As such, we adopted ASC 326 effective January 1, 2023. The adoption of this standard did not have a significant impact on the Company’s financial position and results of operations.

 

NOTE 2. INVENTORIES

 

Inventories consisted of the following at September 30, 2023 and December 31, 2022:

 

  

September 30,

2023

  

December 31,

2022

 
Raw material and component parts– video solutions segment  $3,680,820   $4,509,165 
Work-in-process– video solutions segment   41,194    3,164 
Finished goods – video solutions segment   5,676,031    6,846,091 
Finished goods – entertainment segment   367,704    970,527 
Subtotal   9,765,749    12,328,947 
Reserve for excess and obsolete inventory– video solutions segment   (4,466,748)   (5,230,261)
Reserve for excess and obsolete inventory – entertainment segment   (104,222)   (259,280)
Total inventories  $5,194,779   $6,839,406 

 

Finished goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such units totaled $164,029 and $171,071 as of September 30, 2023 and December 31, 2022, respectively.

 

NOTE 3. DEBT OBLIGATIONS

 

Debt obligations is comprised of the following:

 

  

September 30,

2023

  

December 31,

2022

 
Economic injury disaster loan (EIDL)  $150,000   $150,000 
Convertible note payable, net of unamortized debt discount of $1,014,091   1,860,909     
Contingent consideration promissory note – Nobility Healthcare Division Acquisition   194,477    388,955 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition   87,348    176,456 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition       208,083 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition       4,346 
Commercial Extension of Credit – Entertainment Segment   68,135     
Debt obligations   2,360,869    927,840 
Less: current maturities of debt obligations   2,213,148    485,373 
Debt obligations, long-term  $147,721   $442,467 

 

14
 

 

Debt obligations mature as follows as of September 30, 2023:

 

   September 30, 2023 
2023 (October 1, 2023 to December 31, 2023)  $164,295 
2024   3,066,170 
2025   3,412 
2026   3,542 
2027 and thereafter   137,541 
      
Total  $3,374,960 

 

2020 Small Business Administration Notes.

 

On May 12, 2020, the Company received $150,000 in loan funding from the SBA under the EIDL program administered by the SBA, which program was expanded pursuant to the recently enacted CARES Act. The EIDL is evidenced by a secured promissory note, dated May 8, 2020, in the original principal amount of $150,000 with the SBA, the lender.

 

Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal and interest payments began in November 2022, after being deferred for thirty months after the date of disbursement and total $731.00 per month thereafter. Such note may be prepaid in part or in full, at any time, without penalty. The Company granted the secured party a continuing interest in and to any and all collateral, including but not limited to tangible and intangible personal property.

 

Contingent Consideration Promissory Notes

 

On June 30, 2021, Nobility Healthcare, a subsidiary of the Company, issued a contingent consideration promissory note (the “June Contingent Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “June Seller”) of $350,000. The June Contingent Note has a three-year term and bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for nine months and is due in equal quarterly installments on the seventh business day of each quarter. The principal amount of the June Contingent Note is subject to an earn-out adjustment, being the difference between $975,000 (the “June Projected Revenue”) and the cash basis revenue (the “June Measurement Period Revenue”) collected by the June Seller in its normal course of business from the clients existing on June 30, 2021, during the period from October 1, 2021 through September 30, 2022 (the “June Measurement Period”) measured on a quarterly basis and annualized as of the relevant period. If the June Measurement Period Revenue is less than the June Projected Revenue, such amount will be subtracted from the principal balance of this June Contingent Note on a dollar-for-dollar basis. If the June Measurement Period Revenue is more than the June Projected Revenue, such amount will be added to the principal balance of this June Contingent Note on a dollar-for-dollar basis. In no event will the principal balance of this June Contingent Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no limits to the increases to the principal balance of the June Contingent Note as a result of the earn-out adjustments.

 

15
 

 

The June Contingent Note is considered to be additional purchase price; therefore, the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition with subsequent changes in fair value recorded as a gain or loss in the Consolidated Statements of Operations. Management recorded the contingent consideration promissory note at its estimated fair value of $350,000 at the acquisition date. Total principal payments, since inception, on this contingent consideration promissory note totaled $202,725. The estimated fair value of the June Contingent Note at September 30, 2023 is $87,348, representing a reduction in its estimated fair value of $89,109 as compared to its estimated fair value as of December 31, 2022. This reduction only relates to the principal payments made for the three and nine months ended September 30, 2023. Therefore, the Company recorded no gain or loss in the Consolidated Statements of Operations for the three and nine months ended September 30, 2023.

 

On August 31, 2021, Nobility Healthcare issued another contingent consideration promissory note (the “August Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “August Sellers”) of $650,000. The August Contingent Payment Note has a three-year term and bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for nine months and is due in equal quarterly installments on the seventh business day of each quarter. The principal amount of the August Contingent Payment Note is subject to an earn-out adjustment, being the difference between $3,000,000 (the “August Projected Revenue”) and the cash basis revenue (the “August Measurement Period Revenue”) collected by the August Sellers in its normal course of business from the clients existing on September 1, 2021, during the period from December 1, 2021 through November 30, 2022 (the “August Measurement Period”) measured on a quarterly basis and annualized as of the relevant period. If the August Measurement Period Revenue is less than the August Projected Revenue, such amount will be subtracted from the principal balance of this August Contingent Payment Note on a dollar-for-dollar basis. If the August Measurement Period Revenue is more than the August Projected Revenue, such amount will be added to the principal balance of this August Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this August Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no limits to the increases to the principal balance of the August Contingent Payment Note as a result of the earn-out adjustments.

 

The August Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition with subsequent changes in fair value recorded as a gain or loss in the Consolidated Statements of Operations. Management recorded the contingent consideration promissory note at its estimated fair value of $650,000 at the acquisition date. Total principal payments, since inception, on this contingent consideration promissory note totaled $487,430. The estimated fair value of the August Contingent Note at September 30, 2023 is $194,477, representing a reduction in its estimated fair value of $194,477 as compared to its estimated fair value as of December 31, 2022. This reduction only relates to the principal payments made for the three and nine months ended September 30, 2023. Therefore, the Company recorded no gain or loss in the Consolidated Statements of Operations for the three and nine months ended September 30, 2023.

 

On January 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “January Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “January Sellers”) of $750,000. The January Contingent Payment Note has a two and a half year term and bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for seven months and is due in equal quarterly installments on the tenth business day of each quarter. The principal amount of the January Contingent Payment Note is subject to an earn-out adjustment, being the difference between $3,500,000 (the “January Projected Revenue”) and the cash basis revenue (the “January Measurement Period Revenue”) collected by the January Sellers in its normal course of business from the clients existing on January 1, 2022, during the period from April 1, 2022 through March 31, 2023 (the “January Measurement Period”) measured on a quarterly basis and annualized as of the relevant period. If the January Measurement Period Revenue is less than the January Projected Revenue, such amount will be subtracted from the principal balance of this January Contingent Payment Note on a dollar-for-dollar basis. If the January Measurement Period Revenue is more than the January Projected Revenue, such amount will be added to the principal balance of this January Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this January Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no limits to the increases to the principal balance of the January Contingent Payment Note as a result of the earn-out adjustments.

 

16
 

 

The January Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration promissory note at its estimated fair value of $750,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled $153,769. The estimated fair value of the January Contingent Note at September 30, 2023 is $-0-, representing a reduction in its estimated fair value of $208,083 as compared to its estimated fair value as of December 31, 2022, of which $32,936 represents payments made during the nine months ended September 30, 2023. Therefore, the Company recorded a gain of $175,146 in the Consolidated Statements of Operations for the nine months ended September 30, 2023.

 

On February 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “February Contingent Payment Note”) in connection with an asset purchase agreement between Nobility Healthcare and a private company (the “February Sellers”) of $105,000. The February Contingent Payment Note has a three-year term and bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for seven months and is due in equal quarterly installments on the tenth business day of each quarter. The principal amount of the February Contingent Payment Note is subject to an earn-out adjustment, being the difference between $440,000 (the “February Projected Revenue”) and the cash basis revenue (the “February Measurement Period Revenue”) collected by the February Sellers in its normal course of business from the clients existing on February 1, 2022, during the period from May 1, 2022 through April 30, 2023 (the “February Measurement Period”) measured on a quarterly basis and annualized as of the relevant period. If the February Measurement Period Revenue is less than the February Projected Revenue, such amount will be subtracted from the principal balance of this February Contingent Payment Note on a dollar-for-dollar basis. If the February Measurement Period Revenue is more than the February Projected Revenue, such amount will be added to the principal balance of this February Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this February Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no limits to the increases to the principal balance of the February Contingent Payment Note as a result of the earn-out adjustments.

 

The February Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration promissory note at its estimated fair value of $105,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled $1,584. The estimated fair value of the February Contingent Note at September 30, 2023 is $-0-, representing a decrease in its estimated fair value of $4,347 as compared to its estimated fair value as of December 31, 2022, of which $1,584 represents payments made during the nine months ended September 30, 2023. Therefore, the Company recorded a gain of $2,763 in the Consolidated Statements of Operations for the nine months ended September 30, 2023.

 

2023 Commercial Extension of Credit

 

On February 23, 2023, the Company’s Entertainment segment entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance with the Private Label Agreement previously entered into with the Lender. The Lender agreed to extend, subject to the conditions hereof, and Borrower agreed to take, a Loan for Principal Sum of $1,000,000.

 

Lender shall retain 25% of each remittance owed to Borrower under the terms of the Private Label Agreement. Such remittances shall include regular weekly remittances and any additional incentive payments to which the Borrower may be entitled. The 25% withholding of the Borrower’s applicable remittance shall be deemed a “Payment” under the terms of this Note, and Payments shall continue until the earlier of (i) repayment of the Principal Sum, accrued Interest, and a fee of $35,000.00 or (ii) expiration of the Private Label Agreement on December 31, 2023.

 

During the nine months ended September 30, 2023, the Entertainment segment drew an additional $224,577 on this agreement, with the principal balance never exceeding $1,000,000. During the nine months ended September 30, 2023, the Company’s Entertainment segment had repaid $1,156,441 towards the principal on the loan through remittances and had an outstanding balance of $68,135.

 

17
 

 

Convertible Note

 

On April 5, 2023, the Company entered into and consummated the initial closing (the “First Closing”) of the transactions contemplated by a Securities Purchase Agreement, dated as of April 5, 2023 (the “Purchase Agreement”), between the Company and certain investors (the “Purchasers”).

 

At the First Closing, the Company issued and sold to the Purchasers Senior Secured Convertible Notes in the aggregate original principal amount of $3,000,000 (the “Notes”) and warrants (the “Warrants”). The Purchase Agreement provided for a ten percent (10%) original interest discount resulting in gross proceeds to the Company of $2,700,000. No interest accrues under the Notes. The Warrants are exercisable for an aggregate 1,125,000 shares comprised of 375,000 warrants at an exercise price of $5.50 per share of the Company’s common stock, par value $0.001 (the “Common Stock”), 375,000 warrants at an exercise price of $6.50 per share of Common Stock, and 375,000 warrants at an exercise price of $7.50 per share of Common Stock.

 

Subject to certain conditions, within 18 months from the effectiveness date and while the Notes remain outstanding, the Purchasers have the right to require the Company to consummate a second closing of up to an additional $3,000,000 of Notes (the “Second Notes”) and Warrants on the same terms and conditions as the First Closing, except that the Second Notes may be subordinate to a mortgage on the Company’s headquarters building (the “Bank Mortgage”).

 

The Notes are convertible into shares of Common Stock at the election of the Purchasers at any time at a fixed conversion price of $5.00 (the “Conversion Price”) per share of Common Stock. The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for, Common Stock at a price below the then-applicable Conversion Price (subject to certain exceptions). Subject to certain conditions, including certain equity conditions, the Company may redeem some or all of the then outstanding principal amount of the Note for cash in an amount equal to 110% of the outstanding principal amount of the Notes (the “Optional Redemption Amount”). In addition, the Purchasers may, at their option, demand repayment at the Optional Redemption Amount upon five (5) business days’ written notice following (i) the closing by the Company of the Bank Mortgage, or (ii) a sale by the Company of Common Stock or Common Stock equivalents.

 

The Notes rank senior to all outstanding and future indebtedness of the Company and its subsidiaries, and are secured by substantially all of the Company’s assets, as evidenced by (i) a security agreement entered into at the Closing, (ii) a trademark security agreement entered into at the Closing, (iii) a patent security agreement entered into at the Closing, (iv) a guaranty executed by all direct and indirect subsidiaries of the Company pursuant to which each of them has agreed to guaranty the obligations of the Company under the Notes, and (v) a mortgage on the Company’s headquarters building in favor of the Purchasers.

 

Also at the Closing, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers. Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to prepare and file with the SEC within the 10th business day following the First Closing (the “Filing Date”) a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants, and to use its best efforts to cause such Registration Statement to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”), as promptly as possible, but in any event no later than 45 days following the Filing Date (the “Effectiveness Date”). If the Registration Statement is not filed by the Filing Date or is not declared effective by the Effectiveness Date, or under certain other circumstances described in the Registration Rights Agreement, then the Company shall be obligated to pay, as partial liquidated damages, to each Purchaser an amount in cash equal to 2% of the original principal amount of the Notes each month until the applicable event giving rise to such payments is cured. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay interest thereon at a rate of 10% per annum.

 

18
 

 

The Company recognized the full warrant derivative value, with the remaining amount being allocated to the debt obligation. As the warrant derivative value exceeded the net proceeds from the issuance, the excess amount is recognized as a loss on the date of the issue date. Thus, the Company recorded a loss of $576,380 as an interest expense on the date of issuance relating to the Convertible note. The following is the assumptions used in calculating the estimated grant-date fair value of the detachable warrants to purchase common stock granted in connection with the Convertible Note:

 

   Terms at
April 5, 2023
(issuance date)
 
Volatility - range   106.0%
Risk-free rate   3.36%
Dividend   0%
Remaining contractual term   5.0 years 
Exercise price  $5.507.50 
Common stock issuable under the warrants   1,125,000 

 

Following is a summary of activity relative to the Convertible Note for the nine months ended September 30, 2023:

 

   Amount 
     
Balance, December 31, 2022  $ 
Convertible Note, at par   3,000,000 
Conversion of convertible note into common stock   (125,000)
Principal payments    
Unamortized debt discount   (1,014,091)
      
Balance, September 30, 2023  $1,860,909 

 

During the three and nine months ended September 30, 2023 the Company amortized $1,887,273 of debt discount under interest expense, compared to $-0- for the three and nine months ended September 30, 2022.

 

On June 2, 2023, the Purchasers elected to convert $125,000 principal, at the fixed price of $5.00 per share of common stock, 25,000 shares valued at $119,750. The loss on conversion of convertible note into common shares, of $93,386, was recorded during the period.

 

NOTE 4. FAIR VALUE MEASUREMENT

 

In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.

 

ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1 — Quoted prices in active markets for identical assets and liabilities
   
Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)
   
Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)

 

19
 

 

The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:

 

   Level 1   Level 2   Level 3   Total 
   September 30, 2023 
   Level 1   Level 2   Level 3   Total 
Liabilities:                    
Contingent consideration promissory notes and contingent consideration earn-out agreement  $   $   $281,825   $281,825 
Warrant derivative liabilities           1,412,820    1,412,820 
Liabilities, fair value  $   $   $1,694,645   $1,694,645 

 

   Level 1   Level 2   Level 3   Total 
   December 31, 2022 
   Level 1   Level 2   Level 3   Total 
Liabilities:                    
Contingent consideration promissory notes and contingent consideration earn-out agreement  $   $   $777,840   $777,840 
Warrant derivative liabilities                
Liabilities, fair value  $   $   $777,840   $777,840 

 

The following table represents the change in Level 3 tier value measurements for the periods ended September 30, 2023:

 

   Contingent Consideration Promissory Notes   Warrant Derivative Liabilities 
         
Balance, December 31, 2022  $777,840   $ 
           
Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions   (120,789)    
           
Change in fair value of contingent consideration promissory notes – Revenue Cycle Management Acquisitions   (158,022)    
           
Balance, March 31, 2023  $499,029   $ 
           
Issuance of warrant derivative liabilities       3,216,380 
           
Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions   (96,265)    
           
Change in fair value of warrant derivative liabilities       59,766 
           
Balance, June 30, 2023  $402,764   $3,276,146 
           
Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions   (101,051)    
           
Change in fair value of contingent consideration promissory notes – Revenue Cycle Management Acquisitions   (19,888)    
           
Change in fair value of warrant derivative liabilities       (1,863,326)
           
Balance, September 30, 2023  $281,825   $1,412,820 

 

20
 

 

NOTE 5. ACCRUED EXPENSES

 

Accrued expenses consisted of the following at September 30, 2023 and December 31, 2022:

 

  

September 30,

2023

  

December 31,

2022

 
Accrued warranty expense  $16,543   $15,694 
Accrued litigation costs   2,040,292    247,984 
Accrued sales commissions   57,102    55,000 
Accrued payroll and related fringes   340,373    504,020 
Accrued sales returns and allowances   116,543    118,026 
Accrued taxes   109,164    46,408 
Other   128,051    103,835 
Total accrued expenses  $2,808,068   $1,090,967 

 

Accrued warranty expense was comprised of the following for the nine months ended September 30, 2023:

 

         
Beginning balance  $15,694 
Provision for warranty expense   48,311 
Charges applied to warranty reserve   (47,462)
      
Ending balance  $16,543 

 

NOTE 6. INCOME TAXES

 

The effective tax rate for the three months ended September 30, 2023 and 2022 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of September 30, 2023, primarily because of the Company’s history of operating losses.

 

The Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at September 30, 2023. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it is determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. The Company has available to it approximately $113.3 million (based on its December 31, 2022 tax return) in net operating loss carryforwards to offset future taxable income as of September 30, 2023.

 

NOTE 7. PREPAID EXPENSES

 

Prepaid expenses were the following at September 30, 2023 and December 31, 2022:

 

  

September 30,

2023

  

December 31,

2022

 
Prepaid inventory  $5,660,619   $6,110,321 
Prepaid advertising   955,089    1,931,628 
Other   707,907    424,464 
Total prepaid expenses  $7,323,615   $8,466,413 

 

21
 

 

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following at September 30, 2023 and December 31, 2022:

 

   Estimated
Useful Life
 

September 30,

2023

  

December 31,

2022

 
Building  25 years  $4,537,037   $4,537,037 
Land  Infinite   739,734    739,734 
Office furniture, fixtures, equipment, and aircraft  3-20 years   2,061,484    2,048,169 
Warehouse and production equipment  3-7 years   40,128    51,302 
Demonstration and tradeshow equipment  3-7 years   74,582    72,341 
Building improvements  5-7 years   1,328,601    1,334,374 
Total cost      8,781,566    8,782,957 
Less: accumulated depreciation and amortization      

(1,330,524

)   (884,271)
              
Net property, plant and equipment     $

7,451,042

   $7,898,686 

 

Depreciation expense for the three months ended September 30, 2023 and September 30, 2022 was $188,100 and $73,686, respectively, and is included in general and administrative expenses. Depreciation expense for the nine months ended September 30, 2023 and September 30, 2022 was $533,992 and $381,014, respectively, and is included in general and administrative expenses.

 

NOTE 9. OPERATING LEASE

 

On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which the Company currently utilizes as one of its office, assembly and warehouse locations. The original lease agreement was amended on August 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 of December 2026. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and warehouse operating lease as of September 30, 2023, was thirty-nine months. The Company’s previous office and warehouse space lease expired in April 2020 and the Company paid holdover rent for the time period until it moved to and commenced occupying the new space on June 15, 2020.

 

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

 

On June 30, 2021, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $2,648 to $2,774, with a termination date of July 2024. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on June 30, 2021. The remaining lease term for the Company’s office operating lease as of September 30, 2023, was ten months.

 

22
 

 

On August 31, 2021, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $11,579 to $11,811, with a termination date of March 2023. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company signed an eighty-four-month extension for the lease, the extension terms include monthly payments ranging from $7,436 to $8,877, with a termination date of March 2030. The remaining lease term for the Company’s operating lease as of September 30, 2023 was seventy-eight months.

 

On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211 to $7,364 thereafter, with a termination date of December 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company signed a month-to-month extension for the lease, extending the remaining lease term for the Company’s office until a new space is located. The Company plans to relocate the entertainment operating segment acquired operations to existing owned or leased facilities upon termination of this operating lease.

 

On January 1, 2022, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $4,233 to $4,626, with a termination date of June 2025. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on January 1, 2022. The remaining lease term for the Company’s office operating lease as of September 30, 2023, was twenty-one 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 under the six operating leases was approximately $105,439 and $402,556, during the three and nine months ended September 30, 2023, respectively.

 

The weighted-average remaining lease term related to the Company’s lease liabilities as of September 30, 2023 was 4.5 years.

 

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 September 30, 2023:

 

     
Assets:     
Operating lease right of use assets, net  $1,034,518 
      
Liabilities:     
Operating lease obligations-current portion  $264,958 
Operating lease obligations-less current portion   837,755 
Total operating lease obligations  $1,102,713 

 

The components of lease expense were as follows for the nine months ended September 30, 2023:

 

         
Selling, general and administrative expenses   $ 402,556  

 

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

 

     
Year ending December 31:    
2023 (October 1, to December 31, 2023)  $88,188 
2024   336,992 
2025   290,417 
2026   271,868 
Thereafter   334,651 
Total undiscounted minimum future lease payments   1,322,116 
Imputed interest   (219,403)
Total operating lease liability  $1,102,713 

 

23
 

 

NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Intangible assets consisted of the following at September 30, 2023 and December 31, 2022:

 

   September 30, 2023   December 31, 2022 
   Gross
value
   Accumulated
amortization
   Net
carrying
value
   Gross
value
   Accumulated
amortization
   Net
carrying
value
 
Amortized intangible assets:                              
Licenses (video solutions segment)  $215,071   $87,977   $127,094   $211,183   $80,378   $130,805 
Patents and trademarks (video solutions segment)   439,212    229,198    210,014    472,077    305,021    167,056 
Sponsorship agreement network (entertainment segment)   5,600,000    2,333,333    3,266,667    5,600,000    1,493,333    4,106,667 
SEO content (entertainment segment)   600,000    312,500    287,500    600,000    200,000    400,000 
Personal seat licenses (entertainment
segment)
   180,081    11,704    168,377    180,081    8,001    172,080 
Client agreements (revenue cycle management segments)   999,034    201,792    797,242    999,034    126,864    872,170