UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended | |
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: | |
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(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 | ||
| The
|
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.
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).
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 ☐ |
| 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
☐
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 August 14, 2023 | |
| Common Stock, $0.001 par value per share |
FORM 10-Q
DIGITAL ALLY, INC.
JUNE 30, 2023
| 2 |
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements.
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2023 AND DECEMBER 31, 2022
| June 30, 2023 (Unaudited) | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable – trade, net of $ | ||||||||
| Other receivables, net of $ | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill and other intangible assets, net | ||||||||
| Operating lease right of use assets, net | ||||||||
| Income tax receivable | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of operating lease obligations | ||||||||
| Contract liabilities – current portion | ||||||||
| Debt obligations, net – current portion | ||||||||
| Warrant derivative liabilities | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Debt obligations – long term | ||||||||
| Operating lease obligation – long term | ||||||||
| Contract liabilities – long term | ||||||||
| Lease Deposit | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value per share; shares authorized; shares issued: shares issued – June 30, 2023 and shares issued – December 31, 2022 | ||||||||
| Additional paid in capital | ||||||||
| Noncontrolling interest in consolidated subsidiary | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
| 3 |
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2023 AND 2022
(unaudited)
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue: | ||||||||||||||||
| Product | $ | $ | $ | $ | ||||||||||||
| Service and other | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue: | ||||||||||||||||
| Product | ||||||||||||||||
| Service and other | ||||||||||||||||
| Total cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expenses: | ||||||||||||||||
| Research and development expense | ||||||||||||||||
| Selling, advertising and promotional expense | ||||||||||||||||
| General and administrative expense | ||||||||||||||||
| Total selling, general and administrative expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (loss) | ( | ) | ||||||||||||||
| Loss on accrual for legal settlement | ( | ) | ( | ) | ||||||||||||
| Loss on conversion of convertible note | ( | ) | ( | ) | ||||||||||||
| Change in fair value of contingent consideration promissory notes | ||||||||||||||||
| Change in fair value of short-term investments | ( | ) | ||||||||||||||
| Change in fair value of warrant derivative liabilities | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (income) attributable to noncontrolling interests of consolidated subsidiary | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share information: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
| 4 |
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Restricted common stock grant | ( | ) | ||||||||||||||||||||||
| Restricted common stock forfeitures | ( | ) | ( | ) | ||||||||||||||||||||
| Repurchase and cancellation of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Distribution to noncontrolling interest in consolidated subsidiary | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Restricted common stock forfeitures | ( | ) | ( | ) | ||||||||||||||||||||
| Repurchase and cancellation of common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Restricted common stock grant | ( | ) | ||||||||||||||||||||||
| Issuance due to rounding from reverse stock split | ||||||||||||||||||||||||
| Net Income (loss) | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Restricted common stock forfeitures | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance due to rounding from reverse stock split | ( | ) | ||||||||||||||||||||||
| Conversion of convertible note into common stock | ||||||||||||||||||||||||
| Net Income (loss) | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See Notes to the Unaudited Condensed Consolidated Financial Statements.
| 5 |
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
| For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Non-cash interest expense | ||||||||
| Change in fair value of warrant derivative liabilities | ( | ) | ||||||
| Convertible debt discount amortization | ||||||||
| Loss on conversion of debt | ||||||||
| Provision for inventory obsolescence | ( | ) | ||||||
| Provision for doubtful accounts receivable | ( | ) | ||||||
| Allowance for doubtful lease reserve | ||||||||
| Change in fair value of contingent consideration promissory note | ( | ) | ( | ) | ||||
| Change in operating assets and liabilities: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable – trade | ||||||||
| Accounts receivable – other | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Operating lease right of use assets | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Income taxes payable | ( | ) | ||||||
| Lease deposit | ||||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Contract liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Additions to intangible assets | ( | ) | ( | ) | ||||
| Cash paid for acquisition of Medical Billing Company | ( | ) | ||||||
| Cash paid for asset acquisition of Medical Billing Company | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repurchase and cancellation of common stock | ( | ) | ||||||
| Distribution to noncontrolling interest in consolidated subsidiary | ( | ) | ||||||
| Net proceeds of convertible debt with detachable warrants | ||||||||
| Proceeds – Commercial Extension of Credit – Entertainment Segment | ||||||||
| Payments on Commercial Extension of Credit – Entertainment Segment | ( | ) | ||||||
| Principal payment on contingent consideration promissory notes | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash, cash equivalents, beginning of period | ||||||||
| Cash, cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash payments for interest | $ | $ | ||||||
| Cash payments for income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Commercial extension of credit repaid through accrued revenue – Entertainment segment | $ | $ | ||||||
| ROU and lease liability recorded on extension of lease | $ | $ | ||||||
| Conversion of convertible notes payable into common stock | $ | $ | ||||||
| Issuance of contingent consideration promissory note for business acquired | $ | $ | ||||||
| Assets acquired in business acquisitions | $ | $ | ||||||
| Liabilities assumed in the business acquisition | $ | $ | ||||||
| Goodwill acquired in business acquisitions | $ | $ | ||||||
| Restricted common stock grant | $ | $ | ||||||
| Reverse stock split rounding issuances | $ | $ | ||||||
| Restricted common stock forfeitures | $ | $ | ||||||
| Debt discount on convertible note | $ | $ | ||||||
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 $ per share (the “Predecessor Common Stock”) automatically converted into one share of common stock, par value $ 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, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc., 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.
Business Combination
On June 1, 2023, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp., a Delaware corporation (“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 (the “Sponsor” or the “Purchaser Representative”), 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 (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”), with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of Kustom immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist in exchange for the right for the Company to receive the Merger Consideration (as defined below). Upon consummation of the Business Combination, Clover Leaf will change its name to “Kustom Entertainment, Inc.”
The
aggregate merger consideration to be paid pursuant to the Merger Agreement to the Company as of immediately prior to the Effective Time
will be an amount equal to (the “Merger Consideration”) (i) $
| 7 |
Kustom is comprised of TicketSmarter, Inc. (“TicketSmarter”) and Kustom 440, Inc. (“Kustom 440”), both currently wholly owned subsidiaries. Both TicketSmarter and Kustom 440 will combine their management teams and focus on concerts, entertainment and garnering additional ticketing partnerships in 2023 and beyond. Kustom 440 and TicketSmarter will use their existing sponsorships and sports property partnerships to develop alternative entertainment options for consumers.
The
combined company will be known as Kustom Entertainment and will operate under the same management team as Kustom. which is currently
led by Stanton E. Ross, the current CEO of the Company. The transaction contemplates an equity value of $
The transaction has been approved by the board of directors of the Company (the “Board”) and the board of directors of Clover Leaf and is subject to approval by the stockholders of Clover Leaf and other customary closing conditions. The Company, as the sole holder of Kustom common stock, has approved the transaction.
Due to the plan to consummate the Business Combination, the Company no longer expects to pursue a separation of Kustom into its own independent publicly traded company via spin-off, as announced on December 8, 2022.
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 six-month period ended June 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.
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 (August 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 August 14, 2024.
| 8 |
The
Company has experienced net losses and cash outflows from operating activities since inception. For the six months ended June 30, 2023,
the Company had a net loss attributable to common stockholders of $
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.
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. It will provide primarily liability insurance coverage to the Company for which insurance may not be currently available or economically feasible in today’s insurance marketplace. 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.
| 9 |
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.
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.
| 10 |
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.
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 six months ended June 30, 2023, the Company recognized revenue of $
| June 30, 2023 | ||||||||||||||||
December 31, 2022 | Additions/ Reclass | Recognized Revenue | June 30, 2023 | |||||||||||||
| Contract liabilities, current | $ | $ | $ | $ | ||||||||||||
| Contract liabilities, non-current | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| June 30, 2022 | ||||||||||||||||
December 31, 2021 | Additions/ Reclass | Recognized Revenue | June 30, 2022 | |||||||||||||
| Contract liabilities, current | $ | $ | $ | $ | ||||||||||||
| Contract liabilities, non-current | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Sales
returns and allowances aggregated $
| 11 |
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.
| June 30, 2023 | ||||||||||||||||
| Adjusted Cost | Realized Gains | Realized Losses | Fair Value | |||||||||||||
| Demand deposits | $ | $ | $ | $ | ||||||||||||
| Short-term investments with original maturities of 90 days or less (Level 1)(1): | ||||||||||||||||
| Money market funds | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Adjusted
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
|||||||||||||
| Demand deposits | $ | $ | $ | $ | ||||||||||||
| Short-term investments with original maturities of 90 days or less (Level 1)(1): | ||||||||||||||||
| Money market funds | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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 $
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.
| 12 |
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.
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 June 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.
| 13 |
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
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.
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.
| 14 |
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 June 30, 2023 and December 31, 2022:
June 30, 2023 | December 31, 2022 | |||||||
| Raw material and component parts– video solutions segment | $ | $ | ||||||
| Work-in-process– video solutions segment | ||||||||
| Finished goods – video solutions segment | ||||||||
| Finished goods – entertainment segment | ||||||||
| Subtotal | ||||||||
| Reserve for excess and obsolete inventory– video solutions segment | ( | ) | ( | ) | ||||
| Reserve for excess and obsolete inventory – entertainment segment | ( | ) | ( | ) | ||||
| Total inventories | $ | $ | ||||||
Finished
goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such units
totaled $
NOTE 3. DEBT OBLIGATIONS
Debt obligations is comprised of the following:
June 30, 2023 | December 31, 2022 | |||||||
| Economic injury disaster loan (EIDL) | $ | $ | ||||||
| Convertible note payable, net of unamortized debt discount of $ | ||||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | ||||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | ||||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | ||||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | ||||||||
| Commercial Extension of Credit – Entertainment Segment | ||||||||
| Debt obligations | ||||||||
| Less: current maturities of debt obligations | ||||||||
| Debt obligations, long-term | $ | $ | ||||||
| 15 |
Debt obligations mature as follows as of June 30, 2023:
June 30, 2023 | ||||
| 2023 (July 1, 2023 to December 31, 2023) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total | $ | |||
2020 Small Business Administration Notes.
On
May 12, 2020, the Company received $
Under
the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of
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 $
| 16 |
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 $
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
$
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 $
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
$
| 17 |
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 $
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 $
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 $
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 $
Lender
shall retain
As
of the six months ended June 30, 2023, the Company’s Entertainment segment had repaid $
| 18 |
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 $
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 $
The
Notes are convertible into shares of Common Stock at the election of the Purchasers at any time at a fixed conversion price of $
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
| 19 |
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 $
| Terms at April 5, 2023 (issuance date) | ||||
| Volatility - range | % | |||
| Risk-free rate | % | |||
| Dividend | % | |||
| Remaining contractual term | years | |||
| Exercise price | $ | – | ||
| Common stock issuable under the warrants | ||||
Following is a summary of activity relative to the Convertible Note for the six months ended June 30, 2023:
| Amount | ||||
| Balance, December 31, 2022 | $ | |||
| Convertible Note, at par | ||||
| Conversion of convertible note into common stock | ( | ) | ||
| Principal payments | ||||
| Unamortized debt discount | ( | ) | ||
| Balance, June 30, 2023 | $ | |||
During the three and six months
ended June 30, 2023 the Company amortized $
On June 2, 2023, the Purchasers elected to convert $
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) |
| 20 |
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:
| June 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration promissory notes and contingent consideration earn-out agreement | $ | $ | $ | $ | ||||||||||||
| Warrant derivative liabilities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration promissory notes and contingent consideration earn-out agreement | $ | $ | $ | $ | ||||||||||||
| Warrant derivative liabilities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following table represents the change in Level 3 tier value measurements for the periods ended June 30, 2023:
| Contingent Consideration Promissory Notes | Warrant Derivative Liabilities | |||||||
| Balance, December 31, 2022 | $ | $ | ||||||
| Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions | ( | ) | ||||||
| Change in fair value of contingent consideration promissory notes – Revenue Cycle Management Acquisitions | ( | ) | ||||||
| Balance, March 31, 2023 | $ | $ | ||||||
| Issuance of warrant derivative liabilities | ||||||||
| Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions | ( | ) | ||||||
| Change in fair value of warrant derivative liabilities | ||||||||
| Balance, June 30, 2023 | $ | $ | ||||||
NOTE 5. ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30, 2023 and December 31, 2022:
June 30, 2023 | December 31, 2022 | |||||||
| Accrued warranty expense | $ | $ | ||||||
| Accrued litigation costs | ||||||||
| Accrued sales commissions | ||||||||
| Accrued payroll and related fringes | ||||||||
| Accrued sales returns and allowances | ||||||||
| Accrued taxes | ||||||||
| Other | ||||||||
| $ | $ | |||||||
| 21 |
Accrued warranty expense was comprised of the following for the six months ended June 30, 2023:
| Beginning balance | $ | |||
| Provision for warranty expense | ||||
| Charges applied to warranty reserve | ( |
) | ||
| Ending balance | $ |
NOTE 6. INCOME TAXES
The
effective tax rate for the three months ended June 30, 2023 and 2022 varied from the expected statutory rate due to the Company continuing
to provide a
The
Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at June 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
NOTE 7. PREPAID EXPENSES
Prepaid expenses were the following at June 30, 2023 and December 31, 2022:
June 30, 2023 | December 31, 2022 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Prepaid advertising | ||||||||
| Other | ||||||||
| Total prepaid expenses | $ | $ | ||||||
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at June 30, 2023 and December 31, 2022:
| Estimated Useful Life | June 30, 2023 | December 31, 2022 | ||||||||
| Building | $ | $ | ||||||||
| Land | ||||||||||
| Office furniture, fixtures, equipment, and aircraft | ||||||||||
| Warehouse and production equipment | ||||||||||
| Demonstration and tradeshow equipment | ||||||||||
| Building improvements | ||||||||||
| Total cost | ||||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| Net property, plant and equipment | $ | $ | ||||||||
| 22 |
Depreciation expense for the three months ended June 30, 2023 and June 30, 2022 was $
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 $
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
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 $
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 $
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 $
| 23 |
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 $
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 $
The
weighted-average remaining lease term related to the Company’s lease liabilities as of June 30, 2023 was
The
discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined
the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date,
the operating lease liabilities reflect a weighted average discount rate of
The following sets forth the operating lease right of use assets and liabilities as of June 30, 2023:
| Assets: | ||||
| Operating lease right of use assets, net | $ | |||
| Liabilities: | ||||
| Operating lease obligations-current portion | $ | |||
| Operating lease obligations-less current portion | ||||
| Total operating lease obligations | $ | |||
The components of lease expense were as follows for the six months ended June 30, 2023:
| Selling, general and administrative expenses | $ |
Following are the minimum lease payments for each year and in total:
| Year ending December 31: | ||||
| 2023 (July 1, to December 31, 2023) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
| 24 |
NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following at June 30, 2023 and December 31, 2022:
| June 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) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Patents and trademarks (video solutions segment) | ||||||||||||||||||||||||
| Sponsorship agreement network (entertainment segment) | ||||||||||||||||||||||||
| SEO content (entertainment segment) | ||||||||||||||||||||||||
| Personal seat licenses (entertainment segment) | ||||||||||||||||||||||||
| Client agreements (revenue cycle management segments) | ||||||||||||||||||||||||
| Indefinite life intangible assets: | ||||||||||||||||||||||||
| Goodwill (entertainment and revenue cycle management segments) | ||||||||||||||||||||||||
| Trade name (entertainment segment) | ||||||||||||||||||||||||
| Patents and trademarks pending (video solutions segment) | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Patents and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of the final patent or trademark is denied, then the amount deferred will be immediately charged to expense.
Amortization
expense for the three months ended June 30, 2023 and 2022 was $
| Year ending December 31: | ||||
| 2023 (July 1, to December 31, 2023) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| $ | ||||
| 25 |
NOTE 11. OTHER ASSETS
Other assets were the following at June 30, 2023 and December 31, 2022:
June 30, 2023 | December 31, 2022 | |||||||
| Lease receivable | $ | $ | ||||||
| Sponsorship network | ||||||||
| Other | ||||||||
| Total other assets | $ | $ | ||||||
NOTE 12. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
On May 31, 2022, the Company filed a lawsuit against Culp McAuley, Inc. (“defendant”) in the United States District Court for the District of Kansas. The lawsuit arises from the defendant’s multiple breaches of its obligations to the Company. The Company seeks monetary damages and injunctive relief based on certain conduct by the defendant. On July 18, 2022, the defendant filed its Answer to the Company’s Verified Complaint and included Counterclaims alleging breach of contract and seeking monetary damages. On August 8, 2022, the Company filed its Reply and Affirmative Defenses to the Counterclaims by, among other things, denying the allegations and any and all liability.
As
of June 30, 2023, we are able to estimate a range of reasonably possible loss related to the Culp McCauley case, our estimate of the aggregate reasonably possible
loss (in excess of any accrued amounts) was approximately $
While the ultimate resolution is unknown, based on the information currently available, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect to our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
| 26 |
The Company recorded pre-tax compensation expense related to the grant of stock options and restricted stock issued of $ and $ for the three months ended June 30, 2023 and 2022, and $ and $ for the six months ended June 30, 2023 and 2022, respectively.
As of June 30, 2023, the Company had adopted ten separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”), (viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”), (ix) the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”), and (x) the 2022 Stock Option and Restricted Stock Plan (the “2022 Plan”). The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan, 2020 Plan and 2022 Plan are referred to as the “Plans.”
These Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total of shares of Common Stock. The 2005 Plan terminated during 2015 with shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding as of June 30, 2023 total . The 2006 Plan terminated during 2016 with shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding as of June 30, 2023 total . The 2007 Plan terminated during 2017 with shares not awarded or underlying options, which shares are now unavailable for issuance. There are stock options granted under the 2007 Plan that remain unexercised and outstanding as of June 30, 2023. The 2008 Plan terminated during 2018 with shares not awarded or underlying options, which shares are now unavailable for issuance. There are no stock options granted under the 2008 Plan that remain unexercised and outstanding as of June 30, 2023.
Stock option grants. The Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have been granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of Common Stock that are issuable under its Plans with the SEC. A total of shares remained available for awards under the various Plans as of June 30, 2023.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.
| 27 |
| Options | Number of Shares | Weighted Average Exercise Price | ||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ( | ) | ( | ) | ||||
| Outstanding at June 30, 2023 | $ | |||||||
| Exercisable at June 30, 2023 | $ | |||||||
The Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with an intrinsic value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant to cashless exercises during the six months ended June 30, 2023 and 2022.
The aggregate intrinsic value of options outstanding was $-- and $--, at June 30, 2023 and December 31, 2022, respectively. The aggregate intrinsic value of options exercisable was $-- and $--, at June 30, 2023 and December 31, 2022, respectively.
As of June 30, 2023, the unrecognized portion of stock compensation expense on all existing stock options was $--.
| Outstanding options | Exercisable options | |||||||||||||||||
Exercise price range | Number of options | Weighted average remaining contractual life | Number of options | Weighted average remaining contractual life | ||||||||||||||
| $ | to $ | years | years | |||||||||||||||
| $ | to $ | years | years | |||||||||||||||
| $ | to $ | years | years | |||||||||||||||
| years | years | |||||||||||||||||
Restricted stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to five years corresponding to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may be forfeited upon the termination of service to or employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends.
Number of Restricted shares | Weighted average grant date | |||||||
| Nonvested balance, December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ( | ) | ( | ) | ||||
| Nonvested balance, June 30, 2023 | $ | |||||||
| 28 |
The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of June 30, 2023, there were $ of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next fifty-two months in accordance with their respective vesting scale.
The nonvested balance of restricted stock vests as follows:
| Years ended | Number of shares | |||
| 2023 (July 1, 2023 through December 31, 2023) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
NOTE 14. COMMON STOCK PURCHASE WARRANTS
2021 Purchase Warrants
The
Company has issued Common Stock purchase warrants in conjunction with various debt and equity issuances. The warrants are either immediately
exercisable or have a delayed initial exercise date, no more than six months from their respective issue date and allow the holders to
purchase up to
On
January 14, 2021 and February 1, 2021, the Company issued warrants to purchase a total of
On
August 19, 2021, the Company entered into a Warrant Exchange Agreement (the “Exchange Agreement”) with the Investors
cancelling February Warrants exercisable for an aggregate of
| 29 |
On
the date of the exchange, the February Warrants and Exchange Warrants were valued at $
| Original terms at August 19, 2021 | Modified terms at August 19, 2021 | |||||||
| Volatility - range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend | % | % | ||||||
| Remaining contractual term | ||||||||
| Exercise price | $ | $ | ||||||
| Common stock issuable under the warrants | ||||||||
On
August 23, 2022, the Company entered into Warrant Exchange Agreements (the “Warrant Exchange Agreements”) with certain investors
(the “Investors”), pursuant to which the Company agreed to issue to the Investors an aggregate of shares of Common
Stock in exchange for the cancellation by the Investors of the January Warrants, the Exchange Warrants and the Replacement Originals
Warrants. On the date of the exchange, the Company calculated the fair value of the issuance of shares of Common Stock pursuant to the
Warrant Exchange Agreements, attributing that value to Common Stock and additional paid in capital. The remaining value of the warrant
derivative liability was attributed to an income from change in fair market value of warrant derivative liabilities and gain on extinguishment
of warrant derivative liabilities in the consolidated statement of operations. On the date of the Warrant Exchange Agreement, using the
Black-Scholes method, the fair value of the warrant derivative liability was $
| Terms
at August 23, 2022 |
||||
| Volatility - range | % | |||
| Risk-free rate | % | |||
| Dividend | % | |||
| Remaining contractual term | ||||
| Exercise price | $ | |||
| Common stock issuable under the warrants | ||||
Fluctuations in the Company’s stock price is a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A % change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
2023 Purchase Warrants
On
April 5, 2023, the Company issued warrants to purchase a total of
| 30 |
The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of June 30, 2023:
| Issuance date assumptions | June 30, 2023 assumptions | |||||||
| Volatility - range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend | % | % | ||||||
| Remaining contractual term | ||||||||
| Exercise price | $ | $ | ||||||
| Common stock issuable under the warrants | ||||||||
The following table summarizes information about shares issuable under warrants outstanding during the six months ended June 30, 2023:
| Warrants | Weighted average exercise price | |||||||
| Vested Balance, January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited/cancelled | ( | ) | ( | ) | ||||
| Vested Balance, June 30, 2023 | $ | |||||||
The
total intrinsic value of all outstanding warrants aggregated $-
The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase shares of Common Stock as of June 30, 2023:
| Outstanding and exercisable warrants | ||||||||||
| Exercise price | Number of warrants | Weighted average remaining contractual life | ||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| years | ||||||||||
NOTE 15. STOCKHOLDERS’ EQUITY
2023 Issuance of Restricted Common Stock
On January 10, 2023, the board of directors approved the grant of shares of Common Stock to officers of the Company. Additionally, the board of directors approved the grant of restricted common shares to certain new employees of the Company. Such shares will generally vest over a period of to years on their respective anniversary dates in January through January 2025, provided that each grantee remains an employee of the company on such dates.
Reverse Stock Split
On
February 6, 2023, we filed a Certificate of Amendment to the Articles of Incorporation, as amended, with the Secretary of State of the
State of Nevada to effect a
As a result of the Reverse Stock Split, no fractional shares of new common stock will be issued in connection with the Reverse Stock Split, all of which shares of new common stock shall be rounded up to the nearest whole number of such shares. Therefore, the Company issued shares pursuant to Reverse Stock Split related to rounding up to the nearest whole number of shares.
| 31 |
Noncontrolling Interests
The
Company owns a
Noncontrolling Interests
During the six months ended June 30, 2023, the Company cancelled shares for various reasons.
Conversion of Convertible Note
During
the six months ended June 30, 2023, pursuant to the Convertible Note, the Purchasers elected to convert $
For
the three months ended | For
the six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator for basic and diluted income per share – Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator for basic loss per share – weighted average shares outstanding | ||||||||||||||||
| Dilutive effect of shares issuable under stock options and warrants outstanding | ||||||||||||||||
| Denominator for diluted loss per share – adjusted weighted average shares outstanding | ||||||||||||||||
| Net loss per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the period. For the three and six months ended June 30, 2023 and 2022, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted income (loss) per share.
NOTE 17. DIGITAL ALLY HEALTHCARE VENTURE
On
June 4, 2021, Digital Ally Healthcare, a wholly owned subsidiary of the Company, entered into a venture with Nobility LLC
(“Nobility”), an eight-year-old revenue cycle management (“RCM”) company servicing the medical industry, to
form Nobility Healthcare, LLC (“Nobility Healthcare”). Digital Ally Healthcare is capitalizing the venture with $
| 32 |
On
June 30, 2021, the Company’s revenue cycle management segment completed the acquisition of a private medical billing company
(the “Healthcare Acquisition”). In accordance with the stock purchase agreement, the Company’s revenue cycle
management segment agreed to a non-refundable initial payment (the “June Initial Payment Amount”) of $
The Company accounts for business combinations using the acquisition method and the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Healthcare Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Healthcare Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. Our assumptions and estimates are based upon information obtained from the management of the Company’s revenue cycle management segment. The acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the Healthcare Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the Healthcare Acquisition. The preliminary and final estimated fair value of assets acquired and liabilities assumed in the Healthcare Acquisition were as follows:
| Purchase price allocation | ||||||||
| Description | Preliminary as allocated June 30, 2021 | Final as allocated June 30, 2022 | ||||||
| Assets acquired: | ||||||||
| Tangible assets acquired, consisting of acquired cash, accounts receivable and right of use asset | $ | $ | ||||||
| Intangible assets acquired – client agreements | ||||||||
| Goodwill | ||||||||
| Liabilities assumed consisting of a promissory note issued by the selling shareholders which was paid off at closing, net of lease liability assumed | ||||||||
| Net assets acquired and liabilities assumed | $ | $ | ||||||
| Consideration: | ||||||||
| Cash paid at Healthcare Acquisition date | $ | $ | ||||||
| Contingent consideration earn-out agreement | ||||||||
| Total Healthcare Acquisition purchase price | $ | $ | ||||||
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
| Cost | Amortization through June 30, 2023 | Estimated useful life | ||||||||
| Identifiable intangible assets: | ||||||||||
| Client agreements | $ | $ | ||||||||
| 33 |
For the period from the date of the Healthcare Acquisition to June 30, 2022, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through June 30, 2022, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values of client agreements and goodwill.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.
On
August 31, 2021, the Company’s revenue cycle management segment completed the acquisition of another private medical billing
company (the “Medical Billing Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcare agreed
to a non-refundable initial payment (the “August Initial Payment Amount”) of $
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Medical Billing Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Medical Billing Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the Medical Billing Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the Medical Billing Acquisition. The preliminary and final estimated fair value of assets acquired, and liabilities assumed in the Medical Billing Acquisition were as follows:
| Purchase price allocation | ||||||||
| Preliminary As allocated | Final As allocated | |||||||
| Description | September 30, 2021 | September 30, 2022 | ||||||
| Assets acquired: | ||||||||
| Tangible assets acquired | $ | $ | ||||||
| Identifiable intangible assets acquired – client agreements | ||||||||
| Goodwill | ||||||||
| Liabilities assumed pursuant to stock purchase agreement | ( | ) | ( | ) | ||||
| Net assets acquired and liabilities assumed | $ | $ | ||||||
| Consideration: | ||||||||
| Cash paid at Healthcare Acquisition date | $ | $ | ||||||
| Contingent consideration earn-out agreement | ||||||||
| Total Healthcare Acquisition purchase price | $ | $ | ||||||
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
| Cost | Amortization through June 30, 2023 | Estimated useful life | ||||||||
| Identifiable intangible assets: | ||||||||||
| Client agreements | $ | $ | ||||||||
| 34 |
For the period from the date of the Healthcare Acquisition to August 31, 2022, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through August 31, 2022, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values of client agreements and goodwill.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.
On
January 1, 2022, the Company’s revenue cycle management segment completed the acquisition of another private medical billing
company (the “Medical Billing Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcare agreed
to a non-refundable initial payment (the “January Initial Payment Amount”) of $
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Medical Billing Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Medical Billing Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
| 35 |
The purchase price of the Medical Billing Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the Medical Billing Acquisition. There was no change from the preliminary estimated fair value to the final estimated fair value of assets acquired, and liabilities assumed in the Healthcare Acquisition, those value were as follows:
| Description | Final purchase price allocation | |||
| Assets acquired: | ||||
| Tangible assets acquired | $ | |||
| Goodwill | ||||
| Liabilities assumed pursuant to stock purchase agreement | ( | ) | ||
| Total assets acquired and liabilities assumed | $ | |||
| Consideration: | ||||
| Cash paid at acquisition date | $ | |||
| Contingent consideration promissory note | ||||
| Total acquisition purchase price | $ | |||
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.
On
February 1, 2022, the Company’s revenue cycle management segment completed an asset acquisition from another private medical
billing company (the “Medical Billing Asset Acquisition”). In accordance with the asset purchase agreement, Nobility
Healthcare agreed to a non-refundable initial payment (the “February Initial Payment Amount”) of $
In accordance ASC 805, “Business Combinations”, the acquisition method of accounting is used, and recognition of the assets acquired is at fair value as of the acquisition dates. All acquisition costs were expensed as incurred. The consideration paid has been allocated to the assets acquired based on their estimated fair values at the acquisition date. The estimate of fair values for the intangible assets acquired were agreed to by both buyer and seller. The acquisition was structured as asset purchase and are included in the consolidated financial statements from the acquisition date. The preliminary estimated fair value of intangible assets acquired in the Medical Billing Asset Acquisition were as follows:
| Description | Amount | |||
| Assets acquired: | ||||
| Intangible assets acquired – Client Agreements | $ | |||
| Total assets acquired and liabilities assumed | $ | |||
| Consideration: | ||||
| Cash paid at acquisition date | $ | |||
| Contingent consideration promissory note | ||||
| Total acquisition purchase price | $ | |||
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
| Cost | Amortization through June 30,2023 | Estimated useful life | ||||||||
| Identifiable intangible assets: | ||||||||||
| Client agreements | $ | $ | ||||||||
The change in fair value of the contingent consideration is more fully described in Note 10, “Debt Obligations” and will be estimated on a quarterly basis.
| 36 |
NOTE 18. TICKETSMARTER ACQUISITION
On
September 1, 2021, the Company formed TicketSmarter, through which the Company completed the acquisition of Goody Tickets, LLC, a
Kansas limited liability company (“Goody Tickets”) and TicketSmarter, LLC, a Kansas limited liability company
(“TicketSmarter LLC”) (such acquisitions, collectively, the “TicketSmarter Acquisition”). TicketSmarter,
Inc. comprises the Company’s entertainment business segment. In accordance with the stock purchase agreement, the Company
agreed to an initial payment (the “TicketSmarter Initial Payment Amount”) of $
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the TicketSmarter Acquisition has been allocated to Goody Tickets’ and TicketSmarter LLC’s acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the TicketSmarter Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The TicketSmarter Acquisition was structured as a stock purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and is deductible for income tax purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
| 37 |
The purchase price of the TicketSmarter Acquisition was allocated to Goody Tickets’ and TicketSmarter LLC’s tangible assets, goodwill, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the TicketSmarter Acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company will continue to evaluate the fair value of the identified intangible assets. The preliminary estimated fair value of assets acquired, and liabilities assumed in the TicketSmarter Acquisition were as follows:
| Preliminary purchase price allocation | ||||||||
| As allocated | As allocated | |||||||
| Description | September 30, 2021 | December 31, 2021 | ||||||
| Assets acquired: | ||||||||
| Tangible assets acquired, including $ | $ | $ | ||||||
| Identifiable intangible assets acquired | ||||||||
| Goodwill | ||||||||
| Liabilities assumed | ( | ) | ( | ) | ||||
| Net assets acquired and liabilities assumed | $ | $ | ||||||
| Consideration: | ||||||||
| Cash paid at TicketSmarter Acquisition date | $ | $ | ||||||
| Common stock issued as consideration for TicketSmarter Acquisition at date of acquisition | ||||||||
| Contingent consideration earn-out agreement | ||||||||
| Cash paid at closing to escrow amount | ||||||||
| Cash retained from escrow amount pursuant to settlement of working capital target | ( | ) | ( | ) | ||||
| Total TicketSmarter Acquisition purchase price | $ | $ | ||||||
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
| Cost | Amortization through June 30, 2023 | Estimated useful life | ||||||||
| Identifiable intangible assets: | ||||||||||
| Trademarks | $ | $ | indefinite | |||||||
| Sponsorship agreement network | ||||||||||
| Search engine optimization/content | ||||||||||
| $ | $ | |||||||||
For the period from the date of the TicketSmarter Acquisition to December 31, 2021, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through December 31, 2021, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values (primarily related to the sponsorship agreement network), the estimated fair value of the contingent earn-out agreement liability and goodwill. There were no adjustments to the allocation of the purchase price during the six months ended June 30, 2023.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.
| 38 |
NOTE 19. SEGMENT DATA
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, is also to be reported in the segment information. The Company’s captive insurance subsidiary provides services to the Company’s other business segments and not to outside customers. Therefore, its operations are eliminated in consolidation and is not considered a separate business segment for financial reporting purposes.
The Video Solutions Segment encompasses our law, commercial, and shield divisions. 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 Company’s corporate administration activities are reported in the corporate line item. These activities primarily include expense related to certain corporate officers and support staff, certain accounting staff, expense related to the Company’s Board of Directors, stock option expense for options granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2023, and June 30, 2022:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Revenues: | ||||||||||||||||
| Video Solutions | $ | $ | $ | $ | ||||||||||||
| Revenue Cycle Management | ||||||||||||||||
| Entertainment | ||||||||||||||||
| Total Net Revenues | $ | $ | $ | $ | ||||||||||||
| Gross Profit: | ||||||||||||||||
| Video Solutions | $ | $ | $ | $ | ||||||||||||
| Revenue Cycle Management | ||||||||||||||||
| Entertainment | ||||||||||||||||
| Total Gross Profit | $ | $ | $ | $ | ||||||||||||
| Operating Income (loss): | ||||||||||||||||
| Video Solutions | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Revenue Cycle Management | ||||||||||||||||
| Entertainment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Corporate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Operating Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation and Amortization: | ||||||||||||||||
| Video Solutions | $ | $ | $ | $ | ||||||||||||
| Revenue Cycle Management | ||||||||||||||||
| Entertainment | ||||||||||||||||
| Total Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
June 30, 2023 | December 31, 2022 | |||||||
| Assets (net of eliminations): | ||||||||
| Video Solutions | $ | $ | ||||||
| Revenue Cycle Management | ||||||||
| Entertainment | ||||||||
| Corporate | ||||||||
| Total Identifiable Assets | $ | $ | ||||||
| 39 |
The
segments recorded noncash items effecting the gross profit and operating income (loss) through the established inventory reserves based
on estimates of excess and/or obsolete current and non-current inventory. The Company recorded a reserve for excess and obsolete inventory
in the video solutions segment of $
The segment net revenues reported above represent sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income, which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets.
NOTE 20. RELATED PARTY TRANSACTIONS
Transactions with Managing Member of Nobility Healthcare
Nobility,
LLC is currently the managing member of Nobility Healthcare, LLC. The Company has advanced a total of $
NOTE 21. SUBSEQUENT EVENTS
None.
*************************************
| 40 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This quarterly report on Form 10-Q (the “Report”) of Digital Ally, Inc. (the “Company”, “we”, “us”, or “our”) contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, and the substantial doubt about our ability to continue as a going concern; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (7) our ability to produce our products in a cost-effective manner; (8) competition from larger, more established companies with far greater economic and human resources; (9) our ability to attract and retain quality employees; (10) risks related to dealing with governmental entities as customers; (11) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (12) characterization of our market by new products and rapid technological change; (13) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVU products; (14) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (15) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (16) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (17) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (18) our ability to generate more recurring cloud and service revenues; (19) risks related to our license arrangements; (20) the fluctuation of our operation results from quarter to quarter; (21) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (22) the issuance or sale of substantial amounts of our Common Stock, or the perception that such sales may occur in the future, which may have a depressive effect on the market price of our securities; (23) potential dilution from the issuance of Common Stock underlying outstanding options and warrants; (24) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our Common Stock; (25) the volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; (26) our ability to integrate and realize the anticipated benefits from acquisitions; (27) our ability to maintain the listing of our Common Stock on the Nasdaq Capital Market.
Current Trends and Recent Developments for the Company
Segment Overview
Video Solutions Operating Segment – Within our video solutions operating segment we supply technology-based products utilizing our portable digital video and audio recording capabilities for the law enforcement and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio, computer, mechanical, and multi-media technologies to create positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video systems for law enforcement and commercial markets; the FirstVu body-worn camera line, consisting of the FirstVu Pro, FirstVu II, and the FirstVu HD; our patented and revolutionary VuLink product which integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and commercial markets; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu® which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria.
Our video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and the sale of Shield disinfectant and personal protective products. This segment generates revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the term of the subscription, typically 3 or 5 years.
Revenue Cycle Management Operating Segment – We have entered the revenue cycle management business late in the second quarter of 2021 with the formation of our wholly owned subsidiary, Digital Ally Healthcare, Inc. and its majority-owned subsidiary Nobility Healthcare. Nobility Healthcare completed its first acquisition on June 30, 2021, when it acquired a private medical billing company, and a second acquisition on August 31, 2021 upon the completion of its acquisition of another private medical billing company, along with two more acquisitions completed during the first quarter of 2022, in which we assist in providing working capital and back-office services to healthcare organizations throughout the country. Our assistance consists of insurance and benefit verification, medical treatment documentation and coding, and collections. Through our expertise and experience in this field, we aim to maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins and cash flows.
Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform the obligations of our revenue cycle management services. Our revenue cycle management services are services, performed and charged monthly, generally based on a contractual percentage of total customer collections, for which we recognize our net service fees.
| 41 |
Entertainment Operating Segment - We have also entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter provides ticket sales, partnerships, and mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events through its platform, for a wide range of events, including concerts, sporting events, theatres, and performing arts, throughout the country.
Our entertainment operating segment consists of entertainment services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold. Entertainment direct expenses include the cost of tickets purchased for resale by the Company and held as inventory, credit card fees, ticketing platform expenses, website maintenance fees, along with other administrative costs.
Business Combination
On June 1, 2023, the Company, entered into the Merger Agreement with Clover Leaf, Merger Sub, the Sponsor, and 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, 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. In the Merger, all of the issued and outstanding capital stock of Kustom immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist in exchange for the right for the Company to receive the Merger Consideration. Upon consummation of the Business Combination, Clover Leaf will change its name to “Kustom Entertainment, Inc.”
The aggregate merger consideration to be paid pursuant to the Merger Agreement to the Company as of immediately prior to the Effective Time will be an amount equal to (i) $125 million, minus (ii) the estimated Closing Indebtedness. The Merger Consideration to be paid to the Company will be paid solely by the delivery of the Merger Consideration Shares. The Closing Indebtedness (and the resulting Merger Consideration) is based solely on estimates determined shortly prior to the Closing and is not subject to any post-Closing true-up or adjustment.
Kustom is comprised of TicketSmarter and Kustom 440, both currently wholly owned subsidiaries. Both TicketSmarter and Kustom 440 will combine their management teams and focus on concerts, entertainment and garnering additional ticketing partnerships in 2023 and beyond. Kustom 440 and TicketSmarter will use their existing sponsorships and sports property partnerships to develop alternative entertainment options for consumers.
The combined company will be known as Kustom Entertainment and will operate under the same management team as Kustom. which is currently led by Stanton E. Ross, the current CEO of the Company. The transaction contemplates an equity value of $125 million for Kustom. The combined company is expected to have an implied initial pro forma equity value of approximately $222.2 million, with the proposed Business Combination expected to provide approximately $18.1 million in gross proceeds from the cash held in trust by Clover Leaf, assuming no redemptions. Additionally, the Company will distribute to its shareholders 15% of the Merger Consideration Shares obtained in Kustom immediately following the closing of the merger and intends to distribute the balance of such Merger Consideration Shares following a six-month lock-up period.
The transaction has been approved by the Board and the board of directors of Clover Leaf and is subject to approval by the stockholders of Clover Leaf and other customary closing conditions. The Company, as the sole holder of Kustom common stock, has approved the transaction.
Results of Operations
Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2023, and June 30, 2022:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Revenues: | ||||||||||||||||
| Video Solutions | $ | 1,899,590 | $ | 2,049,756 | $ | 3,798,953 | $ | 4,059,805 | ||||||||
| Revenue Cycle Management | 1,724,772 | 2,120,738 | 3,506,361 | 4,024,695 | ||||||||||||
| Entertainment | 4,655,270 | 5,180,963 | 8,671,506 | 11,561,738 | ||||||||||||
| Total Net Revenues | $ | 8,279,632 | $ | 9,351,457 | $ | 15,976,820 | $ | 19,646,238 | ||||||||
| Gross Profit: | ||||||||||||||||
| Video Solutions | $ | 779,408 | $ | 759,010 | $ | 1,313,601 | $ | 1,027,440 | ||||||||
| Revenue Cycle Management | 802,174 | 957,263 | 1,578,107 | 1,654,432 | ||||||||||||
| Entertainment | 1,155,458 | 2,805 | 1,390,121 | 976,824 | ||||||||||||
| Total Gross Profit | $ | 2,737,040 | $ | 1,719,078 | $ | 4,281,829 | $ | 3,658,696 | ||||||||
| Operating Income (loss): | ||||||||||||||||
| Video Solutions | $ | (1,364,987 | ) | $ | (1,130,749 | ) | $ | (3,328,173 | ) | $ | (2,846,004 | ) | ||||
| Revenue Cycle Management | 152,044 | 247,301 | 255,809 | 118,783 | ||||||||||||
| Entertainment | (328,929 | ) | (2,320,694 | ) | (1,561,936 | ) | (3,766,541 | ) | ||||||||
| Corporate | (3,398,832 | ) | (3,457,110 | ) | (6,479,211 | ) | (6,970,828 | ) | ||||||||
| Total Operating Income (Loss) | $ | (4,940,704 | ) | $ | (6,661,252 | ) | $ | (11,113,511 | ) | $ | (13,464,590 | ) | ||||
| Depreciation and Amortization: | ||||||||||||||||
| Video Solutions | $ | 203,987 | $ | 209,442 | $ | 402,109 | $ | 385,516 | ||||||||
| Revenue Cycle Management | 25,887 | 218 | 51,394 | 364 | ||||||||||||
| Entertainment | 318,058 | 319,175 | 637,539 | 638,358 | ||||||||||||
| Total Depreciation and Amortization | $ | 537,932 | $ | 528,835 | $ | 1,091,042 | $ | 1,024,238 | ||||||||
June 30, 2023 | December 31, 2022 | |||||||
| Assets (net of eliminations): | ||||||||
| Video Solutions | $ | 28,924,558 | $ | 28,509,706 | ||||
| Revenue Cycle Management | 2,556,696 | 2,201,570 | ||||||
| Entertainment | 7,731,275 | 11,190,491 | ||||||
| Corporate | 14,291,394 | 14,766,295 | ||||||
| Total Identifiable Assets | $ | 53,503,923 | $ | 56,668,062 | ||||
| 42 |
Segment net revenues reported above represent only sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income (loss), which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets.
Consolidated Results of Operations
We experienced operating losses for the first half of 2023 and all quarters during 2022. The following is a summary of our recent operating results on a quarterly basis:
| For the three months ended: | ||||||||||||||||||||
June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | ||||||||||||||||
| Total revenue | $ | 8,279,632 | $ | 7,697,190 | $ | 8,879,504 | $ | 8,484,153 | $ | 9,351,457 | ||||||||||
| Gross profit | 2,737,040 | 1,544,792 | (1,932,256 | ) | 595,500 | 1,719,078 | ||||||||||||||
| Gross profit margin % | 33.1 | % | 20.1 | % | (21.8 | )% | 7.0 | % | 18.4 | % | ||||||||||
| Total selling, general and administrative expenses | 7,677,744 | 7,717,598 | 7,769,389 | 7,162,523 | 8,380,330 | |||||||||||||||
| Operating loss | (4,940,704 | ) | (6,172,806 | ) | (9,701,645 | ) | (6,567,023 | ) | (6,661,252 | ) | ||||||||||
| Operating loss % | (59.7 | )% | (80.2 | )% | (109.3 | )% | (77.4 | )% | (71.2 | )% | ||||||||||
| Net loss | $ | (8,320,549 | ) | $ | (5,979,579 | ) | $ | (9,574,258 | ) | $ | (1,919,071 | ) | $ | (682,187 | ) | |||||
Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; (7) the impact of COVID-19 on the economy and our businesses; and (8) the completion of corporate acquisitions. We reported a net loss of $8,320,550 on revenues of $8,279,632 for second quarter of 2023.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses other than the following:
We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 9, “Operating Leases,” to our condensed consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.
| 43 |
For the Three Months Ended June 30, 2023 and 2022
Results of Operations
Summarized immediately below and discussed in more detail in the subsequent subsections is an analysis of our operating results for the three months ended June 30, 2023 and 2022, represented as a percentage of total revenues for each such quarter:
| For the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Cost of revenue | 67 | % | 82 | % | ||||
| Gross profit | 33 | % | 18 | % | ||||
| Selling, general and administrative expenses: | ||||||||
| Research and development expense | 7 | % | 6 | % | ||||
| Selling, advertising and promotional expense | 25 | % | 30 | % | ||||
| General and administrative expense | 61 | % | 54 | % | ||||
| Total selling, general and administrative expenses | 93 | % | 90 | % | ||||
| Operating loss | (60 | )% | (71 | )% | ||||
| Loss on accrual for legal settlement | (22 | )% | — | % | ||||
| Change in fair value of contingent consideration promissory notes | — | % | 6 | % | ||||
| Loss on conversion of convertible notes | (1 | )% | — | % | ||||
| Change in fair value of derivative liabilities | (1 | )% | 58 | % | ||||
| Other income and interest income (expense), net | (17 | )% | — | % | ||||
| Income (loss) before income tax benefit | (100 | )% | (7 | )% | ||||
| Income tax (provision) | — | % | — | % | ||||
| Net income/(loss) | (100 | )% | (7 | )% | ||||
| Net income (loss) attributable to noncontrolling interests of consolidated subsidiary | (1 | )% | (4 | )% | ||||
| Net income (loss) attributable to common stockholders | (101 | )% | (11 | )% | ||||
| Net income/(loss) per share information: | ||||||||
| Basic | $ | (3.01 | ) | $ | (0.44 | ) | ||
| Diluted | $ | (3.01 | ) | $ | (0.44 | ) | ||
| 44 |
Revenues
Revenues by Type and by Operating Segment
Our operating segments generate two types of revenues:
Product revenues primarily includes video operating segment hardware sales of in-car and body-worn cameras, along with sales of our ThermoVuTM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale of tickets by our entertainment operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our entertainment segment until their sale.
Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video solutions segment. Our entertainment operating segments’ secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services provided to medical providers throughout the country.
Our video operating segment sells our products and services to customers in the following manner:
| ● | Sales to domestic customers are made directly to the end customer (typically a law enforcement agency or a commercial customer) through our sales force, comprised of our employees. Revenue is recorded when the product is shipped to the end customer. | |
| ● | Sales to international customers are made through independent distributors who purchase products from us at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement. | |
| ● | Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer. |
Our revenue cycle management operating segment sells its services to customers in the following manner:
| ● | Our revenue cycle management operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying service revenue is recognized upon execution of services. Service revenues are generally determined as a percentage of the dollar amount of medical billings collected by the customer. |
Our entertainment operating segment sells our products and services to customers in the following manner:
| ● | Our entertainment operating segment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter, are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform. |
We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.
| 45 |
Product revenues by operating segment is as follows:
| For
the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Product Revenues: | ||||||||
| Video Solutions | $ | 1,148,602 | $ | 1,404,242 | ||||
| Revenue Cycle Management | — | — | ||||||
| Entertainment | 1,929,059 | 805,939 | ||||||
| Total Product Revenues | $ | 3,077,661 | $ | 2,210,181 | ||||
Product revenues for the three months ended June 30, 2023 and 2022 were $3,077,661 and $2,210,181 respectively, an increase of $867,480 (39%), due to the following factors:
| ● | Revenues generated by the new entertainment operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The new entertainment operating segment generated $1,929,059 in product revenues for the three months ended June 30, 2023, compared to $805,939 for the three months ended June 30, 2022, an increase of $1,123,120 (39%). This product revenue relates to the first Kustom 440 music festival, as well as the resale of tickets purchased for live events, including sporting events, concerts, and theatre, then sold through various platforms to customers. |
| ● | The Company’s video segment operating segment generated revenues totaling $1,148,602 during the three months ended June 30, 2023 compared to $1,404,242 for the three months ended June 30, 2022, a decrease of $255,640 (18%). In general, our video solutions operating segment has experienced pressure on its product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined compared to the same period in 2022 due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. | |
| ● | Our video solutions operating segment management has continued to focus on migrating commercial customers, from a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and a portion of our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has gained some traction, resulting in decreased product revenues and increasing our service revenues. We expect this program to continue to hold traction, resulting in recurring revenues over a span of three to five years. |
Service and other revenues by operating segment is as follows:
| For
the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Service and Other Revenues: | ||||||||
| Video Solutions | $ | 750,988 | $ | 645,514 | ||||
| Revenue Cycle Management | 1,724,772 | 2,120,738 | ||||||
| Entertainment | 2,726,211 | 4,375,024 | ||||||
| Total Service and Other Revenues | $ | 5,201,971 | $ | 7,141,276 | ||||
| 46 |
Service and other revenues for the three months ended June 30, 2023 and 2022 were $5,201,971 and $7,141,276, respectively, a decrease of $1,939,305 (27%), due to the following factors:
| ● | Cloud revenues generated by the video solutions operating segment were $471,949 and $365,599 for the three months ended June 30, 2023 and 2022, respectively, an increase of $106,350 (29%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of our cloud-based EVO-HD in-car system and our next generation body-worn camera products, which contributed to our increased cloud revenues in the three months ended June 30, 2023. We expect this trend to continue throughout 2023 as the migration from local storage to cloud storage continues in our customer base. | |
| ● | Video solutions operating segment revenues from extended warranty services were $221,228 and $163,639 for the three months ended June 30, 2023 and 2022, respectively, an increase of $57,589 (35%). This correlates with the increase in sales of DVM-800 hardware systems resulting in an increase in their associated extended warranty. | |
| ● | Our entertainment operating segment generated service revenues totaling $2,726,211 and $4,375,024 for the three months ended June 30, 2023 and 2022, respectively, a decrease of $1,648,813 (38%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021, thus resulting in the new revenue stream for the Company. TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. We expect our entertainment operating segment to continue to fluctuate as we look to right-size this segment and work towards profitability. | |
| ● | Our revenue cycle management operating segment generated service revenues totaling $1,724,772 and $2,120,738 for the three months ended June 30, 2023 and 2022, respectively, a decrease of $395,966 (19%). Our revenue cycle management operating segment has completed four acquisitions since formation in June of 2021, thus resulting in the new service revenue stream added in the three months ended June 30, 2022. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. The slight decrease in revenue is due to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue. |
Total revenues for the three months ended June 30, 2023 and 2022 were $8,279,632 and $9,351,458, respectively, a decrease of $1,071,826 (11%), due to the reasons noted above.
Cost of Product Revenue
Overall cost of product revenue sold for the three months ended June 30, 2023, and 2022 was $2,219,515 and $2,070,476, respectively, an increase of $149,039 (7%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended June 30, 2023, and 2022 were 72% and 94%, respectively. Cost of products sold by operating segment is as follows:
| For
the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of Product Revenues: | ||||||||
| Video Solutions | $ | 805,389 | $ | 1,029,403 | ||||
| Revenue Cycle Management | — | — | ||||||
| Entertainment | 1,414,126 | 1,041,073 | ||||||
| Total Cost of Product Revenues | $ | 2,219,515 | $ | 2,070,476 | ||||
| 47 |
The decrease in cost of goods sold for our video solutions segment products is directly correlated with the decrease in product sales for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. In addition, the Video Solutions Segment recorded valuation allowances for its older product lines and a portion of its Shield products during the first quarter of 2023. Cost of product sold as a percentage of product revenues for the video solutions segment decreased to 70% for the three months ended June 30, 2023 as compared to 73% for the three months ended June 30, 2022.
The increase in entertainment operating segment cost of product sold directly correlates to the increase in product revenues for the three months ended June 30, 2023 compared to June 30, 2022, resulting in cost of product revenue of $1,414,126 for the three months ended June 30, 2023, compared to $1,041,073 for the three months ended June 30, 2022. Cost of product sold as a percentage of product revenues for the entertainment segment was 73% for the three months ended June 30, 2023 as compared to 129% for the three months ended June 30, 2022.
We recorded $5,414,534 and $5,489,541 in reserves for obsolete and excess inventories at June 30, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-progress were $3,673,516 and $4,512,329 at June 30, 2023 and December 31, 2022, respectively, a decrease of $838,813 (19%). Finished goods balances were $7,581,234 and $7,816,618 at June 30, 2023 and December 31, 2022, respectively, a decrease of $235,384 (3%) which was attributable to a decrease in finished goods from our entertainment segment. The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory, offset by the increase in reserve at the entertainment segment. We believe the reserves are appropriate given our inventory levels as of June 30, 2023.
Cost of Service Revenue
Overall cost of service revenue sold for the three months ended June 30, 2023, and 2022 was $3,323,077 and $5,561,903, respectively, a decrease of $2,238,826 (40%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended June 30, 2023, and 2022 were 64% and 78%, respectively. Cost of service revenues by operating shipment is as follows:
| For
the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of Service Revenues: | ||||||||
| Video Solutions | $ | 314,794 | $ | 261,363 | ||||
| Revenue Cycle Management | 922,598 | 1,163,476 | ||||||
| Entertainment | 2,085,685 | 4,137,064 | ||||||
| Total Cost of Service Revenues | $ | 3,323,077 | $ | 5,561,903 | ||||
The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 42% for the three months ended June 30, 2023 as compared to 40% for the three months ended June 30, 2022.
Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 53% for the three months ended June 30, 2023 as compared to 55% for the three months ended June 30, 2022.
The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Cost of service revenues as a percentage of service revenues for the entertainment segment was 77% for the three months ended June 30, 2023 as compared to 95% for the three months ended June 30, 2022.
Gross Profit
Overall gross profit for the three months ended June 30, 2023 and 2022 was $2,737,040 and $1,719,078, respectively, an increase of $1,017,962 (59%). Gross profit by operating segment was as follows:
| For the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Gross Profit: | ||||||||
| Video Solutions | $ | 779,407 | $ | 759,010 | ||||
| Revenue Cycle Management | 802,174 | 957,263 | ||||||
| Entertainment | 1,155,459 | 2,805 | ||||||
| Total Gross Profit | $ | 2,737,040 | $ | 1,719,078 | ||||
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The overall increase is attributable to the large increase in gross profit for the entertainment segment for the three months ended June 30, 2023 along with a decrease in the overall cost of sales as a percentage of overall revenues to 67% for the three months ended June 30, 2023 from 82% for the three months ended June 30, 2022. Our goal is to continue to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, ShieldTM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficiently management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $7,677,744 and $8,380,330 for the three months ended June 30, 2023 and 2022, respectively, a decrease of $702,586 (8%). The decrease was primarily attributable to the reduction in new sponsorships being entered into by the Company. Our selling, general and administrative expenses as a percentage of sales increased to 93% for the three months ended June 30, 2023 compared to 90% in the same period in 2022. The significant components of selling, general and administrative expenses are as follows:
| For the three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Research and development expense | $ | 540,276 | $ | 540,222 | ||||
| Selling, advertising and promotional expense | 2,104,625 | 2,763,045 | ||||||
| General and administrative expense | 5,032,843 | 5,077,063 | ||||||
| Total | $ | 7,677,744 | $ | 8,380,330 | ||||
Research and development expense. We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $540,276 and $540,222 for the three months ended June 30, 2023 and 2022, respectively. Most of our engineers are dedicated to research and development activities for new products, primarily the new generation of body-worn cameras, EVO-HD and EVO Fleet that can be located in multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings based on our new body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources.
Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $2,104,625 and $2,763,045 for the three months ended June 30, 2023 and 2022, respectively, a decrease of $658,420 (24%). Promotional and advertising expenses represent the primary component of these costs and totaled $1,654,593 during the three months ended June 30, 2023, compared to $2,361,235 during the three months ended June 30, 2022, a decrease of $706,642 (30%). The decrease is primarily attributable to the reduction in new sponsorships being entered into by the Company. Additionally, TicketSmarter remains active in sponsorship and advertising, as it continues to build its brand and gain recognition.
General and administrative expense. General and administrative expenses totaled $5,032,843 and $5,077,063 for the three months ended June 30, 2023 and 2022, respectively. The minor decrease in general and administrative expenses in the three months ended June 30, 2023 compared to the same period in 2022 is primarily attributable to a decrease in administrative salaries, as payroll begins to adjust from the new acquisitions completed by the Company. General and administrative expenses also decreased due to a decline in rent expenses, and legal and professional expenses for the three months ended June 30, 2023 compared to the same period in 2022.
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Operating Loss
For the reasons stated above, our operating loss was $4,940,704 and $6,661,252 for the three months ended June 30, 2023 and 2022, respectively, an improvement of $1,720,548 (26%). Operating loss as a percentage of revenues increased to 60% in the three months ended June 30, 2023 from 71% in the same period in 2022.
Interest Income
Interest income increased to $55,730 for the three months ended June 30, 2023, from $32,233 in the same period of 2022, which reflects our change in cash and cash equivalent levels in the second quarter of 2023 compared to the second quarter of 2022.
Interest Expense
We incurred interest expenses of $1,515,509 and $8,501 during the three months ended June 30, 2023 and 2022, respectively. The increase is attributable to the convertible note issued in the second quarter, along with a reduction in the contingent earn-out notes associated with the four Nobility Healthcare acquisitions.
Change in Fair Value of Contingent Consideration Promissory Notes
The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $-0- and $542,096 during the three months ended June 30, 2023 and 2022, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment.
Change in Fair Value of Derivative Liabilities
During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities from March 31, 2023, to June 30, 2023, totaled $59,766 which was recognized as a loss in the second quarter of 2023.
Loss on accrual for legal settlement
The Company recognized a loss on accrual for legal settlement of $1,792,308 and $-0- during the three months ended June 30, 2023 and 2022, respectively. This is in connection with the ongoing lawsuit with Culp McCauley, Inc.
Loss on conversion of convertible debt
The Company recognized a loss on conversion of convertible debt of $93,386 and $-0- during the three months ended June 30, 2023 and 2022, respectively. This is in connection with the convertible note issued during the three months ended June 30, 2023 and the conversion from debt to equity during the period.
Other income (loss)
Other income (loss) increased to $25,394 for the three months ended June 30, 2023, from ($381) during the three months ended June 30, 2022, which reflects income related to a warehouse lease within the corporate headquarters.
Loss before Income Tax Benefit
As a result of the above results of operations, we reported a loss before income tax benefit of $8,320,549, and $682,187 for the three months ended June 30, 2023 and 2022, respectively, a decrease of $7,638,362 (1,120%).
Income Tax Benefit
We did not record an income tax expense related to our income for the three months ended June 30, 2023 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of June 30, 2023. We had approximately $113.3 million of net operating loss carryforwards and $1.8 million of research and development tax credit carryforwards as of June 30, 2023 available to offset future net taxable income.
Net Loss
As a result of the above results of operations, we reported a net loss of $8,320,549 and $682,187 for the three months ended June 30, 2023 and 2022, respectively, a decrease of $7,638,362 (1,120%).
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Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary
The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income of Nobility Healthcare which is reflected in the statement of income as “net income attributable to noncontrolling interests of consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $72,755 and $383,326 for the three months ended June 30, 2023 and 2022, respectively.
Net Loss Attributable to Common Stockholders
As a result of the above, we reported a net loss attributable to common stockholders of $8,393,304 and $1,065,513 for the years three months June 30, 2023 and 2022, respectively, a decrease of $7,327,791 (688%).
Basic and Diluted Loss per Share
The basic and diluted loss per share was $3.01 and $0.44 for the three months ended June 30, 2023 and 2022, respectively. Basic loss per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended June 30, 2023 and 2022, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted loss per share.
For the Six Months Ended June 30, 2023 and 2022
Results of Operations
Summarized immediately below and discussed in more detail in the subsequent subsections is an analysis of our operating results for the six months ended June 30, 2023 and 2022, represented as a percentage of total revenues for each such quarter:
For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | 100 | % | 100 | % | ||||
| Cost of revenue | 73 | % | 81 | % | ||||
| Gross profit | 27 | % | 19 | % | ||||
| Selling, general and administrative expenses: | ||||||||
| Research and development expense | 9 | % | 5 | % | ||||
| Selling, advertising and promotional expense | 25 | % | 28 | % | ||||
| General and administrative expense | 62 | % | 54 | % | ||||
| Total selling, general and administrative expenses | 96 | % | 87 | % | ||||
| Operating loss | (70 | )% | (69 | )% | ||||
| Loss on accrual for legal settlement | (11 | )% | — | % | ||||
| Change in fair value of contingent consideration promissory notes | 1 | % | 2 | % | ||||
| Change in fair value of derivative liabilities | — | % | 28 | % | ||||
| Other income and interest income (expense), net | (21 | )% | 1 | % | ||||
| Income (loss) before income tax benefit | (90 | )% | (38 | )% | ||||
| Income tax (provision) | — | % | — | % | ||||
| Net income/(loss) | (90 | )% | (38 | )% | ||||
| Net loss attributable to noncontrolling interests of consolidated subsidiary | (1 | )% | (1 | )% | ||||
| Net income (loss) attributable to common stockholders | (91 | )% | (39 | )% | ||||
| Net income/(loss) per share information: | ||||||||
| Basic | $ | (5.24 | ) | $ | (3.08 | ) | ||
| Diluted | $ | (5.24 | ) | $ | (3.08 | ) | ||
Product revenues by operating segment is as follows:
| For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Product Revenues: | ||||||||
| Video Solutions | $ | 2,341,622 | $ | 2,740,472 | ||||
| Revenue Cycle Management | — | — | ||||||
| Entertainment | 3,189,847 | 1,879,769 | ||||||
| Total Product Revenues | $ | 5,531,469 | $ | 4,620,241 | ||||
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Product revenues for the six months ended June 30, 2023 and 2022 were $5,531,469 and $4,620,241 respectively, an increase of $911,228 (20%), due to the following factors:
| ● | Revenues generated by the new entertainment operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The new entertainment operating segment generated $3,189,847 in product revenues for the six months ended June 30, 2023, compared to $1,879,769 for the six months ended June 30, 2022. This product revenue relates to the first Kustom 440 music festival, as well as the resale of tickets purchased for live events, including sporting events, concerts, and theatre, then sold through various platforms to customers. |
| ● | The Company’s video segment operating segment generated revenues totaling $2,341,622 during the six months ended June 30, 2023 compared to $2,740,472 for the six months ended June 30, 2022. In general, our video solutions operating segment has experienced pressure on its product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined compared to the same period in 2022 due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. |
| ● | Our video solutions operating segment management has been focusing on migrating customers, and in particular commercial customers, from a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has continued to gain traction, resulting in decreased product revenues and increased service revenues. We expect this program to continue to gain momentum, resulting in recurring revenues over a span of three to five years. |
Service and other revenues by operating segment is as follows:
| For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Service and Other Revenues: | ||||||||
| Video Solutions | $ | 1,457,331 | $ | 1,319,333 | ||||
| Revenue Cycle Management | 3,506,361 | 4,024,695 | ||||||
| Entertainment | 5,481,659 | 9,681,969 | ||||||
| Total Service and Other Revenues | $ | 10,445,351 | $ | 15,025,997 | ||||
Service and other revenues for the six months ended June 30, 2023 and 2022 were $10,445,351 and $15,025,997, respectively, an increase of $4,580,646 (30%), due to the following factors:
| ● | Cloud revenues generated by the video solutions operating segment were $894,773 and $627,874 for the six months ended June 30, 2023 and 2022, respectively, an increase of $266,899 (43%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of our cloud-based EVO-HD in-car system and our next generation body-worn camera products, which contributed to our increased cloud revenues in the six months ended June 30, 2023. We expect this trend to continue throughout 2023 as the migration from local storage to cloud storage continues in our customer base. | |
| ● | Video solutions operating segment revenues from extended warranty services were $433,074 and $363,130 for the six months ended June 30, 2023 and 2022, respectively, an increase of $69,944 (19%). This correlates with the increase in sales of DVM-800 hardware systems resulting in an increase in their associated extended warranty. | |
| ● | Our new entertainment operating segment generated service revenues totaling $5,481,659 and $9,681,969 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $4,200,310 (43%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021, thus resulting in the new revenue stream for the Company. TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. We expect our entertainment operating segment to continue to fluctuate as we look right-size this segment and work towards profitability. | |
| ● | Our new revenue cycle management operating segment generated service revenues totaling $3,506,361 and $4,024,695 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $518,334 (13%). Our revenue cycle management operating segment has completed four acquisitions since formation in June of 2021, thus resulting in the new service revenue stream added in the six months ended June 30, 2023. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. The slight decrease in revenue is due to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue. |
Total revenues for the six months ended June 30, 2023 and 2022 were $15,976,820 and $19,646,238, respectively, a decrease of $3,669,418 (19%), due to the reasons noted above.
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Cost of Product Revenue
Overall cost of product revenue sold for the six months ended June 30, 2023, and 2022 was $4,520,616 and $4,892,527, respectively, a decrease of $371,911 (8%). Overall cost of goods sold for products as a percentage of product revenues for the six months ended June 30, 2023, and 2022 were 82% and 106%, respectively. Cost of products sold by operating segment is as follows:
| For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of Product Revenues: | ||||||||
| Video Solutions | $ | 1,842,983 | $ | 2,507,118 | ||||
| Revenue Cycle Management | — | — | ||||||
| Entertainment | 2,677,633 | 2,385,409 | ||||||
| Total Cost of Product Revenues | $ | 4,520,616 | $ | 4,892,527 | ||||
The decrease in cost of goods sold for our video solutions segment products is directly correlated with the decrease in product sales for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. In addition, the video solutions segment recorded valuation allowances for its older product lines and a portion of its Shield products during the first six months of 2023, directly increasing cost of goods sold for the period. Cost of product sold as a percentage of product revenues for the video solutions segment improved to 79% for the six months ended June 30, 2023 as compared to 91% for the six months ended June 30, 2022.
The increase in entertainment operating segment cost of product sold directly correlates to the increase in product revenues for the six months ended June 30, 2023 compared to June 30, 2022, resulting in cost of product revenue of $2,677,633 for the six months ended June 30, 2023, compared to $2,385,409 for the six months ended June 30, 2022. Cost of product sold as a percentage of product revenues for the entertainment segment was 84% for the three months ended June 30, 2023 as compared to 127% for the six months ended June 30, 2022.
We recorded $5,414,534 and $5,489,541 in reserves for obsolete and excess inventories at June 30, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-progress were $3,673,516 and $4,512,329 at June 30, 2023 and December 31, 2022, respectively, a decrease of $838,813 (19%). Finished goods balances were $7,581,234 and $7,816,618 at June 30, 2023 and December 31, 2022, respectively, a decrease of $235,384 (3%) which was attributable to a decrease in finished goods from our entertainment segment. The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory, offset by the increase in reserve at the entertainment segment. We believe the reserves are appropriate given our inventory levels as of June 30, 2023.
Cost of Service Revenue
Overall cost of service revenue sold for the six months ended June 30, 2023, and 2022 was $7,174,375 and $11,095,015, respectively, a decrease of $3,920,640 (35%). Overall cost of goods sold for services as a percentage of service revenues for the six months ended June 30, 2023, and 2022 were 69% and 74%, respectively. Cost of service revenues by operating segment is as follows:
| For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of Service Revenues: | ||||||||
| Video Solutions | $ | 642,369 | $ | 525,247 | ||||
| Revenue Cycle Management | 1,928,253 | 2,370,263 | ||||||
| Entertainment | 4,603,753 | 8,199,505 | ||||||
| Total Cost of Service Revenues | $ | 7,174,375 | $ | 11,095,015 | ||||
The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 44% for the six months ended June 30, 2023 as compared to 40% for the six months ended June 30, 2022.
| 53 |
The decrease in revenue cycle management operating segment cost of service revenue is commensurate with the decrease in service revenues in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 55% for the six months ended June 30, 2023 as compared to 59% for the six months ended June 30, 2022.
The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Cost of service revenues as a percentage of service revenues for the entertainment operating segment was 84% for the six months ended June 30, 2023 as compared to 85% for the six months ended June 30, 2022.
Gross Profit
Overall gross profit for the six months ended June 30, 2023 and 2022 was $4,281,829 and $3,658,696, respectively, an increase of $623,133 (17%). Gross profit by operating segment was as follows:
| For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Gross Profit: | ||||||||
| Video Solutions | $ | 1,313,601 | $ | 1,027,440 | ||||
| Revenue Cycle Management | 1,578,107 | 1,654,432 | ||||||
| Entertainment | 1,390,121 | 976,824 | ||||||
| Total Gross Profit | $ | 4,281,829 | $ | 3,658,696 | ||||
The overall increase is attributable to the large overall increase in revenues for the six months ended June 30, 2023 and an increase in the overall cost of sales as a percentage of overall revenues to 73% for the six months ended June 30, 2023 from 81% for the six months ended June 30, 2022. Our goal is to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, ShieldTM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $15,395,340 and $17,123,286 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $1,727,946 (10%). The decrease was primarily attributable to the reduction in new sponsorships being entered into by the Company. Our selling, general and administrative expenses as a percentage of sales decreased to 96% for the six months ended June 30, 2023 compared to 87% in the same period in 2022. The significant components of selling, general and administrative expenses are as follows:
For the six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Research and development expense | $ | 1,475,215 | $ | 1,038,222 | ||||
| Selling, advertising and promotional expense | 3,952,115 | 5,542,448 | ||||||
| General and administrative expense | 9,968,010 | 10,542,616 | ||||||
| Total | $ | 15,395,340 | $ | 17,123,286 | ||||
| 54 |
Research and development expense. We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $1,475,215 and $1,038,222 for the six months ended June 30, 2023 and 2022, respectively, an increase of $436,993 (42%). Most of our engineers are dedicated to research and development activities for new products, primarily the new generation of body-worn cameras, EVO-HD and EVO Fleet that can be located in multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings based on our new body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources.
Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $3,952,115 and $5,542,448 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $1,590,333 (29%). The decrease is primarily attributable to the reduction in new sponsorships being entered into by the Company. Additionally, TicketSmarter remains active in sponsorship and advertising, as it continues to build its brand and gain recognition.
General and administrative expense. General and administrative expenses totaled $9,968,010 and $10,542,616 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $574,606 (5%). The decrease in general and administrative expenses in the six months ended June 30, 2023 compared to the same period in 2022 is primarily attributable to a decrease in administrative salaries, as payroll begins to adjust from the new acquisitions completed by the Company. General and administrative expenses also decreased due to a decline in rent expenses, and legal and professional expenses for the three months ended June 30, 2023 compared to the same period in 2022.
Operating Loss
For the reasons stated above, our operating loss was $11,113,511 and $13,464,590 for the six months ended June 30, 2023 and 2022, respectively, an improvement of $2,351,079 (17%). Operating loss as a percentage of revenues changed to 70% in the six months ended June 30, 2023 from 69% in the same period in 2022.
Interest Income
Interest income decreased to $71,085 for the six months ended June 30, 2023, from $103,595 in the same period of 2022, which reflects our change in cash and cash equivalent levels in the second quarter of 2023 compared to the second quarter of 2022. The Company held significant cash and cash equivalents throughout the second quarter of 2022, allowing a full six months of interest income.
Interest Expense
We incurred interest expense of $1,521,049 and $25,511 during the six months ended June 30, 2023 and 2022, respectively. The increase is attributable to the convertible note entered into in the second quarter of 2023, and the contingent earn-out notes associated with the four Nobility Healthcare acquisitions, with interest rates of 3.00% per annum.
Change in Fair Value of Short-Term Investments
We recognized a loss on change in fair value of short-term investments totaling $-0- and $84,818 during the six months ended June 30, 2023 and 2022, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less.
Change in Fair Value of Contingent Consideration Promissory Notes
During the six months ended June 30, 2023, The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $158,021 and $486,046 during the six months ended June 30, 2023 and 2022, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment.
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Change in Fair Value of Derivative Liabilities
During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities from December 31, 2022, to June 30, 2023, totaled $59,766 which was recognized as a loss in the second quarter of 2023.
Loss on conversion of convertible debt
The Company recognized a loss on conversion of convertible debt of $93,386 and $-0- during the six months ended June 30, 2023 and 2022, respectively. This is in connection with the convertible note issued during the six months ended June 30, 2023 and the conversion from debt to equity during the period.
Other income
Other income increased to $50,786 for the six months ended June 30, 2023, from $43,059 during the six months ended June 30, 2022, which reflects income related to a warehouse lease within the corporate headquarters.
Loss before Income Tax Benefit
As a result of the above results of operations, we reported a loss before income tax benefit of $14,300,128 and $7,380,430 for the six months ended June 30, 2023 and 2022, respectively, a decline of $6,919,698 (94%).
Income Tax Benefit
We did not record an income tax expense related to our income for the six months ended June 30, 2023 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of June 30, 2023. We had approximately $113.3 million of net operating loss carryforwards and $1.8 million of research and development tax credit carryforwards as of June 30, 2023 available to offset future net taxable income.
Net Loss
As a result of the above results of operations, we reported a net loss of $14,300,128 and $7,380,430 for the six months ended June 30, 2023 and 2022, respectively, a decline of $6,919,698 (94%).
Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary
The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income of Nobility Healthcare which is reflected in the statement of income as “net income attributable to noncontrolling interests of consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $198,994 and $285,232 for the six months ended June 30, 2023 and 2022, respectively.
Net Loss Attributable to Common Stockholders
As a result of the above, we reported a net loss attributable to common stockholders of $14,499,122 and $7,665,662 for the six months June 30, 2023 and 2022, respectively, a deterioration of $6,833,460 (89%).
Basic and Diluted Loss per Share
The basic and diluted loss per share was $5.24 and $3.08 for the six months ended June 30, 2023 and 2022, respectively. Basic loss per share is based upon the weighted average number of common shares outstanding during the period. For the six months ended June 30, 2023 and 2022, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted loss per share.
Liquidity and Capital Resources
Overall:
Management’s Liquidity Plan. We have experienced net losses and cash outflows from operating activities since inception. Based upon our current operating forecast, we anticipate that we will need to restore positive operating cash flows and/or raise additional capital in the short-term to fund operations, meet our customary payment obligations and otherwise execute our business plan over the next 12 months. We are continuously in discussions to raise additional capital, which may include a variety of equity and debt instruments; however, there can be no assurance that our capital raising initiatives will be successful. Our recurring losses and level of cash used in operations, along with uncertainties concerning our ability to raise additional capital, raise substantial doubt about our ability to continue as a going concern.
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Cash, cash equivalents: As of June 30, 2023, we had cash and cash equivalents with an aggregate balance of $2,923,881, a decrease from a balance of $3,532,199 at December 31, 2022. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $608,318 net decrease in cash during the six months ended June 30, 2023:
| ● | Operating activities: | $3,109,986 of net cash used in operating activities. Net cash used in operating activities was $3,109,986 and $10,932,515 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $7,822,529. The improvement is attributable to the non-cash gain attributable to the change in value of the warrant derivative liability no longer being applicable to 2023, as well as the decline in the usage of cash to increase accounts receivable, prepaid expenses, and other operating assets during the six months ended June 30, 2023 compared to the same period in 2022. | |
| ● | Investing activities: | $126,946 of net cash used in investing activities. Cash used in investing activities was $126,946 and $3,361,994 for the six months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023, we made capital expenditures for: (i) building improvements of the newly purchased office and warehouse building; and (ii) patent applications on our proprietary technology utilized in our new products and included in intangible assets. | |
| ● | Financing activities: | $2,628,614 of net cash provided by financing activities. Cash provided by (used in) financing activities was $2,628,614 and ($4,259,037) for the six months ended June 30, 2023 and 2022, respectively. During the first six months of 2023, we most notably completed a convertible note agreement, made principal payments on contingent consideration promissory notes, received a Commercial Extension of Credit for our Entertainment Segment, and made principal payments on that extension of credit. During the first six months of 2022 the Company repurchased its common stock on the open market pursuant to the stock repurchase plan, as well as principal payments on contingent consideration promissory notes. |
Commitments:
We had $2,923,881 of cash and cash equivalents and net negative working capital of ($3,109,982) as of June 30, 2023. Accounts receivable and other receivables balances represented $4,587,929 of our net working capital at June 30, 2023. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2023, which would help to provide positive cash flow to support our operations during 2023. Inventory represents $5,840,216 of our net working capital at June 30, 2023. We are actively managing the level of inventory and our goal is to reduce such level during the balance of 2023 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2023.
Capital Expenditures:
We had the following material commitments for capital expenditures at June 30, 2023:
Lease commitments. Total lease expense under the six operating leases was approximately $156,856 and $297,117, during the three and six months ended June 30, 2023, respectively.
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The following sets forth the operating lease right of use assets and liabilities as of June 30, 2023:
| Assets: | ||||
| Operating lease right of use assets, net | $ | 1,124,291 | ||
| Liabilities: | ||||
| Operating lease obligations-current portion | $ | 291,074 | ||
| Operating lease obligations-less current portion | 901,412 | |||
| Total operating lease obligations | $ | 1,192,486 |
The components of lease expense were as follows for the six months ended June 30, 2023:
| Selling, general and administrative expenses | $ | 297,117 |
Following are the minimum lease payments for each year and in total:
| Year ending December 31: | |||
| 2023 (July 1, to December 31, 2023) | $ | 201,602 | |
| 2024 | 336,992 | ||
| 2025 | 290,417 | ||
| 2026 | 271,868 | ||
| Thereafter | 334,650 | ||
| Total undiscounted minimum future lease payments | 1,435,529 | ||
| Imputed interest | (243,043 | ) | |
| Total operating lease liability | $ | 1,192,486 | |
Debt obligations – Outstanding debt obligations comprises the following:
June 30, 2023 | December 31, 2022 | |||||||
| Economic injury disaster loan (EIDL) | $ | 150,000 | $ | 150,000 | ||||
| Convertible note payable, net of unamortized debt discount of $1,975,909 | 899,091 | — | ||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | 259,303 | 388,955 | ||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | 117,637 | 176,456 | ||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | 5,937 | 208,083 | ||||||
| Contingent consideration promissory note – Nobility Healthcare Division Acquisition | 19,887 | 4,346 | ||||||
| Commercial Extension of Credit – Entertainment Segment | 175,617 | — | ||||||
| Debt obligations | 1,627,472 | 927,840 | ||||||
| Less: current maturities of debt obligations | 1,468,857 | 485,373 | ||||||
| Debt obligations, long-term | $ | 158,615 | $ | 442,467 | ||||
Debt obligations mature as follows as of June 30, 2023:
June 30, 2023 | |||
| 2023 (July 1, 2023 to December 31, 2023) | $ | 374,915 | |
| 2024 | 3,083,972 | ||
| 2025 | 3,412 | ||
| 2026 | 3,542 | ||
| 2027 and thereafter | 137,541 | ||
| Total | $ | 3,603,382 | |
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Critical Accounting Estimates
Our significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to our consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies and estimates are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions:
| ● | Revenue Recognition / Allowance for Doubtful Accounts; | |
| ● | Allowance for Excess and Obsolete Inventory; | |
| ● | Goodwill and other intangible assets; | |
| ● | Warranty Reserves; | |
| ● | Fair value of warrant derivative liabilities; | |
| ● | Stock-based Compensation Expense; | |
| ● | Accounting for Income Taxes; and |
Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all five of the following conditions are met:
| (i) | Identify the contract with the customer; | |
| (ii) | Identify the performance obligations in the contract; | |
| (iii) | Determine the transaction price; | |
| (iv) | Allocate the transaction price to the performance obligations in the contract; and | |
| (v) | Recognize revenue when a performance obligation is satisfied. |
We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract when the customer order is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.
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Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i) products, (ii) professional services, and (iii) extended warranties.
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on the relative standalone selling price (“SSP”).
Revenue for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with customers.
Revenue for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to-end service fees. These service fees are reported as revenue monthly upon completion of our performance obligation to provide the agreed upon services.
Revenue for our entertainment segment is recorded on a gross or net basis based on management’s assessment of whether we are 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.
We sell our 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. We act as the principal in these transactions as we own the ticket at the time of sale, therefore we control 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.
We also act 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 we do not control the ticket prior to the transfer, we act 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. Payment is due at the time of sale.
We review all significant, unusual, or nonstandard shipments of product or delivery of services as a routine part of our accounting and financial reporting process to determine compliance with these requirements. Extended warranties are offered on selected products, and when a customer purchases an extended warranty, the associated proceeds are treated as contract liability and recognized over the term of the extended warranty.
For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible, with less than $258,000 charged off as uncollectible on cumulative revenues of $248.0 million since we commenced deliveries during 2006.
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For our entertainment segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition, we will track historical bad debts and continue to assess appropriate reserves.
For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves.
Allowance for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost.
Inventories consisted of the following at June 30, 2023 and December 31, 2022:
June 30, 2023 | December 31, 2022 | |||||||
| Raw material and component parts– video solutions segment | $ | 3,656,511 | $ | 4,509,165 | ||||
| Work-in-process– video solutions segment | 17,005 | 3,164 | ||||||
| Finished goods – video solutions segment | 6,545,100 | 6,846,091 | ||||||
| Finished goods – entertainment segment | 1,036,134 | 970,527 | ||||||
| Subtotal | 11,254,750 | 12,328,947 | ||||||
| Reserve for excess and obsolete inventory– video solutions segment | (5,095,330 | ) | (5,230,261 | ) | ||||
| Reserve for excess and obsolete inventory – entertainment segment | (319,204 | ) | (259,280 | ) | ||||
| Total inventories | $ | 5,840,216 | $ | 6,839,406 | ||||
We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk of inventory obsolescence due to changing technology and customer requirements. As reflected above, our inventory reserves represented 48% of the gross inventory balance at June 30, 2023, compared to 45% of the gross inventory balance at December 31, 2022. We had $5,414,534 and $5,489,541 in reserves for obsolete and excess inventories at June 30, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-process were $3,673,516 and $4,512,329 at June 30, 2023 and December 31, 2022, respectively, a decrease of $838,813 (19%). Finished goods balances were $7,581,234 and $7,816,618 at June 30, 2023 and December 31, 2022, respectively, a decrease of $235,384 (3%). The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of June 30, 2023.
If actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established.
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Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets.
Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets.
Determining an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset’s useful life.
The Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring changes or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value.
When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test.
Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data.
Our most recent annual impairment test of goodwill was a qualitative analysis conducted as of December 31, 2022 that indicated no impairment. Subsequent to completing our 2022 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 — Nature of Business and Summary of Significant Accounting Policies and Note 10 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements provide additional information regarding the Company’s goodwill and other intangible assets.
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Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were increased to $15,936 as of June 30, 2023 compared to $15,694 as of December 31, 2022 due to newer products gaining a long history of claims to consider, which was slightly offset as we begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.
Warrant derivative liabilities. On April 5, 2023, the Company issued warrants to purchase a total of 1,125,000 shares of Common Stock. The warrant terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Furthermore, the Company revalues the fair value of warrant derivative liability as of the date the warrant is exercised with the resulting warrant derivative liability transitioned to equity.
The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of June 30, 2023:
| Issuance date assumptions | June 30, 2023 assumptions | |||||||
| Volatility - range | 106.0 | % | 106.2 | % | ||||
| Risk-free rate | 3.36 | % | 4.13 | % | ||||
| Dividend | 0 | % | 0 | % | ||||
| Remaining contractual term | 5.0 years | 4.8 years | ||||||
| Exercise price | $ | 5.50 - 7.50 | $ | 5.50 - 7.50 | ||||
| Common stock issuable under the warrants | 1,125,000 | 1,125,000 | ||||||
Stock-based Compensation Expense. We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were no stock options granted during the three or six months ended June 30, 2023.
If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect our estimates of fair values of our share-based compensation. Certain share-based payment awards, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. In addition, we account for forfeitures as they occur.
Accounting for Income Taxes. Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.
As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. As of June 30, 2023, we have fully reserved all of our deferred tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased by $17,220,000 to a balance of $34,200,000 to fully reserve our deferred tax assets at December 31, 2022. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of June 30, 2023, because of the overall net operating loss carryforwards available. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine 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. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.
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As required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We have no recorded liability as of June 30, 2023 representing uncertain tax positions.
We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year. We do not believe that our Video Solutions and Revenue Cycle Management segments business is seasonal in nature, however; the Entertainment Segment is expected to generate higher revenues during the second half of the calendar year than in the first half.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) under the Exchange Act. The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of such disclosure controls and procedures for this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2023 to provide reasonable assurance that material information required to be disclosed by the Company in this Report was recorded, processed, summarized and communicated to the Company’s management as appropriate and within the time periods specified in SEC rules and forms.
As part of our plan to remediate our controls which were not effective, we are performing a full review of our internal control procedures. We have implemented, and plan to continue to implement, new controls and new processes. We have hired and plan to continue to hire additional qualified personnel and establish more robust processes to support our internal control over financial reporting, including clearly defined roles and responsibilities. The Company anticipates time being required to complete the implementation and to assess and ensure the sustainability of these controls. The effectiveness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The information regarding certain legal proceedings in which we are involved as set forth in Note 12 – Contingencies of the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report on Form 10-Q) is incorporated by reference into this Item 1.
In addition to such legal proceedings, we are faced with or involved in various other claims and legal proceedings arising in the normal course of our businesses. At this time, we do not believe any material losses under such other claims and proceedings to be probable. While the ultimate outcome of such claims or legal proceedings cannot be predicted with certainty, it is in the opinion of management, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the first half of 2023 that were not disclosed by the Company on a Current Report on Form 8-K.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(a) Exhibits.
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 14, 2023
| DIGITAL ALLY, INC. | ||
| By: | /s/ Stanton E. Ross | |
| Name: | Stanton E. Ross | |
| Title: | Chief Executive Officer | |
| By: | /s/ Thomas J. Heckman | |
| Name: | Thomas J. Heckman | |
| Title: | Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) | |
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