United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

[X]☒ ANNUAL REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31 2020, 2022

[  ]

or

☐ TRANSITION REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to .__________.

Commission file number: 001-33899

Digital Ally, Inc.Digital Ally, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (913)814-7774

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

Securities registered underpursuant to Section 12(g) of the Exchange Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] ☐ No [X] ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] ☐ No [X] ☒

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] ☒ No [  ]☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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 the Exchange Act.

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [  ]☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] ☐ No [X] ☒

As of June 30, 2020,2022, the aggregate market value of the Company’s common equityvoting and non-voting stock held by non-affiliates computed by reference to the closing price ($3.14) of the registrant’s most recently completed second fiscal quarter, computed by reference to the closing price ($15.80), was: $75,239,600.34,496,434, which have been adjusted for the Reverse Split (as defined below).

The number of shares of our common stock outstanding as of March 31, 20212023 was: 51,521,191.

Documents Incorporated by Reference: Portions of2,755,224 as adjusted for the Registrant’s definitive proxy statement,Company’s 1-for-20 reverse stock split, which the Company expects to file no later than 120 days after December 31, 2020, are incorporated by reference into Part III ofwas effective on February 6, 2023 (the “Reverse Split”). All share and price per share information in this Annual Report on Form 10-K.10-K has been adjusted to reflect the Reverse Split.

Documents Incorporated by Reference: None.

FORM 10-K

DIGITAL ALLY, INC.

DECEMBER 31, 20202022

Table of Contents

Note Regarding Forward Looking Statements

This annual report on Form 10-K contains forward-looking statements as that term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intends,” and other variations of these words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events, circumstances or trends and that do not relate to historical matters are forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.

As used in this annual report, “Digital Ally,” the “Company,” “we,” “us,” or “our” refer to Digital Ally, Inc., unless otherwise indicated.

Part I

Overview

We produce digital video imaging, storage products and disinfectant and related safety products for use in law enforcement, security and commercial applications. Our current products include, in-car digital video/audio recorders contained in a rear-view mirror for use in law enforcement and commercial fleets; a system that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free automatic activation of body-worn cameras and in-car video systems; a miniature digital video system designed to be worn on an individual’s body; and cloud storage solutions. Additionally, the Company has recently added two new lines of branded products: (1) the ThermoVu™ which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria. The Company began offering its Shield™ disinfectants and cleansers to its law enforcement and commercial customers late in the second quarter of 2020. We have active research and development programs to adapt our technologies to other applications. We can integrate electronic, radio, computer, mechanical, and multi-media technologies to create unique solutions to address needs in a variety of other industries and markets, including mass transit, school bus, taxicab and the military. We sell our products to law enforcement agencies, private security customers and organizations and consumer and commercial fleet operators through direct sales domestically and third-party distributors internationally.

Corporate History

We were incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. From that date until November 30, 2004, when we entered into a Plan of Merger with Digital Ally, Inc., a Nevada corporation which was formerly known as Trophy Tech Corporation (the “Acquired Company”“Predecessor Registrant”), we had not conducted any operations and were a closely-held company. In conjunction with the merger, we were renamed Digital Ally, Inc.

The Acquired Company, which was incorporated on May 16, 2003, engaged in the design, development, marketing and sale of bow hunting-related products. Its principal product was a digital video recording system for use in the bow hunting industry. We changed its business plan in 2004 to adapt its digital video recording system for use in the law enforcement and security markets. We began shipments of our in-car digital video rear view mirror in March 2006.

On January 2, 2008, we commenced trading on the Nasdaq Capital Market under the symbol “DGLY.” We conduct our business from 15612 College Blvd,14001 Marshall Drive, Lenexa, Kansas 66219.66215. Our telephone number is (913) 814-7774.

COVID – 19 Pandemic

Our website address is www.digitalallyinc.com. The COVID-19 pandemic represents a fluid situation that presents a wide rangecontents of, potential impacts of varying durations for different global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.

Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts onor information accessible through, our business in March 2020. By that time, much of our first fiscal quarter was completed. During the remainder of the year ended December 31, 2020, we observed recent decreases in demand from certain customers, including primarily our law-enforcement and commercial customers.

Given the fact that our products are sold through a variety of distribution channels, we expect our sales will experience more volatility as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. We are aware that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from COVID-19 on future operating results. Although we observed significant declines in demand for our products from certain customers during the year ended December 31, 2020, we believe that it remains too early for us to know the exact impact COVID-19 will have on the long-term demand for our products. We also cannot be certain how demand may shift over time as the impacts of the COVID-19 pandemic may go through several phases of varying severity and duration.

In light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have taken, and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic. We continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number of factors thatwebsite are not entirely within our control and are discussed in this and other sectionspart of this Annual Report on Form 10-K. We do not expect theremake our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to be material changes to our assetsthose reports, as well as beneficial ownership filings available free of charge on our balance sheetwebsite as soon as reasonably practicable after we file such reports with, or our abilityfurnish such reports to, timely account for those assets. Further,the SEC. Our filings with the SEC are available to the public through the SEC’s website at www.sec.gov.

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 preparationMerger Agreement or the transactions contemplated thereby.

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

For the purposes of this Annual Report on Form 10-K, we reviewedunless the potential impacts ofcontext otherwise requires, (i) the COVID-19 pandemic on goodwill and intangible assets and have determined there to be no material impact at this time. We have also reviewed the potential impacts on future risksterm “our,” or “us” refers to the business as it relates to collections, returnsPredecessor Registrant and other business-related items.

To date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to assist our customers and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect these restrictions on personal travel to be material to our business operations or financial results. We have taken steps to restrain and monitor our operating expenses and therefore we do not expect any such impacts to materially change the relationship between costs and revenues.

Like most companies, we have taken a range of actionsits subsidiaries with respect to how we operatethe period prior to assure we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our business effectively. To date, we have been able to operate our business effectively using these measuresEffective Time and to maintain internal controlsthe Registrant and its subsidiaries with respect to the period on and after the Effective Time; (ii) as documentedof any period prior to the Effective Time, references to the “directors” mean the directors of the Predecessor Registrant, and, posted. Weas of any period at and after the Effective Time, the directors of the Registrant, (iii) as of any period prior to the Effective Time, references to “stockholders” mean the holders of Predecessor Common Stock, and, as of any period at and after the Effective Time, the holders of Registrant Common Stock, and (iv) as of any period prior to the Effective Time, references to “Common Stock” means the Predecessor Common Stock, and, as of any period at and after the Effective Time, Registrant Common Stock.

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., 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 have not experienced challengesacquire 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 maintaining business continuityannual financial statements and do not expectrequires selected information of those segments to incur material expenditures to do so. However,be presented in financial statements. The following table sets forth the impacts of COVID-19Company’s total revenue and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.revenue derived from each reportable operating segment:

The actions

Additional information regarding each reportable operating segment is also included in Note 23 entitled Segment Data of “Notes to Consolidated Financial Statements”.

Video Solutions Operating Segment

Within our video solutions operating segment we have taken so far during the COVID-19 pandemic include, but are not limited to:

We currently believe revenue for the year ending December 31, 2021 may decline year over year due to the conditions noted. In April 2020, we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses during the pandemic. Actions taken to date include work hour and salary reductions for senior management. These cost reductions are in addition to the significant restructuring actions we initiated in the first quarter of 2020. Based on our current cash position, our projected cash flow from operations and our cost reduction and cost containment efforts to date, we believe that we will have sufficient capital and or have access to sufficient capital through public and private equity and debt offerings to sustain operations for a period of one year following the date of this filing. If business interruptions resulting from the COVID-19 pandemic were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.

Our Products

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 mirror systems for law enforcement;enforcement and commercial markets; the FirstVUFirstVu body-worn camera line, consisting of the FirstVu Pro, FirstVu II, and the FirstVU HD, which are body-worn cameras;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 FleetVUFleetVu and VuLink, which are our cloud-based evidence management systems. We introduced the EVO-HD product in the second quarter of 2019further diversified and began full-scale deliveries in the third quarter 2019, which continued into 2020. The EVO-HD is designed and built on a new and highly advanced technology platform that will become the platform for a new family of in-car video solution products for the law enforcement and commercial markets. We believe that the launch of these new products will help to reinvigorate our in-car and body-worn systems revenues while diversifying and broadening the market forbroadened our product offerings. Additionally, we introducedofferings in 2020, by introducing two new lines of branded products: (1) the ThermoVu™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. We began offering our Shield™ disinfectants

Our video solutions segment revenue encompasses video recording products and cleansers toservices for our law enforcement and commercial customers and the sale of Shield^TM 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 entered the revenue cycle management business late in the second quarter of 2020. The following describes2021 with the formation of our product portfolio.wholly owned subsidiary, Digital Ally Healthcare, Inc. and its majority-owned subsidiary Nobility Healthcare, LLC (“Nobility Healthcare”). Nobility Healthcare completed its first acquisition on June 30, 2021, when it acquired a private medical billing company, and has since completed three more acquisitions of private medical billing companies, 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.

Entertainment Operating Segment

We have also entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter, Inc. (“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 ticketing 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. Ticketing 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.

Our Video Operating Segment Products and Services

Through our video 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, and the FirstVu HD; our patented and revolutionary VuLink product 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.

In-Car Digital Video Mirror System for law enforcementLaw Enforcement – EVO-HD, DVM-800 and DVM-800 Lite

In-car video systems for patrol cars are now a necessity and have generally become standard. Current systems are primarily digital based systems with cameras mounted on the windshield and the recording device generally in the trunk, headliner, dashboard, console or under the seat of the vehicle. Most manufacturers have developed and transitioned completely to digital video, and some have offered full high definition (“HD”) level recordings, which is currently state-of-art for the industry.

Our digital video rear-view mirror unit is a self-contained video recorder, microphone and digital storage system that is integrated into a rear-view mirror, with a monitor, global positioning system (“GPS”) and 900 megahertz (“MHz”) audio transceiver. Our system is more compact and unobtrusive than certain of our competitors because it requires no recording equipment to be located in other parts of the vehicle.

Our in-car digital video rear-view mirror has the following features:

The Company launched its in-car digital video platform under the name EVO-HD during the second quarter of 2019. The EVO-HD is a next generationrevolutionary in-car system that offers a multiple HD in-car camera solution system with built-in patented VuLink auto-activation technology. The EVO-HD is built on a newdelivers versatility and highly advanced technology platform that enables many new and revolutionary features, including auto activation beyond the car and body camera. We believe that no other provider can offer built-in patented VuLink auto-activation technology. The EVO-HD providesreliability for law enforcement officers with an easier to use, faster and more advanced system for capturing video evidence and uploading than the Company’s competitors. Additional features include:enforcement.

TheWith built-in, patented auto-activation technology, EVO-HD is designedcaptures multiple recording angles in sync from a FirstVu PRO or FirstVu HD body-worn camera and built on a new and highly advanced technology platform that is expected to become the platform for a new family of in-car video solution products for law enforcement. The innovative EVO-HD technology replaces the current in-car mirror-based systems with a miniaturized system that can be custom-mounted in the vehicle while offering numerous hardware configurations to meet the varied needs and requirements of our law enforcement customers. The EVO-HD can support up to four HD in-car cameras – all from a single trigger. The EVO-HD maximizes space and offers top-end reliability when paired with two cameras having pre-event and evidence capture assurance (“ECA”) capabilities to allow agencies to review entire shifts.remote service capabilities. An internal cell modem will allow for connectivity to the VuVault.net cloud, powered by Amazon Web Services (“AWS”) and real time metadata when in the field.

The Company offers the DVM-800, a continuation in the family of highly successful digital video mirrored (DVM) systems developed by the Company. The DVM-800 is a time-tested, compact, powerful and easy-to-use solution designed for law enforcement. The DVM-800 system has built-in road and driver facing cameras and can record up to two external HD cameras. The DVM-800 is compatible with the patented VuLink® auto-activation technology and can be paired with a FirstVu HD body-worn camera.

The Company also offers the DVM-800 Lite, an entry level system is a self-contained video recorder, microphone and digital storage system that is integrated into a rear-view mirror and is designed for law enforcement. The system can record up to two internal HD cameras.

In-Car Digital Video “Event Recorder” System – DVM-250 Plus and FLT-250 for Commercial Fleets

Digital Ally provides commercial fleets and commercial fleet managers with the digital video tools that they need to increase driver safety, track assets in real-time and minimize the company’s liability risk while enabling fleet managers to operate the fleet at an optimal level. We market a product designed to address these commercial fleet markets with our DVM-250 Plus and FLT-250 event recorders that provide various types of commercial fleets with features and capabilities that are fully-customizable and consistent with their specific application and inherent risks.

The DVM-250 Plus is a rear-view mirror basedpart of the DVM family and is designed for commercial fleets featuring built-in digital audio and video recording system with many, but nottechnology and other features to provide commercial fleet managers unmatched driver and asset management – all while aiming to deliver the return on investment that matters most: the safety and security of the features of our DVM-800 law enforcement mirror systems, which we sell at a lower price point.drivers and passengers. The DVM-250 Plus is designed to capture events, such as wrecks and erratic driving or other abnormal occurrences, for evidentiary or training purposes. The commercial fleet markets may find our units attractive from both a feature and a cost perspective compared to other providers. We believe that, dueDue to our marketing efforts, commercial fleets are adoptingbeginning to adopt this technology, and in particular, the ambulance and taxi-cab markets.

In the first quarter of 2021, Digital Ally released the FLT-250, offering the same great features of the DVM-250 Plus in a new compact, non-mirrored form factor that allows for multiple mounting options in any vehicle type for commercial fleets. We believe that, due to non-mirror-based aspect of this product, the FLT-250 will become more attractive for our potential customers, as it is a much simpler plug and play option compared to mirror-based products.

Digital Ally offers a suite of data management web-based tools to assist fleet managers in the organization, archival, and management of videos and telematics information. Within the suite, there are powerful mapping and reporting tools that are intended to optimize efficiency, serve as training tools for teams on safety, and, ultimately, generate a significant return on investment for the organization.

The Company’s management expectsWe expect the EVO-HD to become the platform for a new family of in-car video solution products for the commercial markets. The innovative EVO-HD technology is expected to replace the current in-car mirror-based systems with a miniaturized system that can be custom-mounted in the vehicle, while offering numerous hardware configurations to meet the varied needs and requirements of the Company’sour commercial customers. In its commercial market application, the EVO-HD can support up to four HD cameras, with two cameras having pre-event and ECA capabilities to allow customers to review entire shifts. An internal cell modem will allow for connectivity to the FleetVUFleetVu Manager cloud-based system for commercial fleet tracking and monitoring, which is powered by AWS and real time metadata when in the field.

Miniature Body-Worn Digital Video System – FirstVUFirstVu Pro, FirstVu II, and FirstVu HD for Law Enforcement and Private Security

During 2021, Digital Ally launched two next generation body-worn cameras and docking stations, refreshing the Company’s complete ecosystem of evidence recording devices. The latest body worn camera launched by the Company is the FirstVu Pro, the Company’s flagship product in its family of next generation of technology. The light weight, one-piece unit captures full HD video and audio, while offering industry leading features such as live streaming, a full-color touchscreen display, an advanced image sensor with IR LEDs, proprietary image distortion reduction, IP67 rated resisting dust and wind and is water submersible for 30 minutes at a depth of 3 feet. It is also MIL-STD-810G compliant capable of handling drops, shock, and vibration, and will function flawlessly in a wide temperature range.

In addition to the FirstVu Pro, Digital Ally also added the FirstVu II to its family of next generation technology. The FirstVu II is a one-piece device offering industry leading technology such as an articulating camera head, a full-color display, an advanced image sensor, and GPS. It can be used in law enforcement, private and event security and commercial segments.

Digital Ally still carries the FirstVu HD, the two-piece body-worn camera which allows for multiple mounting options while minimizing space and weight. It can be used in law enforcement, private and event security

and commercial segments. This system is also a derivative of our in-car video systems, but is much smaller and lighter and more rugged and water-resistant to handle a hostile outdoor environment. These systemsThe FirstVu HD can be used in many applications in addition to law enforcement and private security and areis designed specifically to be clipped to an individual’s pocket or other outer clothing. The unit is self-contained and requires no external battery or storage devices. Current systems offered by competitors are digital based, but generally require a battery pack and/or storage device to be connected to the camera by wire or other means. We believe that our FirstVU HD product is more desirable for potential users than our competitors’ offerings because of its video quality, small size, shape and lightweight characteristics. Our FirstVU HD integrates with our in-car video systems through our patented VuLink system allowing for automatic activation of both systems.

With the newly introduced body-worn cameras, Digital Ally also introduced two new QuickVu docking stations compatible with the FirstVu PRO and FirstVu II body-worn cameras. The QuickVu docking stations provide a comprehensive and elegant solution for storing and charging body cameras while uploading video evidence to the cloud. QuickVu also allows for rapid reviewing of footage right from the interactive touchscreen display, and is available in eight or twenty-four individual docking bays. For docking with the FirstVu HD body-worn cameras, Digital Ally offers a 12-bay docking station and Mini-Docks. The 12-bay docking station includes a 1TB local memory hard drive which simultaneously upload 4 hours of video from 12 FirstVu HD cameras within a 15-minute shift change and push configuration updates. The Mini-Dock is a single unit, portable smart dock that uploads video evidence to VuVault from a FirstVu HD body camera.

Auto-activation and Interconnectivity between in-car video systemsBetween In-car Video Systems and FirstVU HD body worn camera productsBody-worn Camera Products – VuLink for law enforcement applicationsLaw Enforcement

Recognizing a critical limitation in law enforcement camera technology, we pioneered the development of our VuLink ecosystem that provides intuitive auto-activation functionality as well as coordination between multiple recording devices. The United States Patent and Trademark Office (the “USPTO”) has recognized these pioneering efforts by granting us multiple patents with claims covering numerous features, such as automatically activating an officer’s cameras when the light bar is activateda variety of triggers, including emergency lights and sirens, extreme acceleration or when a data-recording device such as a smart weapon is activated.braking, g-force or any 12-volt relay. Additionally, the awarded patent claims cover automatic coordination between multiple recording devices. Prior to this work,our VuLink ecosystem, officers were forcedhad to manually activate each device while responding to emergency scenarios, a requirement that both decreased the usefulness of the existing camera systems and diverted officers’ attention during critical moments. Our FirstVU HD integrates with our in-car video systems through our patented VuLink system allowing for automatic activation of both systems.

VuVault.netEVO Web and FleetVUFleetVu Manager

VuVault.netEVO Web is a cost-effective, fully expandable, law enforcement cloud storage solutionweb-based software, powered by and hosted on the AWS GovCloud platform, that enables police departments and security agencies to manage digital video evidence quickly and easily. EVO Web is capable of playing back, reviewing, downloading, archiving, unit configuration and management, running customizable reports and maintaining a chain of custody logs. AWS is the most secure cloud platform on the market with features that go beyond simply storing and reviewing video evidence. AWS GovCloud platform is trusted by the Department of Justice, Defense Digital Services for the US Air Force, U.S. Department of Treasury, and U.S. Department of Homeland Security. Our products that are compatible with EVO Web include: FirstVu Pro, FirstVu II, FirstVu HD, QuickVu, EVO-HD, DVM-800 and DVM-800 Lite.

FleetVu Manager is a web-based software that provides redundant and security-enhanced storage of all uploaded videos that complycommercial fleet managers with the United States Federal Bureau of Investigation’s Criminal Justice Information Services Division requirements.

FleetVUtools to increase driver safety, track assets in real-time and minimize their companies’ liability risks. FleetVu Manager is our web-based software forable to generate driver reports, identify at risk behaviors before an incident takes place, and enable commercial fleet trackingmanagers to manage the entire fleet through a single, easy to use platform. Our products compatible with FleetVu Manager include: DVM-250 and monitoringFLT-250.

Shield^TM Heath Protection Products

The Company’s Shield^TM brand offers a variety of products to help keep you safe, including; Shield Cleansers, ThermoVu, Shield Electrostatic Sprayer, Shied Disinfectant, and a variety of personal protection equipment including masks, gloves and sanitizer wipes.

Shield Cleansers is a full line of safe and effective hypochlorous acid (HOCl) based products - and is free of toxic bleach, ammonia, methanol, ethanol, and alcohol ingredients. Shield Disinfectant is EPA approved and has shown effectiveness against SARS-COV-2, the virus that featurescauses the novel COVID-19 disease. Other products in the Shield brand include animal wellness products, wound care, and manages video captured by our video event data recorders of incidents requiring attention, such as accidents. This software solution features our cloud-based web portal that utilizes many of the features of our VuVault.net law-enforcement cloud-based storage solution.household cleaning solutions.

ThermoVu and Shield Disinfectants

ThermoVu is a non-contact temperature-screening instrument that measures temperature through the wrist and controls entry to facilities when temperature measurements exceed pre-determined parameters. ThermoVu has optional features such as facial recognition to improve facility security by restricting access based on temperature and/or facial recognition reasons. ThermoVu provides an instant pass/fail audible tone with its temperature display and controls access to facilities based on such results.

Shield DisinfectantsElectrostatic Sprayer is a compact and Cleansers consists of a disinfectantlightweight disinfecting sprayer utilizing electrostatic induction. The charged particles repel each other and cleanser line, whichaffix to surfaces more evenly, eliminating large droplets for better disinfecting coverage. It is ideal for use against virusesin office buildings, schools, and bacteria, that is less harsh than many of the traditional products now widely distributed. Shield Disinfectants and Cleansers is offered in a variety of sizes and quantities.other populated areas.

The Company has also begunbeen distributing other personal protective equipment and supplies, since the second quarter of 2021, such as masks and gloves to supplement its Shield brand of products to health care workers as well as other consumers.consumers, consisting of vinyl and nitrile gloves, level 3 and N95 NIOSH certified face masks, and disposable wipes.

OtherOur Revenue Management Operating Segment Products and Services

DuringThrough our revenue cycle management segment, we provide assistance in providing working capital and back-office services to healthcare organizations throughout the last year,country. Our RCM operating segment services consist of insurance and benefit verification, medical treatment documentation and coding, and collections. Through our expertise and experience in this field, we focusedmaximize our researchcustomers’ service revenues collected, leading to substantial improvements in their operating margins and development effortscash flows. We generally receive a service fee based on a percentage of the service revenues collected by our customers.

Our Entertainment Operating Segment Products and Services

Through our entertainment segment, we provide customers with access to meet the varying needsonline live event ticketing marketplace through our online platform - TicketSmarter.com. Offering over 48 million tickets for sale for over 125,000 live events, TicketSmarter is a national ticket marketplace offering tickets for live events featuring sports, concerts and theatre. TicketSmarter is the official ticket resale partner of ourmore than 35 collegiate conferences, over 300 universities, and hundreds of events and venues.

Our entertainment operating segment primarily receives compensation for its services generally determined as a percentage of the face-value of the tickets being purchased. Our entertainment operating segment also provides customers enhance our existing products and commence development of new products and product categories. Our research and development efforts are intendedwith access to maintain and enhance our competitivenesstickets which it has purchased or received in return for its sponsorship or partnership from the market niche we have carved out, as well as positioning us to compete in diverse markets outside of law enforcement. In December 2019, we announced a partnership with Pivot International for design and manufacture of a new and innovative Breathalyzer Device utilizing our recently issued patent. With this new technology, when an officer is conducting a field sobriety test and the breathalyzer is activated, the digital video recording device will automatically start a recording, later embedding the meta-data captured onto the recorded video. The U.S. Patent No. 10,390,732 (the “‘732 Patent’”) was granted by the U.S. Patent Office in August 2019 and is an expansion of our patented VuLink automatic activation technology.venue, event or owner.

Market and Industry Overview – Video Solutions Operating Segment

Historically, ourOur video solutions segment has historically had a primary market has beenof domestic and international law enforcement agencies. In 2012, weWe have since expanded our scope by pursuing the commercial fleet vehicle and mass transit markets. Recently,Additionally, we have expanded into event security services wherebywhere we provide the hardware and software to supplement private security for NASCAR races, football and other sporting events, concerts and other events where people gather. In the future, given sufficient capital and market opportunity, we mayWe continue to further expand orour focus on private security, homeland security, mass transit, healthcare, general retail, educational, general consumer and other commercial markets. In that regard, we have several installations involving private security on cruise ships and similar markets. Our view isWe believe there are many potential private uses of our product offerings. We continue to have sales in the commercial fleet and the ambulance service provider market, confirming that our DVM-250 Plus product and FleetVUFLT-250 products and FleetVu Manager can become a significant revenue producer for us.

Law Enforcement

We believe that Additionally, our body-worn cameras have applications in law enforcement, already recognizes a valuable use of our various digital audio/video products foralong with private and event security, as well as commercial segments. With the recording of roadside sobriety tests. Without some form of video or audio recording, court proceedings usually consist ofrecent acquisitions we completed in 2021, we hope to utilize the police officer’s word against that of the suspect. Records show that conviction rates increase substantially where there is video evidenceconnections we now have to back up officer testimony. Video evidence also helps to protect police departments against frivolous lawsuits.live events, stadiums, and arenas, as well as new medical connections.

An important source of police video evidence today is in-car video. Some police cars still do not have in-car video, and in those that do, the camera usually points forward rather than to the side of the road where the sobriety test takes place. The in-car video is typically of little use for domestic violence investigations, burglary or theft investigations, disorderly conduct calls or physical assaults. In virtually all of these cases, the FirstVU HD may provide recorded evidence of the suspect’s actions and reactions to police intervention.

Additionally, motorcycle patrolmen rarely have video systems. Our FirstVU body camera is well suited as a mobile application of our digital video recording system that can be used by motorcycle police and water patrol.

Crime scene investigations, including detailed photography, are typically a large part of the budgets of metropolitan police forces. The FirstVU may record a significant portion of such evidence at a much lower cost for gathering, analyzing and storing data and evidence.

Commercial and Other Markets

There are numerous potential applications for our digital audio/video camera products. We believe that other potential markets for our digital video systems, including the derivatives currently being developed, include private investigators, SWAT team members, over-the-road trucking fleets, airport security, municipal fire departments, and the U.S. military. Other potential commercial markets for our digital video systems include sporting venues and arenas.

Schools

We believe our products and offerings may be of benefit in kindergarten through twelve grade school systems. We are assessing our entry into this potential market through several pilot tests. Preliminary results of our exploration of this market have been mixed, but we believe it may represent a new addressable market for our mobile audio/video recording products in the future. Recent tragic events at schools have heightened the need for providing a “safer” environment in general for schools. Additionally, we believe this market would heavily utilize our new ThermoVu and Shield lines as the economy continues to deal with the Covid-19 pandemic.

Market and Industry Overview – Revenue Cycle Management Operating Segment

Private Security Companies

There are thousandsOur revenue cycle management segment consists of private security agenciesend-to-end revenue cycle management services that focuses on claim reimbursement billing, verification, and related services to medical providers throughout the country. We offer agreements with customers in which we provide our services and bill the customers monthly for our services. The healthcare industry in the United States employingrepresents a large numberstrong portion of guards. Police forces use video systems for proof of correct conduct by officers, but private security services usually have no such tool. We believe that the FirstVU HD is an excellent management toolUnited States’ economy, offering a robust market for these companiesservices. Our current market includes many diverse specialties, including radiology, oncology, orthopedics, pediatrics, internal medicine, and cardiology. We continue to monitor conductinvestigate ways to expand our market reach, although can make no assurances in that regard.

Market and timing of security rounds. In additionIndustry Overview – Entertainment Operating Segment

Our entertainment segment refers to the FirstVU HD,sale of event tickets primarily through our online and mobile platforms. We will buy inventory of event ticket to then sell tickets through various platforms, including our own. Our resale services refer to the digital video security camera can provide fill-in security when guards have large areassale of tickets by a holder, who originally obtained the tickets directly from a venue or entity, through our platform in which we then collect services fees on the transaction. This is commonly referred to coveras secondary ticketing. We work directly with consumers looking to buy or in areas that do not have to be monitored around the clock.

Event Security

Recently, we have expanded intosell event security services whereby we provide the hardware and software to supplement private securitytickets for NASCAR races, footballparticular shows, concerts, games, and other sporting events, concertsallowing a simple and similar events where people gather. In this regard, we have obtained new customers including the Kansas City Chiefs, Met-Life Stadium, NASCAR and a number of other customers who have a need for event security for specific dates rather than 100% of the time. Additionally, we believe this market would heavily utilize our new ThermoVu and Shield lines as the economy continueseffective platform to deal with the Covid-19 pandemic. We believe that this area will be a productive source of future revenues.

Homeland Security Market

In addition to the government, U.S. corporations are spending heavily for protection against potential terrorist attacks. Public and private-sector outlays for antiterrorism measures and for protection against other forms of violence are significant. These are potential markets for our products.

Manufacturing

We have entered into contracts with manufacturers for the assembly of the printed circuit boards used in our products. Dedicated circuit board manufacturers are well-suited to the assembly of circuit boards with the complexity found in our products. Dedicated board manufacturers can spread the extensive capital equipment costs of circuit board assembly among multiple projects and customers. Such manufacturers also have the volume to enable the frequent upgrade to state-of-the-art equipment. We have identified multiple suppliers who meet our quality, cost, and performance criteria.move tickets. We also usecurrently partner with more than one source for circuit board assembly to ensure a reliable supply35 collegiate conferences, over time. We use contract manufacturers to manufacture our component subassemblies300 universities, and may eventually use them to perform final assemblyhundreds of events and testing. Due to the complexity of our products, we believe that it is important to maintain a core of knowledgeable production personnel for consistent quality and to limit the dissemination of sensitive intellectual property, and we expect to continue this practice. In addition, such technicians are valuable in our service and repair business to support our growing installed customer base.venues.

We also contract with two manufacturers that have manufacturing facilities in the Philippines and South Korea to produce our DVM-250 Plus, DVM-800 and DVM-800 HD products. The contracts are general in nature addressing confidentiality and other matters, have no minimum purchase requirements and require the acceptance of specific purchase orders to support any product supply acquisitions. We are using additional contract manufacturers based in the United States for these product lines to further mitigate any supply disruption risk and ensure competitive pricing. We typically perform final assembly, testing and quality control functions for these products in our Lenexa, Kansas facility.

Sales and Marketing

We have an employee-based, direct sales force for domestic selling efforts that enables us to control and monitor its daily activities and independent distributors for international sales. Our sales force is organized in seven territories. The direct territory sales team is supported by a team of five inside sales representatives, a tele-sales specialist and a pre-sales solution design team. We also have a bid specialist to coordinate large bid opportunities. We believe our employee-based model encourages our sales personnel in lower performing territories to improve their efforts and, consequently, their sales results. Our executive team also supports sales agents with significant customer opportunities by providing pricing strategies and customer presentation assistance. Our technical support personnel may also provide sales agents with customer presentations and product specifications in order to facilitate sales activities.

We use our direct sales force and international distributors to market our products. Our key promotional activities include:

Competition - Video Solutions Operating Segment

TheOur video solutions segment, consisting of law enforcement and security surveillance markets, areis extremely competitive. Competitive factors in these industries include ease of use, quality, portability, versatility, reliability, accuracy and cost. There are direct competitors with technology and products in the law enforcement and surveillance markets for all of our products, including those that are in development. Many of these competitors have significant advantages over us, including greater financial, technical, marketing and manufacturing resources, more extensive distribution channels, larger customer bases and faster response times to adapt new or emerging technologies and changes in customer requirements. Our primary competitors in the in-car video systems market include L-3 Mobile-Vision, Inc., Coban Technologies, Inc., Enforcement Video, LLC d/b/a WatchGuard Video (“WatchGuard”), Kustom Signals, Panasonic System Communications Company, International Police Technologies, Inc. and a number of other competitors who sell, or may in the future sell, in-car video systems to law enforcement agencies. Our primary competitors in the body-worn camera market include Axon Enterprises, Inc. (“Axon”), Reveal Media, WatchGuard, and VieVU, Inc., which was acquired by Axon in 2018. We face similar and intense competitive factors for our event recorders in the mass transitcommercial fleet and private security markets as we do in the law enforcement and security surveillance markets. We will also compete with any company making surveillance devices for commercial use. There can be no assurance that we will be able to compete successfully in these markets. Further, there can be no assurance that new and existing companies will not enter the law enforcement and security surveillance markets in the future.

The commercial fleet security and surveillance markets likewise are also very competitive. There are direct competitors for our FLT-250 and DVM-250 Plus “event recorders,” which may have greater financial, technical marketing, and manufacturing resources than we do. Our primary competitors in the commercial fleet sector include Lytx, Inc. (previously DriveCam, Inc.) and SmartDrive Systems.Systems, among others.

Competition – Revenue Cycle Management Operating Segment

Our revenue cycle management segment is a highly competitive market that is only intensifying as the market continues to grow. We face competition from a variety of sources, including internal revenue cycle management departments within healthcare organizations, as these organizations are beginning to make internal investments in these departments to keep these services in house. Additionally, other revenue cycle management providers exist and offer similar services through software vendors, traditional consultants, and information technology sources.

Competition – Entertainment Operating Segment

Our entertainment segment faces robust competition from several sources throughout the industry. As the online and mobile ticketing market continues to increase, it has allowed for more technology-based companies to offer ticketing services and systems. The online environment consists of numerous other websites and platforms for all markets. With the market continuing to grow, resale marketplaces and websites can reach a vastly larger audience with more convenient access to tickets for a wide variety of events. We continue to build our brand and recognition, through the numerous partnerships and sponsorships throughout the country, in attempt to become a preferred platform for consumers.

Worldwide Reinsurance Ltd.

In December 2021, the Company formed a wholly-owned subsidiary, Worldwide Reinsurance Ltd. (“Worldwide Re”), a Bermuda incorporated captive insurance company that 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.

Worldwide Re is subject to capital and other regulatory requirements imposed by the Bermuda Monetary Authority (“BMA”). Although these capital requirements are generally less constraining than U.S. capital requirements, failure to satisfy these requirements could result in regulatory actions from the BMA or loss of or modification of Worldwide Re’s Class 1 insurer license, which could adversely impact our ability to support our insurance needs and to grow this business into another line of business for our holding company. To date, our captive’s relatively immature claims history limits the predictive value of estimating the costs of incurred and future claims. Accordingly, the captive could continue to incur significant fluctuations in financial results as the captive provides insurance coverage to Digital Ally and its affiliated businesses and seeks to expand beyond our affiliated companies to offer coverage for third parties.

Intellectual Property – Video Solutions Operating Segment

Our video solutions operating segment’s ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States and abroad. We have filed for patent protection in the United States and certain other countries to cover certain design aspects of our products.

Some of our patent applications are still under review by the USPTO and, therefore, we have not yet been issued all the patents that we applied for in the United States. We were issued several patents in recent years, including a patent on our VuLink product that provides automatic triggering of our body-worn camera and our in-car video systems. No assurance can be given which, or any, of the patents relating to our existing technology will be issued from the United States or any foreign patent offices. Additionally, no assurance can be given that we will receive any patents in the future based on our continued development of our technology, or that our patent protection within and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.

We have entered into supply and distribution agreements with several companies that produce certain of our products, including our DVM-250 and DVM-800 products. These supply and distribution agreements contain certain confidentiality provisions that protect our proprietary technology, as well as that of the third-party manufacturers.

In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality and invention agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

Intellectual Property – Revenue Cycle Management Operating Segment

Our revenue cycle management’s operating segment’s ability to compete effectively primarily depends on our trade secrets and know-how and does not depend heavily on any proprietary technology or patents.

Intellectual Property – Entertainment Operating Segment

Our entertainment operating segment’s ability to compete effectively primarily depends on our trade secrets and know-how and does not depend heavily on any proprietary technology or patents.

Human Capital

As of December 31, 2020,2022, Digital Ally, and its subsidiaries, had approximately 201 full-time 86 employees spread throughout the country, representing the core values and objectives of the Company. These employees are spread amongst our operating segments as follows:

[1] Our revenue cycle management operating segment has no direct employees. Nobility Healthcare, our minority interest partner provides all human capital resources to manage and operate the Company’s revenue cycle management operating segment.

Our employees are our most important assets and they set the foundation for our ability to achieve our strategic objectives. All of our employees contribute to Digital Ally’s success and, in particular, the employees in our manufacturing, sales, research and development, and quality assurance departments are instrumental in driving operational execution and strong financial performance, advancing innovation and maintaining a strong quality and compliance program.

Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We strive to create a culture and work environment that enables us to attract, train, promote, and retain a diverse group of talented employees who together can help us gain a competitive advantage. Our key programs and initiatives that are focused to attract, develop and retain our diverse workforce include:

Not applicable.

None.

On May 13, 2020, the Company entered into an operating lease for new warehouse and office space which hashad served as its new principal executive office and primary business location, since June 15, 2020. Ourprior to the completed building purchase. The Company plans to relocate the entertainment operating segment operations to this existing leased facility in 2023. This facility contains approximately 16,531 square feet and is located at 15612 College Blvd, Lenexa, Kansas 66219. The lease terms, as amended, include no base rent for the first nine months and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 31, 2026.

On February 24,April 30, 2021, the Company entered into a contractclosed on the purchase and sale agreement to purchaseacquire a 71,361 square footfeet commercial office building located in Lenexa, Kansas which is intended to serve as the Company’s future office and warehouse needs.needs for executive offices and for management and warehouse operations for the video solutions operating segment. The building contains approximately 30,000 square footfeet of office space and the remainder warehouse space. The total purchase price iswas approximately $5.3 millionmillion. The Company funded the purchase price with cash on hand, without the addition of external debt or other financing.

On June 30, 2021, the Company completed the acquisition of a private medical billing company, through Nobility Healthcare, a majority owned subsidiary. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $2,648 to $2,774 and is expectedterminate in July 2024. The Company plans to close onrelocate the revenue cycle management operating segment acquired operations to existing owned or around Mayleased facilities upon termination of this operating lease.

On August 31, 2021, the Company completed the acquisition of another private medical billing company, through Nobility Healthcare. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $11,579 to $11,811 and terminate in March 2023. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing owned or leased facilities upon termination of this operating lease.

On September 1, 2021.2021, 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 the TicketSmarter office space. The lease terms included monthly payments ranging from $7,211 to $7,364 and expired in December 2022. The Company signed a six month extension through June 2023, and plans to relocate the entertainment operating segment operations at that time.

On January 1, 2022, the Company completed the acquisition of another private medical billing company, through Nobility Healthcare. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $4,233 to $4,626 and terminate in June 2025. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing owned or leased facilities upon termination of this operating lease.

The Company is subject to various legal proceedings arising from normal business operations. Although there can be no assurances, based on the information currently available, management believes that it is probable that the ultimate outcome of each of the actions will not have a material adverse effect on the consolidated financial statement of the Company. However, an adverse outcome in certain of the actions could have a material adverse effect on the financial results of the Company in the period in which it is recorded.

Axon

The Company owns U.S. Patent No. 9,253,452 (the “‘452 Patent’”), which generally covers the automatic activation and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating the light bar on the vehicle.

The Company filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against Axon, alleging willful patent infringement against Axon’s body camera product line and Signal auto-activation product. The Company is seeking both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.

In December 2016 and January 2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452 Patent. The USPTO rejected both of Axon’s petitions. Axon is now statutorily precluded from filing any more IPR petitions against the ‘452 Patent.

The District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR. However, on November 17, 2017, the Federal District Court of Kansas rejected Axon’s request to maintain the stay. With this significant ruling, the parties will now proceed towards trial. Since litigation has resumed, the Court has issued a claim construction order (also called a Markman Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope of the claims. Following the Markman Order, the Court set all remaining deadlines in the case. Fact discovery closed on October 8, 2018, and a Final Pretrial Conference took place on January 16, 2019. The parties filed motions for summary judgment on January 31, 2019.

On June 17, 2019, the Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s patent and dismissed the case. Importantly, the Court’s ruling did not find that Digital’s ‘452 Patent was invalid. It also did not address any other issue, such as whether Digital’s requested damages were appropriate, and it did not impact the Company’s ability to file additional lawsuits to hold other competitors accountable for patent infringement. This ruling solely related to an interpretation of the claims as they relate to Axon and was unrelated to the supplemental briefing Digital recently filed on its damages claim and the WatchGuard settlement. Those issues are separate and the judge’s ruling on summary judgment had nothing to do with Digital’s damages request.

The Company filed an opening appeal brief on August 26, 2019 with the U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”), appealing the U.S. District Court’s granting of Axon’s motion for summary judgment. Axon responded by filing a responsive brief on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019. The Court of Appeals scheduled oral arguments on our appeal of the U.S. District Court’s summary judgment ruling on April 6, 2020. This appeal was intended to address the Company’s position that the U.S. District Court incorrectly dismissed our claims against Axon. If the Court of Appeals overturns the ruling of the U.S. District Court, the case will be remanded to the U.S District Court before a new judge. On March 12, 2020, the panel of judges for the Court of Appeals issued an order cancelling the oral arguments previously set for April 6, 2020, having determined that the appeal will be decided solely based on the parties’ briefs. On April 22, 2020, a three-judge panel of the United States Court of Appeals denied our appeal and affirmed the District Court’s previous decision to grant Axon summary judgment. On May 22, 2020, we filed a petition for panel rehearing requesting that we be granted a rehearing of our appeal of the U.S. District Court’s summary judgment ruling. Furthermore, we filed a motion requesting that we be given an opportunity to make our case through oral argument in front of the three-judge panel of the Court of Appeals, which motion was denied on June 9, 2020. The Company had until November 7, 2020 to decide whether it would appeal the U.S. District Court’s and Court of Appeals’ decisions to the United States Supreme Court. The Company has abandoned its right to any further appeals.

WatchGuard

On May 27, 2016, the Company filed suit against WatchGuard, (Case No. 2:16-cv-02349-JTM-JPO) alleging patent infringement based on WatchGuard’s VISTA Wi-Fi and 4RE In-Car product lines.

On May 13, 2019, the parties resolved the dispute and executed a settlement agreement in the form of a Release and License Agreement. The litigation has been dismissed as a result of this settlement.

The Release and License Agreement encompasses the following key terms:

Upon receipt of the $6,000,000 the parties filed a joint motion to dismiss the lawsuit with the court, which was granted.

General

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.

While the ultimate resolution is unknown, 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.

Culp McCauley

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. We have not concluded that a material loss related to the allegations is probable, nor have we accrued a liability related to these claims. Although we believe a loss could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the potential damages given that the dispute is yet to enter the discovery process. We will continue to vigorously pursue these claims, and we continue to believe that we have valid grounds for recovery of the disputed deliverables. However, there can be no assurances as to the outcome of the dispute.

Not applicable.

PART II

Market Prices

Our common stock, par value $0.001 per share (“Common Stock”), commenced trading on the Nasdaq Capital Market on January 2, 2008 under the symbol “DGLY,” and continues to do so. From July 2007 until we became listed on the Nasdaq Capital Market, our Common Stock was traded on the OTC Bulletin Board and prior to that it was quoted in the “Pink Sheets.”

Holders of Common Stock

As of March 31, 2021,2023, we had approximately 158170 shareholders of record for our Common Stock.

Dividend Policy

To date, we have not declared or paid cash dividends on our shares of Common Stock. The holders of our Common Stock will be entitled to non-cumulative dividends on the shares of Common Stock, when and as declared by our board of directors (the “Board(“Board of Directors” or the “Board”), in its discretion. We intend to retain all future earnings, if any, for our business and do not anticipate paying cash dividends in the foreseeable future.

Any future determination to pay cash dividends will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and such other factors as our Board may deem relevant.

Securities Authorized for Issuance under Equity Compensation Plans

Our Board of Directors adopted the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”) on September 1, 2005. The 2005 Plan authorized us to reserve 312,500 shares of our Common Stock for issuance upon exercise of options and grant of restricted stock awards. The 2005 Plan terminated in 2015 with 19,678 shares of Common Stock reserved for awards that are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding as of December 31, 2020 total 7,563.

On January 17, 2006, our Board adopted the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”). The 2006 Plan authorizes us to reserve 187,500 shares of Common Stock for future grants under it. The 2006 Plan terminated in 2016 with 25,849 shares of Common Stock reserved for awards that are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding as of December 31, 2020 total 39,750.

On January 24, 2007, our Board adopted the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”). The 2007 Plan authorizes us to reserve 187,500 shares of Common Stock for future grants under it. The 2007 Plan terminated in 2017 with 89,651 shares of Common Stock reserved for awards that are now unavailable for issuance. Stock options granted under the 2007 Plan that remain unexercised and outstanding as of December 31, 2020 total 5,000.

On January 2, 2008, our Board adopted the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”). The 2008 Plan authorizes us to reserve 125,000 shares of Common Stock for future grants under it. The 2008 Plan terminated in 2018 with 9,249 shares of Common Stock reserved for awards that are now unavailable for issuance. Stock options granted under the 2008 Plan that remain unexercised and outstanding as of December 31, 2020 total 31,250.

On March 18, 2011, our Board adopted the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”). The 2011 Plan authorizes us to reserve 62,500 shares of Common Stock for future grants under it. At December 31, 2020, there were 726 shares of Common Stock reserved for awards available for issuance under the 2011 Plan. Stock options granted under the 2011 Plan that remain unexercised and outstanding as of December 31, 2020 total 9,750.

On March 22, 2013, our Board adopted the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”). The 2013 Plan was amended on March 28, 2014 and November 14, 2014 to increase the number of shares of Common Stock authorized and reserved for issuance under the 2013 Plan to a total of 300,000. At December 31, 2020, there were 100 shares of Common Stock reserved for awards available for issuance under the 2013 Plan. Stock options granted under the 2013 Plan that remain unexercised and outstanding as of December 31, 2020 total 20,000.

On March 27, 2015, our Board of Directors adopted the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”). The 2015 Plan was amended on February 25, 2016 and May 31, 2017 to increase the number of shares of Common Stock authorized and reserved for issuance under the 2015 Plan to a total of 1,250,000. At December 31, 2020, there were 3,686 shares of Common Stock reserved for awards available for issuance under the 2015 Plan, as amended. Stock options granted under the 2015 Plan that remain unexercised and outstanding as of December 31, 2020 total 130,000.

On April 12, 2018, our Board of Directors adopted the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”). The 2018 Plan was amended on May 21, 2019 to increase the number of shares of Common Stock authorized and reserved for issuance under the 2018 Plan to a total of 1,750,000. At December 31, 2020, there were 625,500 shares of Common Stock reserved for awards available for issuance under the 2018 Plan. Stock options granted under the 2018 Plan that remain unexercised and outstanding as of December 31, 2020 total 340,000.

On September 9, 2020, our board of directors adopted the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”). The 2020 Plan authorizes us to reserve 1,500,000 shares of Common Stock for future grants under it. At December 31, 2020, there were 408,341 shares of Common Stock reserved for awards available for issuance under the 2020 Plan. Stock options granted under the 2020 Plan that remain unexercised and outstanding as of December 31, 2020 total 255,000.

The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan, and 2020 Plan are collectively referred to as the “Plans.”

The Plans authorize us to grant (i) to the key employees incentive stock options (except for the 2007 Plan) to purchase shares of Common Stock and non-qualified stock options to purchase shares of Common Stock and restricted stock awards, and (ii) to non-employee directors and consultants’ non-qualified stock options and restricted stock. The Compensation Committee of our Board (the “Compensation Committee”) administers the Plans by making recommendations to the Board or determinations regarding the persons to whom options or restricted stock should be granted and the amount, terms, conditions and restrictions of the awards.

The Plans allow for the grant of incentive stock options (except for the 2007 Plan), non-qualified stock options and restricted stock awards. Incentive stock options granted under the Plans must have an exercise price at least equal to 100% of the fair market value of the Common Stock as of the date of grant. Incentive stock options granted to any person who owns, immediately after the grant, stock possessing more than 10% of the combined voting power of all classes of our stock, or of any parent or subsidiary corporation, must have an exercise price at least equal to 110% of the fair market value of the Common Stock on the date of grant. Non-statutory stock options may have exercise prices as determined by our Compensation Committee.

The Compensation Committee is also authorized to grant restricted stock awards under the Plans. A restricted stock award is a grant of shares of the Common Stock that is subject to restrictions on transferability, risk of forfeiture and other restrictions and that may be forfeited in the event of certain terminations of employment or service prior to the end of a restricted period specified by the Compensation Committee.

We have filed various registration statements on Form S-8 and amendments to previously filed Form S-8’s with the Securities and Exchange Commission (the “SEC”), which registered a total of 5,675,000 shares of Common Stock issued or to be issued upon exercise of the stock options underlying Plans.

The following table sets forth certain information regarding the Plans as of December 31, 2020:

Equity Compensation Plan Information

Recent Sales of Unregistered Securities

Except as previously reported by the Company on its Quarterly Reports on Form 10-Q or its Current Reports on Form 8-K, as applicable, we did not sell any securities during the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act.

Not applicable.

This Reportdiscussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal 2020years 2022 and 2019;2021; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to deliver our new product offerings as scheduled in 2020, such as the Shield™ disinfectant/sanitizers products2023, and ThermoVU™ temperature screening systems, whether such new products perform as planned or advertised and whether they will help increase our revenues; (7) whether we will be able to increase the sales, domestically and internationally, for our products in the future; (8) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (9) our ability to produce our products in a cost-effective manner; (10) competition from larger, more established companies with far greater economic and human resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities as customers; (13) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (14) characterization of our market by new products and rapid technological change; (15) our dependence on sales of our EVO-HD, DVM-800, FirstVU HD and DVM-250 products; (16) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (17)(16) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (18)(17) our dependence on key personnel; (19)(18) our reliance on third-party distributors and sales representatives for part of our marketing capability; (20)(19) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (21)(20) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (22)(21) our ability to generate more recurring cloud and service revenues; (23)(22) risks related to our license arrangements; (24)(23) our revenues and operating results may fluctuate unexpectedly from quarter to quarter; (25)(24) 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; (26)(25) the sale of substantial amounts of our Common Stock that may have a depressive effect on the market price of the outstanding shares of our Common Stock; (27)(26) the possible issuance of Common Stock subject to options and warrants that may dilute the interest of stockholders; (28)(27) our nonpayment of dividends and lack of plans to pay dividends in the future; (29)(28) future sale of a substantial number of shares of our Common Stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (30)(29) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our Common Stock; (31)(30) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (32) whether our patented VuLink technology is becoming the de-facto “standard” for agencies engaged in deploying state-of-the-art body-worn and in-car camera systems, which might impact our revenues; (33)(31) whether such technology will have a significant impact on our revenues in the long-term; (34)(32) whether we will be able to meet the standards for continued listing on the Nasdaq Capital Market; and (35)(33) indemnification of our officers and directors.

Current Trends and Recent Developments for the Company

Overview

WeVideo 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 uniquepositive solutions to our customers’ requests. Our products includeinclude: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video mirror systems for law enforcement;enforcement and commercial markets; the FirstVU body-worn camera line, consisting of the FirstVu Pro, FirstVu, and the FirstVU HD, which are body-worn cameras,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 aour commercial line of digital video mirrors that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVUFleetVu and VuLink, which are our cloud-based evidence management systems. We introduced the EVO-HD product in late June 2019further diversified and began full-scale deployments in the third quarter 2019. It is designed and built on a new and advanced technology platform that is expected to become the platform for a new family of in-car video solution products for the law enforcement and commercial markets. We believe that the launch of these new products will help to reinvigorate our in-car and body-worn systems revenues while diversifying and broadening the market forbroadened our product offerings as circumstances normalize in a post-COVID-19 economy, although we can offer no assurance in this regard. The Company has recently added2020, by introducing two new lines of branded products: (1) the ThermoVu™,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. The Company began offering its Shield™ disinfectants and cleansers to its law enforcement and commercial customers

Revenue Cycle Management Operating Segment - We entered the revenue cycle management business late in the second quarter of 2020.2021 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 in June 2021, when it acquired a private medical billing company, and have since completed three additional acquisitions of private medical billing companies, in which we will 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 maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins and cash flows.

Entertainment Operating Segment - We 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.

Segment Overview

Our reportable segments are: 1) video solutions, 2) revenue cycle management, and 3) entertainment.

Video Solutions Operating Segment

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 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.

To judge the health of our video solutions segment, we review the current active subscriptions and deferred service revenues, along with the quantity and gross margins generated by our video solutions hardware sales.

Revenue Cycle Management Operating Segment

Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform our obligations of our revenue cycle management services. Our revenue cycle management segment is services performed and such services are charged monthly, generally based on a contractual percentage of total customer collections, for which we recognize our net service fees.

To judge the health of our revenue cycle management segment, we review the collection success rate and collection timing. In addition, we review the associated costs incurred to assist our customers, and any changes in operating margins and cash flows.

Entertainment Operating Segment

Our entertainment operating segment consists of ticketing 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. Ticketing direct expenses include the cost of tickets purchased for resale by the Company and holds as inventory, credit card fees, ticketing platform expenses, website maintenance fees, along with other administrative costs.

To judge the health of our entertainment operating segment, we review the gross transaction value, which represents the total value related to a ticket sale and includes the face value of the ticket as well as the service charge. In addition, we review the number of visits to our websites, cost of customer acquisition, the purchase conversion rate, the overall number of customers in our database, and the number and percentage of tickets sold via the website and mobile app.

Summary Financial Data

Summarized financial information for the Company’s reportable business segments is provided for the years ended December 31, 2022, and 2021:

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 all quarters during 20202022 and 2019 except for third quarter 2020 which was aided by the launch of our ThermoVU™ and the Shield™ line, and second quarter 2019 which was aided by a patent litigation settlement.2021. The following is a summary of our recent operating results on a quarterly basis:

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™ThermoVu™ and the Shield™ line;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 (5)(6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; and (6) most recently,(7) the impactcompletion of COVID-19 oncorporate acquisitions including the economyrecent purchases in the revenue cycle management and our business.entertainment operating segments. We reported an operatingnet loss of $321,318$9,574,258 on revenues of $2,798,291$8,879,504 for the fourth quarter 2020. The income recognized in the third quarter 2020 and second quarter 2019 ended a series of quarterly losses resulting from competitive pressures, supply chain problems, increases in inventory reserves as our current product suite ages, product quality control issues, product warranty issues, and litigation expenses relating to patent infringement claims.2022.

The factors and trends affecting our recent performance include:

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.

We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 11,15, “Commitments and Contingencies,” to our 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.

For the Years Ended December 31, 20202022 and 20192021

Results of Operations

Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31, 20202022 and 2019,2021, represented as a percentage of total revenues for each respective year:

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 ThermoVu^TM 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.

RevenuesService 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 current product offerings include the following:The following table presents revenues by type and segment:

We sellOur video operating segment sells our products and services to law enforcement and commercial customers in the following manner:

Our revenue cycle management operating segment sells its services to customers in the following manner:

Our entertainment operating segment sells our products and services to customers in the following manner:

We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.

The COVID-19 pandemic had an impact on our 2020 revenues and a negative impact generally on our legacy products and, in particular, our commercial event recorder hardware (DVM-250 Plus) and in-car hardware for law enforcement (DVM-800) during the quarter. The COVID-19 pandemic had a positive impact generally on our new Shield^TM disinfectant/sanitizer and ThermoVU^TM product lines.

Revenues for the years ended December 31, 2020 and 2019 were derived from the following sources:

Product revenues for the years ended December 31, 20202022 and 20192021 were $8,029,457$10,999,892 and $7,732,796,$9,180,287, respectively, an increase of $296,661 (3%$1,819,605 (20%), due to the following factors:

Service and other revenues for the years ended December 31, 20202022 and 20192021 were $2,485,411$26,010,003 and $2,708,568,$12,233,147, respectively, a decreasean increase of $223,157 (8%$13,776,856 (113%), due to the following factors:

Total revenues for the years ended December 31, 20202022, and 20192021 were $10,514,868$37,009,895 and $10,441,364,$21,413,434, respectively, an increase of $73,504 (1%$15,596,461 (73%), due to the reasons noted above.

Cost of Product Revenue

CostOverall cost of product revenue on units sold for the years ended December 31, 20202022, and 20192021 was $5,739,572$14,372,115 and $6,577,347,$8,635,047, respectively, a decreasean increase of $837,775 (13%$5,737,068 (66%). CostOverall cost of goods sold for products as a percentage of product revenues for the years ended December 31, 20202022, and 20192021 were 71%131% and 85%94%, respectively. This improvementCost of products sold by operating segment is as follows:

The increase in cost of goods sold for our video solutions segment products is due to numerous factors including a sizeable increase in the allowance for excess and obsolete inventory, mostly surrounding the personal protective equipment product line. Cost of product sold as a percentage of product revenues is due to the Company moving to new and smaller warehouse facilities during June 2020, resulting in manufacturing efficiencies during the year ended December 31, 2020. Additionally, the improvement in cost as a percentage of revenues is attributable to the new product lines, including ThermoVU™ and Shield™, which the Company introduced in 2020 and have higher margins than our legacy products.

Cost of service and other revenue for the years ended December 31, 2020 and 2019 was $712,702 and $631,388, respectively, an increase of $81,314 (13%). The increase in service and other cost of goods sold is primarily duevideo solutions segment increased to an increase in the cost of service and other revenues sold as a percentage of service and other revenues to 29%154% for the year ended December 31, 20202022 as compared to 23%97% for the year ended December 31, 2019 offset by the 13% decrease in service and other revenues for the 2020 period compared to the 2019 period. 2021.

The increase in theentertainment operating segment cost of service and other revenuesproduct sold as a percentage of service and other revenues is attributable to inefficiencies and additional expenses related to service technicians performing installation and other software related services due to the effectsSeptember 1, 2021 acquisition of the COVID-19 pandemic.

TotalTicketSmarter, resulting in a full twelve months of cost of sales as a percentage ofproduct revenues decreased to 61% for the year ended December 31, 2020 from 69%2022, and an increase to cost of product revenue of $3,601,645 for the year ended December 31, 2019. We believe our gross margins will continue2022 compared to improve$2,437,986 for the year ended December 31, 2021. Cost of product sold as we continuea percentage of product revenues for the entertainment segment increased to improve revenue levels, continue108% for the year ended December 31, 2022 as compared to reduce product warranty issues and add higher margin revenues from cloud-based and other services.87% for the year ended December 31, 2021.

We recorded $1,960,351$5,489,541 and $4,144,013$3,353,458 in reserves for obsolete and excess inventories atfor the years ended December 31, 20202022 and 2019,2021, respectively. Total raw materials and component parts were $3,186,426$4,509,165 and $4,481,611 at$3,062,046 for the years ended December 31, 20202022 and 2019,2021, respectively, an increase of $1,447,119 (47%). Finished goods balances were $7,816,618 and $10,512,579 for the years ended December 31, 2022 and December 31, 2021, respectively, a decrease of $1,295,185 (29%). We scrapped older version inventory component parts that were mostly or fully reserved during the year ended December 31, 2020 which was the primary cause for the decrease. Finished goods balances were $6,974,291 and $4,906,956 at December 31, 2020 and December 31, 2019, respectively, an increase of $2,067,335 (42%$2,695,961 (26%) which was attributable to accumulatinga reduction in inventory for the new Shieldvideo solutions product lines and ThermoVu product lines.a large decrease in ticket inventory for the newly acquired entertainment segment. The decreaseincrease in the inventory reserve is primarily due to the scrapping of older version legacy products that were mostly or fully reserved during the year 2020 as a result of moving our warehouse and office location. The remaining reserve for inventory obsolescence is generally provided for the level of excess component parts of the older versions of our PCBprinted circuit boards and the phase out of our DVM-750, DVM-500 Plus, DVM-500 and LaserAlly legacy products.products, ThermoVu products, and personal protective equipment. 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 atas of December 31, 2020.2022.

Cost of Service Revenue

Overall cost of service revenue sold for the years ended December 31, 2022, and 2021 was $20,315,839 and $7,114,612, respectively, an increase of $13,201,227 (186%). Overall cost of goods sold for services as a percentage of service revenues for the years ended December 31, 2022, and 2021 were 78% and 58%, respectively. Cost of service revenues by operating segment is as follows:

Gross Profit

Gross

Overall gross profit for the years ended December 31, 20202022 and 20192021 was $4,062,594$2,321,941 and $3,232,629,$5,663,775, respectively, an increasea decrease of $829,965 (26%$3,341,833 (59%). Gross profit by operating segment was as follows:

The increaseoverall decrease is attributable to the 1% overall increase in revenuescost of goods sold across our video and entertainment segments for the year ended December 31, 2020 coupled with2022, as there was an improvementoverall increase in the overall cost of sales as a percentage of overall revenues to 61%94% for the year ended December 31, 20202022 from 69%74% for the year ended December 31, 2019.2021. Our goal is to improve our margins to 60% over the longer term based on the expected margins ofgenerated 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 HD, ThermoVu^TM,FirstVu Pro, FirstVu II, Shield^TM disinfectants and our cloud evidence storage and management offering, ifprovided that they gain traction in the marketplace and subject to a normalizing economy in the wake of the COVID-19 pandemic.marketplace. In addition, if revenues from these productsthe video solutions segment increase, we will seek to further improve our margins from themthis segment through economies of scaleexpansion and more efficientlyincreased 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,

Overall selling, general and administrative expenses were $11,726,245$32,055,199 and $9,265,410$20,424,685 for the years ended December 31, 20202022 and 2019,2021, respectively, an increase of $2,460,835 (27%$11,630,514 (57%). The increase was primarily attributable to a patent litigation settlementthe recent acquisitions completed in the first quarter of $6.0 million we received during 2019 that did not recur in 2020. Exclusive2022 and third quarter of the 2019 patent litigation settlement; our2021. Our selling, general and administrative expenses as a percentage of sales decreased to 112%87% for 20202022 compared to 146%95% in the same period in 2019. 2021.

The significant components of selling, general and administrative expenses are as follows:

The significant components of selling,Selling, general and administrative expenses by operating segment are as follows:

Research and development expense. We continueOur video solutions operating segment continues to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $1,842,800$2,290,293 and $2,005,717$1,930,784 for the years ended December 31, 20202022 and 2019,2021, respectively, a decreasean increase of $162,917 (9%$359,509 (19%). We employed 1521 engineers at December 31, 20202022 compared to 1617 engineers at December 31, 2019,2021, most of whom are dedicated to research and development activities for new products and primarily the ThermoVu^TM, Shield^TM,FirstVu Pro, FirstVu II, QuickVu docking stations, EVO-HD and non-mirror based DVM-250 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 EVO-HD product platform and we continue to outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and will continue to invest in this area on a prudent basis and consistent with our financial resources.

Selling, advertising and promotional expenses. Selling, advertising and promotional expenseexpenses totaled $2,607,242$9,312,204 and $3,652,434$5,717,824 for the years ended December 31, 20202022 and 2019,2021, respectively, a decreasean increase of $1,045,192 (40%$3,594,380 (63%). Salesman salaries and commissions for our video solutions segment represent the primary components of these costs and were $1,616,267$1,643,563 and $2,632,729$1,605,034 for the years ended December 31, 20202022 and 2019,2021, respectively, a decreaseslight increase of $1,016,432 (63%$38,529 (2%). The effective commission rate was 15.4%4% for the year ended December 31, 20202022 compared to 25.2%8% for the year ended December 31, 2019.2021. We reducedincreased the number of salesmen in our law enforcement and commercial channels in early 2020 and decreased travel expenses in 20202022 compared to 2019,2021, thus leading to an increase in sales commissions paid during the year ended December 31, 2022. Further, our recent acquisitions require minimal salespeople, due to the impact of Covid-19 restrictions. In addition, we are utilizing third-party distributors as a major component of our new Shieldtheir specific service offerings and ThermoVU sales channel.platforms.

Promotional and advertising expenses totaled $990,975$7,668,641 during the year ended December 31, 20202022 compared to $1,533,679$4,112,790 during the year ended December 31, 2019, a decrease2021, an increase of $542,704 (35%$3,555,851 (86%). The overall decreaseincrease is primarily attributable to our 2019 sponsorship of2022 sponsorships within NASCAR and the ultimate suspensionIndyCar, along with TicketSmarter’s very active approach to sponsorship and advertising, as they are continuing to build a brand and gaining recognition. TicketSmarter accounted for $4,024,748 of the 2020 NASCAR season during 2020, a reduction in attendance at trade shows as a result of the COVID-19 pandemic, altered by our sponsorship of several events to promote our new Shieldtotal promotional and ThermoVU product lines including the Indianapolis 500 race that occurred in August 2020.

Stock-based compensation expense. Stock based compensationadvertising expense totaled $1,462,270 and $2,112,090 for the years ended December 31, 2020 and 2019, respectively, a decrease of $649,820 (31%). The decrease is primarily due to the decreased amortization during the year ended December 31, 2020 related to the restricted stock granted during 2020 and 2019 to our officers, directors, and other employees. We relied more on stock-based compensation in 2019 as we attempted to reduce cash expenses; however, in 2020 we attempted to reduce all expenses due to the impact of COVID-19.2022.

Professional fees and expense. Professional fees and expenses totaled $990,256$3,297,895 and $1,533,679$1,513,862 for the years ended December 31, 20202022 and 2019,2021, respectively, a decreasean increase of $543,423 (35%$1,784,033 (118%). The decreaseincrease in professional fees is primarily attributable to increased legal and other fees in connection with strategic transactions and acquisitions during the year ended December 31, 2022 paired with other current due diligence items and opportunities the Company is exploring. Additionally, board fees, audit fees, and expenses relatedservice fees that also attribute to the termination of the Axon lawsuit and the resolution of the WatchGuard and PGA lawsuits. We resolved the PGA lawsuit on April 17, 2019 and the associated cost was accrued as of December 31, 2019 and the WatchGuard lawsuit was settled on May 13, 2019. On June 17, 2019, the U.S. District Court granted Axon’s Motion for Summary Judgment and accepted Axon’s position that it did not infringe on the ‘452 Patent and dismissed the lawsuit in its entirety. We appealed the U.S. District Court’s ruling and on April 22, 2020, a three-judge panel of the United States Court of Appeals for the Tenth Circuit denied our appeal and affirmed the U.S. District Court’s previous decision to grant Axon summary judgment. The Company filed a motion requesting a rehearing in front of the Court of Appeals which motion was also denied on June 9, 2020.this increase.

The Company had until November 7, 2020 to decide whether it would appeal the U.S. District Court’s and Court of Appeals’ decisions to the United States Supreme Court. Our spending on legal fees on the Axon case has slowed during 2020 as we waited for the appeal to be heard. The Company has decided not to appeal the decisions to the United States Supreme Court and to abandon the lawsuit against Axon which reduced the amount of legal expenses for 2020 as compared to 2019.

Executive, sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled $2,449,690$6,544,711 and $3,083,021$3,288,360 for the years ended December 31, 20202022 and 2019,2021, respectively, a decreasean increase of $633,331 (21%$3,256,351 (99%). The primary reason for the decreaseincrease in executive, sales and administrative staff payroll was a reduction in our technical support staffing in response to the COVID-19 pandemic and the Company expects such reductions to continue to reduce related staff expenses during the balance of 2020. The COVID-19 pandemic has significantly impacted the Company’s new event security business channel in 2020 as many sporting venues were closed including those served by these service technicians. In addition, several membersrecent formation of the Company’srevenue cycle management accepted reductions inand entertainment operating segments and their cash compensation in 2020 to help the Company’s liquidity position in lightacquisitions of the COVID-19 pandemic.medical billing companies and TicketSmarter which occurred in late 2021 and early 2022. These recent acquisitions resulted in additional payroll expenses with expanded executive positions, sales, and administrative staff numbers compared to 2021.

Other. Other selling, general and administrative expenses totaled $2,373,987$10,610,096 and $2,878,469$7,973,855 for the years ended December 31, 20202022 and 2019,2021, respectively, a decreasean increase of $504,482 (17%$2,636,241 (33%). The decreaseincrease in other expenses in 2020the year ended December 31, 2022 compared to 2019the same period in 2021 is primarily attributable to lower contract employeethe increased expenses related to the two new operating segments and their acquisitions, and associated operating expenses, completed during the year ended December 31, 2022, that were not relevant to the year ended December 31, 2021. Additionally, this increase is also attributable to an increase in travel costs resulting fromand increased insurance costs, primarily in general liability and related coverages which premiums have been increased throughout the COVID-19 pandemic offset by increases in the Company’s insurance costs.marketplace.

Operating Loss

For the reasons previously stated, our operating loss was $7,663,651$29,733,258 and $6,032,781$14,760,910 for the years ended December 31, 20202022 and 2019,2021, respectively, aan increase of $1,630,870 (27%$14,972,348 (101%). Operating loss as a percentage of revenues decreasedworsened to 73%80% in 20202022 from 58%69% in 2019.2021.

Interest and Other Income

Interest income increaseddecreased to $47,893$131,025 for the year ended December 31, 20202022, from $37,410$310,200 in 2019,2021, which reflectedreflects our overall higherdecline in our cash and cash equivalent levels in 20202022 compared to 2019.2021. The Company raised significant amountscompany has completed five acquisitions and numerous other capital expenditures since the beginning of 2021, leading to the decrease in cash through the closing of several underwritten public offerings and the exercise of outstanding common stock purchase warrants during 2020, which generated additionalbalances: thus, leading to a decrease in interest income for the period.

Interest Expense

We incurred interest expenses of $37,196 and $28,600 during the years ended December 31, 2022 and 2021, respectively. The increase is attributable to the contingent earn-out notes associated with the four Nobility Healthcare acquisitions, currently at a total balance of $777,840 for the four notes, with interest rates of 3.00% per annum.

Change in 2020 whenFair Value of Short-Term Investments

We recognized a loss on change in fair value of short-term investments totaling $84,818 and $101,645 during the years ended December 31, 2022 and 2021, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. The decrease reflects our overall lower cash and cash equivalent levels in 2022 compared to 2019.2021.

Change in Fair Value of Warrant Derivative Liabilities

During 2021, the Company issued detachable warrants to purchase a total of 2,127,500 shares of Common Stock in association with the two registered direct offerings 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 during year ended December 31, 2022 totaled $6,726,638, compared to $36,664,907 for the year ended December 31, 2021, which was recognized as a gain on the Consolidated Statements of Operations.

Interest Expense

We incurred interest expense of $342,379 and $43,373 during the years ended December 31, 2020 and 2019, respectively. The increase was attributable to higher interest-bearing debt balances outstanding in 2020 as compared to 2019. We had secured convertible notes outstanding in 2020 represented by the $1.667 million principal amount of notes issued on April 17, 2020 and by the $2.778 million principal amount of notes issued on August 5, 2019, both of which bore interest at 8% per annum, and both of which were paid off during 2020. In addition, we issued an aggregate of $300,000 principal amount of an unsecured promissory note on December 23, 2019 bearing interest at 8% per annum on the outstanding principal balance which was paid off during 2020.

On May 12, 2020 the Company received $150,000 in additional loan funding under the Economic Injury Disaster Loans (“EIDL”) program administered by the Small Business Administration (“SBA”). Under the terms of the EIDL promissory note, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of the EIDL promissory note is thirty years and monthly principal and interest payments are deferred for twelve months after the date of disbursement and total $731.00 per month thereafter.

Change in Fair Value of Secured ConvertibleContingent Consideration Promissory Notes and Earn-Out Agreements

We elected to account for

During the secured convertible notesyear ended December 31, 2021, the Company issued a contingent consideration earn-out agreement in connection with the Stock Purchase Agreement between TicketSmarter, Inc., Goody Tickets, LLC and TicketSmarter of $3,700,000. Management determined that the actual Measurement Period EBITDA generated by TicketSmarter was less than 70% of the Projected EBITDA threshold provided in such an agreement. Therefore, no TicketSmarter earn-out payments were issued on April 17, 2020 on their fair value basis.due under such agreement. Therefore, we determined the fair value of the secured convertible notes ascontingent consideration earn-out agreement was reduced to zero, and the resulting gain of their issuance date of April 17, 2020 and through June 12, 2020, when they were paid$3,700,000 was reported in full. The change in fair value from their issuance date of April 17, 2020 to their pay-off date was $887,807, which was recognized as a charge in theour Consolidated StatementStatements of Operations for the year ended December 31, 2020.2021. There was no gain recorded for the year ended December 31, 2022.

We elected to account forOn June 30, 2021, Nobility Healthcare, a subsidiary of the secured convertible notes that wereCompany, issued a contingent consideration promissory note (the “June Contingent Note”) in August 2019connection with a stock purchase agreement between Nobility Healthcare and a private company (the “June Seller”) of $350,000. Principal payments, since its inception, on its fair value basis. Therefore, we determined thethis contingent consideration promissory note totaled $113,617. The estimated fair value of the secured convertible notesnote at December 31, 2022 is $176,456, representing a decrease in its estimated fair value of $27,139 as compared to its estimated fair value as of their issuance date on December 31, 2019 until they were paid in full March 3, 2020. The change in fair value from December 31, 2019 to their pay-off date was $412,445, which was recognized as2021. Therefore, the Company recorded a chargegain of $27,139 and $32,789 in the Consolidated StatementStatements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.

On August 31, 2021, Nobility Healthcare, issued another contingent consideration promissory note (the “August Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “August Sellers”) of $650,000. Principal payments, since its inception, on this contingent consideration promissory note totaled $292,953. The estimated fair value of the August Contingent Note at December 31, 2020. The change2022 is $388,954, representing an increase in its estimated fair value fromof $31,907 as compared to is estimated fair value as of December 31, 2021. Therefore, the issuance dateCompany recorded a loss of August 5, 2019$31,907 and $-0- in the Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2019 was $519,821, which was recognized2021, respectively.

On January 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “January Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “January Sellers”) of $750,000. Principal payments, since its inception, on this contingent consideration promissory note totaled $120,833. The estimated fair value of the January Contingent Note at December 31, 2022 is $208,083, representing a decrease in its estimated fair value of $421,085 as compared to its estimated fair value as of the inception date. Therefore, the Company recorded a chargegain of $421,085 and $-0- in the Consolidated StatementStatements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.

On February 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “February Contingent Payment Note”) in connection with an asset purchase agreement between Nobility Healthcare and a private company (the “February Sellers”) of $105,000. The estimated fair value of the February Contingent Note at December 31, 20192022 is $4,346, representing a decrease in its estimated fair value of $100,654 as compared to its estimated fair value as of the inception date. Therefore, the Company recorded a gain of $100,654 and $-0- in the Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.

Change in Fair ValueGain on Extinguishment of Proceeds Investment AgreementDebt

We recordedrecognized a gain (loss) representing the change in fair valueon extinguishment of proceeds investment agreement of $5,250,000debt totaling $-0- and $(3,358,000)$10,000 during the years ended December 31, 20202022 and 2019, respectively.

We elected to account for the PIA that was entered into in July 2018 on its fair value basis. Therefore, we determined the fair value of the 2018 PIA as of December 31, 2020, and 2019 to be $0 and $6,500,000,2021, respectively. During the year ended December 31, 2019, we settled our patent infringement litigation with WatchGuard and2021 the Company was notified that its $10,000 EIDL advance received a lump sum payment of $6.0 million as further described in Note 12, “Commitments and Contingencies,” to our consolidated financial statements. In accordance with the terms of the PIA, we remitted the $6.0 million as a principal payment toward our minimum return payment obligations under the PIA. The change in fair value from December 31, 2019 to December 31, 2020Payroll Protection Program (the “PPP”) Loan was $5,250,000, which was recognized as a loss in the Consolidated Statement of Operations at December 31, 2020.

On July 20, 2020, the Company and BKI executed the Termination Agreement. Under the terms of the Termination Agreement, the parties agreed to terminate the PIA and to release each other from any further liability under the PIA obligation.

Under the terms of the Termination Agreement, upon payment of $1,250,000 by the Company to BKI, both parties agreed to terminate the PIA and to release each other from any further liability thereunder. Such $1,250,000 payment was made on July 22, 2020. In addition to the $1,250,000 payment, the Company further agreed to pay BKI the following: (a) a contingent payment in the amount of $2,750,000 following the closing of an asset purchase, membership interest purchase, or similar transaction between the Company and a specified third-party (the “Purchase Transaction”) and (b) any and all future proceeds received from Watchguard and its successors and assigns by the Company for WatchGuard’s use of the ‘292 Patent and the ‘452 Patent. For clarity, the Company and BKI further agreed that the payment of the contingent payment would only be due and payable upon the closing of the specified Purchase Transaction and the relevant contingent payment portion of the Termination Agreement, and any obligations stemming therefrom, would automatically terminate if the specified Purchase Transaction is abandoned prior to its closing, including its failure to close within three years from the date of the Termination Agreement.

The parties abandoned the Purchase Transaction during the year ended December 31, 2020 and, therefore, the contingent payment obligation automatically terminated as the specified Purchase Transaction was abandoned prior to its closing. Furthermore, the Company does not anticipate any future recoveries from Watchguard and its successors and assigns relative to WatchGuard’s use of the ‘292 Patent or ‘452 Patent. As a result, the PIA obligation was extinguished upon the payment of the $1,250,000 required under the Termination Agreement.

Secured Convertible Debentures Issuance Expenses

We elected to account for and record our $1.667 million principal amount of secured convertible notes on April 17, 2020 on a fair value basis. Accordingly, we were required to expense the related issuance costs to other expense in the consolidated statements of operations. Such costs totaled $34,906 for the year ended December 31, 2020 and primarily included related legal and accounting fees.

We elected to account for and record our $2.778 million principal amount of secured convertible notes on August 5, 2019 on a fair value basis. Accordingly, we were required to expense the related issuance costs to other expense in the consolidated statements of operations. Such costs totaled $89,148 for the year ended December 31, 2019 and primarily included related legal and accounting fees.

Gain on Extinguishment of Debt

As discussed in Note 7,“Debt Obligations,” on May 4, 2020 the Company received a $1,418,900 promissory note under the SBA’s PPP Loan through the CARES Act. On December 10, 2020, we were informed that the Company’s SBA Loan had beenfully forgiven, less the EIDL Advance received, thus the remaining balance has been released resulting in a gain on extinguishment of debt.

In accordance with ASC Topic No. 470, “Debt – Modifications and Extinguishments” (Topic 470), the transaction noted above was determined to be an extinguishment of the existing debt. As a result, we recorded a gain on the extinguishment of debt in the amount of $1,417,413, which is included in “Gain on Extinguishment of Debt” in our Consolidated Statements of Operations.Operations for the year ended December 31, 2021, and further resulting in $-0- for the year ended December 31, 2022.

Income Gain on Extinguishment of Warrant Derivative Liabilities

We recognized a gain on the extinguishment of warrant derivative liabilities of $3,624,794 and $-0- during the year ended December 31, 2022 and December 31, 2021, respectively. This is in connection with the Warrant Exchange Agreements executed by the Company on August 23, 2022.

Income/(Loss) before Income Tax Benefit

As a result of the above, we reported a lossnet income/(loss) before income tax benefit of $2,625,881($18,873,758) and $10,005,713$25,530,961 for the years ended December 31, 20202022 and 2019,2021, respectively, an improvementa decline of $7,379,832 (74%$44,404,719 (174%).

Income Tax Benefit

We recorded an income tax benefit of $-0- for the years ended December 31, 20202022 and 2019,2021, respectively. The effective tax rate for both 20202022 and 20192021 varied from the expected statutory rate due to our continuing to provide a 100% valuation allowance on net deferred tax assets. We determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 20202022 and 20192021 primarily because of the recurring operating losses.

We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of December 31, 2020.2022. During 2020,2022, we increaseddecreased our valuation reserve on deferred tax assets by $405,000$17,220,000 whereby our deferred tax assets continue to be fully reserved due to our recent operating losses.

We had approximately $76,070,000$113,315,000 of federal net operating loss carryforwards and $1,795,000 of research and development tax credit carryforwards as of December 31, 20202022 available to offset future net taxable income.

Net Income/(Loss)

As a result of the above, we reported a net income/(loss) of ($18,873,758) and $25,530,961 for the years ended December 31, 2022 and 2021, respectively, a decline of $44,404,719 (174%).

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/loss of Nobility Healthcare which is reflected in the statement of income (loss) as “net income (loss) attributable to noncontrolling interests of consolidated subsidiary”. We reported net income (loss) attributable to noncontrolling interests of consolidated subsidiary of $407,933 and $56,453 for the years ended December 31, 2022 and 2021, respectively.

Loss on Redemption – Series A & B Convertible Redeemable Preferred Stock

During the year ended December 31, 2022, the Company redeemed 1,400,000 shares of Series A & 100,000 shares of Series B Preferred Stock, for a redemption price of $15,750,000, with a $13,365,000 carrying amount, resulting in a $2,385,000 loss on redemption.

Net LossIncome/(Loss) Attributable to Common Stockholders

As a result of the above, we reported a net lossesincome/(loss) of $2,625,881($21,666,691) and $10,005,713$25,474,508 for the years ended December 31, 20202022 and 2019,2021, respectively, an improvementa decline of $7,379,832 (74%$47,141,199 (185%).

Basic and Diluted LossIncome/(Loss) per Share

The basic and diluted lossincome/(loss) per share was $0.12($8.50) and $0.87$10.14 for the years ended December 31, 20202022 and 2019,2021, respectively, for the reasons previously noted. All outstanding stock options and common stock purchase warrants were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the years ended December 31, 20202022 and 20192021 because all potentially dilutive securities during 2022 had exercise prices in excess of the market value of the company’s common stock and because of the net loss reported for each period.2022.

Liquidity and Capital Resources

Overall:

Management’s Liquidity Plan - The Company has historically raised capital in the form of equityWe have experienced net losses and debt instrumentscash outflows from private and public sourcesoperating activities since inception. Based upon our current operating forecast, we anticipate that we will need to supplement its needs for funds to support its business operational and strategic plans. In addition, during 2019, the Company settled one of its patent infringement cases and received a lump sum payment of $6.0 million, which it used to pay its obligations under the PIA agreement, and on July 20, 2020, the Company and BKI executed a Termination Agreement which terminated the PIA and released the parties from any further liability under the PIA obligation upon payment of $1,250,000 by the Company to BKI. Such $1,250,000 payment was made on July 22, 2020 and the PIA obligation was extinguished, as more fully described in Note 7, “Debt Obligations”. In recent years the Company has accessed the public and private capital markets to raise funding through the issuance of debt and equity. In that regard, the Company raised $12.8 million in underwritten public offerings of Common Stock, $5.2 million through the exercise of common stock purchase warrants and options, $1.6 million through the issuance of promissory notes under the SBA’s PPP and EIDL programs, raised $1.5 million through the issuance of secured convertible notes and $419,000 in unsecured promissory notes and detachable warrants during the year ended December 31, 2020. These debt and equity raises were utilized to fund its operations during 2020. Management believes that it now has adequate liquidity for the foreseeable future from recent issuances of equity in 2021 through the utilization of the Company’s shelf registration statement on Form S-3 (File No. 333-239419), which was initially filed with the SEC on June 25, 2020, and was declared effective on July 2, 2020 (the “Shelf Registration Statement”).