UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 20212022.

 

or

 

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

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

 

For the transition period from ___________ to __________.

 

Commission File Number: 001-33899

 

Digital Ally, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada 20-0064269

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

14001 Marshall Drive, Lenexa, KS6621566219

(Address of principal executive offices) (Zip Code)

 

(913)814-7774

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class Trading Symbol(s) Name of exchange on which registered
Common stock, $0.001 par value per shareDGLY theDGLYThe NasdaqCapital Market LLC

 

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

 

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

 

Yes☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule12b-2Rule 12b-2 of Exchange Act.

 

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

 

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

 

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

 

Yes ☐ No☒

 

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

 

Class Outstanding at November 19, 2021August 15, 2022
Common Stock, $0.001 par value per share 52,702,94747,828,405

 

 

FORM 10-Q

DIGITAL ALLY, INC.

SEPTEMBERJune 30, 20212022

 

TABLE OF CONTENTSPage(s)
PART I – FINANCIAL INFORMATION
  
Item 1. Financial Statements.
 
Condensed Consolidated Balance Sheets – June 30, 2022 (Unaudited) and December 31, 20213
  
Condensed Consolidated Balance Sheets – September 30, 2021 (Unaudited) and December 31, 20203
Condensed Consolidated Statements of Operations for the Three and Nine months ended SeptemberSix Months Ended June 30, 2022 and 2021 and 2020 (Unaudited)4
  
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine months ended SeptemberSix Months Ended June 30, 2022 and 2021 and 2020 (Unaudited)5
  
Condensed Consolidated Statements of Cash Flows for the Nine months ended SeptemberThree and Six Months Ended June 30, 2022 and 2021 and 2020 (Unaudited)6
  
Notes to the Condensed Consolidated Financial Statements (Unaudited)7-317-36
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.3237-63
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk.5863
  
Item 4. Controls and Procedures.5863
  
PART II - OTHER INFORMATION
  
Item 1. Legal Proceedings.5963
  
Item 1A. Risk FactorsFactors.5963
  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.5964
  
Item 3. Defaults Upon Senior Securities5964
  
Item 4. Mine Safety Disclosures5964
  
Item 5. Other Information.5964
  
Item 6. Exhibits.5964
  
SIGNATURES6065

2

 

PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements.

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBERJune 30, 20212022 AND DECEMBER 31, 20202021

 

 

September 30, 2021

 

December 31, 2020

  

June 30, 2022

(Unaudited)

 December 31,
2021		 
 (Unaudited)       
Assets                
Current assets:                
Cash and cash equivalents $40,743,057  $4,361,758  $13,454,246  $32,007,792 
Restricted cash  500,000   — 
Accounts receivable-trade, less allowance for doubtful accounts
of $123,751 and $123,224 – September 30, 2021 and December 31, 2020, respectively		  2,356,411   1,705,461 
Other receivables  1,621,053   1,529,920 
Accounts receivable – trade, net  2,167,280   2,727,052 
Other receivables (including $138,384 due from related parties – June 30, 2022 and $158,384 – December 31, 2021, refer to Note 20)  2,798,029   2,021,813 
Inventories, net  11,611,249   8,202,274   9,405,954   9,659,536 
Prepaid expenses and other current assets  9,306,660   2,030,693 
Prepaid expenses  7,911,435   9,728,782 
                
Total current assets  66,138,430   17,830,106   35,736,944   56,144,975 
                
Property, plant and equipment, net  6,068,255   666,800 
Property, plant, and equipment, net  8,457,199   6,841,026 
Goodwill and other intangible assets, net  16,454,946   392,564   18,675,469   16,902,513 
Operating lease right of use assets, net  1,109,463   753,175   951,928   993,384 
Other assets  2,121,158   1,154,882   6,907,281   2,107,299 
                
Total assets $91,892,252  $20,797,527  $70,728,821  $82,989,197 
                
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable $5,710,765  $1,144,676  $6,762,924  $4,569,106 
Accrued expenses  1,218,958   796,094   1,130,737   1,175,998 
Current portion of operating lease obligations  384,222   113,484   353,646   373,371 
Contract liabilities – current  1,630,529   1,647,469 
Debt obligations – current  4,547,421   11,727 
Contract liabilities – current portion  1,944,382   1,665,519 
Debt obligations – current portion  514,664   389,934 
Warrant derivative liabilities  17,942,020   —   9,285,143   14,846,932 
Income taxes payable  1,827   7,158   11,796   1,827 
                
Total current liabilities  31,435,742   3,720,608   20,003,292   23,022,687 
                
Long-term liabilities:                
Debt obligations – long term  846,979   148,273   754,680   727,278 
Operating lease obligation, long term  795,704   723,272 
Contract liabilities-long term  2,575,786   1,848,869 
Operating lease obligation – long term  666,477   688,207 
Contract liabilities – long term  4,087,426   2,687,786 
                
Total liabilities  35,654,211   6,441,022   25,511,875   27,125,958 
                
Commitments and contingencies          -   - 
                
Stockholders’ Equity:                
Common stock, $0.001 par value per share; 100,000,000 shares authorized; shares issued: 52,702,947 – September 30, 2021 and 26,834,709 – December 31, 2020  52,703   26,835 
Common stock, $0.001 par value per share; 100,000,000 shares authorized; shares issued: 47,828,405 shares issued – June 30, 2022 and 50,904,391 shares issued – December 31, 2021  47,828   50,904 
Additional paid in capital  123,968,757   106,501,396   125,202,080   124,426,379 
Treasury stock, at cost (63,518 shares)  (2,157,226)  (2,157,226)
Noncontrolling interest in consolidated subsidiary  

(19,863

)  

—

   325,993   56,453 
Accumulated deficit  (65,606,330)  (90,014,500)  (80,358,955)  (68,670,497)
                
Total stockholders’ equity  56,238,041   14,356,505  45,216,946   55,863,239 
                
Total liabilities and stockholders’ equity $91,892,252  $20,797,527  $70,728,821  $82,989,197 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

3

 

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINESIX MONTHS ENDED

SEPTEMBERJUNE 30, 20212022 AND 20202021

(Unaudited)(unaudited)

            
 

Three months ended

September 30,

 

Nine months ended

September 30,

  2022 2021 2022 2021 
 2021  2020  2021  2020  Three months ended June 30, Six months ended June 30, 
          2022 2021 2022 2021 
Revenue:                                
Product $1,356,454  $2,958,579  $4,988,364  $5,778,695  $2,210,181  $1,719,332  $4,620,241  $3,631,910 
Service and other  3,283,368   630,061   4,680,959   1,967,881   7,141,276   774,339   15,025,997   1,397,591 
                                
Total revenue  4,639,822   3,588,640   9,669,323   7,746,576   9,351,457   2,493,671   19,646,238   5,029,501 
                                
Cost of revenue:                                
Product  1,197,217   2,177,676   3,776,185   4,332,450   2,070,476   1,017,659   4,892,527   2,578,969 
Service and other  2,042,035   188,316   2,419,884   533,690   5,561,903   215,212   11,095,015   377,849 
                                
Total cost of revenue  3,239,252   2,365,992   6,196,069   4,866,140   7,632,379   1,232,871   15,987,542   2,956,818 
                                
Gross profit  1,400,570   1,222,648   3,473,254   2,880,436   1,719,078   1,260,800   3,658,696   2,072,683 
                
Selling, general and administrative expenses:                                
Research and development expense  492,221   405,083   1,402,185   1,250,528   540,222   460,999   1,038,222   909,964 
Selling, advertising and promotional expense  1,511,682   789,854   2,978,620   1,958,884   2,763,045   870,183   5,542,448   1,466,938 
General and administrative expense  2,995,640   1,871,668   8,174,002   5,585,500   5,077,063   2,546,502   10,542,616   5,178,359 
                                
Total selling, general and administrative expenses  4,999,543   3,066,605   12,554,807   8,794,912   8,380,330   3,877,684   17,123,286   7,555,261 
                                
Operating loss  (3,598,973)  (1,843,957)  (9,081,553)  (5,914,476)  (6,661,252)  (2,616,884)  (13,464,590)  (5,482,578)
                                
Other income (expense):                                
Interest income  90,036   11,339   222,497   33,208   32,233   90,774   103,595   132,461 
Interest expense  (5,675)  (4,940)  (8,466)  (338,136)  (8,501)  (1,365)  (25,511)  (2,793)
Secured convertible notes issuance expense  —   —   —   (34,906)
Change in fair value of proceeds investment agreement  —   2,365,000   —   5,250,000 
Change in fair value of secured convertible notes  —   —   —   (1,300,252)
Other income (loss)  (381)  —   43,059   — 
Gain on extinguishment of debt  —   10,000   —   10,000 
Change in fair value of contingent consideration promissory notes  542,096   —   486,046   — 
Change in fair value of short-term investments  (21,656)  —   (28,210)  —   —   (1,590)  (84,818)  (6,554)
Change in fair value of warrant derivative liabilities  11,585,204   —   33,274,039   —   5,413,618   (2,863,422)  5,561,789   21,688,835 
Gain on extinguishment of debt  —   —   10,000   — 
Total other income  11,647,909   2,371,399   33,469,860   3,609,914
                
Total other income (expense)  5,979,065   (2,765,603)  6,084,160   21,821,949 
                                
Income (loss) before income tax benefit  8,048,936   527,442   24,388,307   (2,304,562)  (682,187)  (5,382,487)  (7,380,430)  16,339,371 
Income tax benefit (expense)  —   —   —   — 
Income tax benefit  —   —   —   — 
                                
Net income (loss) 8,048,936  527,442  24,388,307  (2,304,562)  (682,187)  (5,382,487)  (7,380,430)  16,339,371 
                                
Net loss attributable to noncontrolling interests of consolidated subsidiary  19,863   —   19,863   — 
Net income attributable to noncontrolling interests of consolidated subsidiary  (383,326)  0   (285,232)  0 
                                
Net income (loss) attributable to common stockholders $8,068,799  $527,442  $24,408,170  $(2,304,562) $(1,065,513) $(5,382,487) $(7,665,662) $16,339,371 
                                
Net income (loss) per share attributable to common stockholders’ information:                
Net loss per share information:                
Basic $0.16  $0.02  $0.49  $(0.12) $(0.02) $(0.10) $(0.15) $0.34 
Diluted $0.16  $0.02  $0.49  $(0.12) $(0.02) $(0.10) $(0.15) $0.34 
                                
Weighted average shares outstanding:                                
Basic  51,809,435   26,613,109   49,404,794   19,861,694   48,657,440   51,513,691   49,787,562   48,177,399 
Diluted  51,809,435   26,627,941   49,404,794   19,861,694   48,657,440   51,513,691   49,787,562   48,177,399 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

4

 

 

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20212022 AND 20202021

(Unaudited)

 

                     
  Common Stock  Additional
Paid In		  Treasury  

Noncontrolling

interest in consolidated

    Accumulated  Total
Stockholders’
Equity		 
  Shares  Amount  Capital  stock  subsidiary deficit  (Deficit) 
Balance, December 31, 2019  12,079,095  $12,079  $83,216,387  $(2,157,226) $      —  $(87,388,619) $(6,317,379)
Stock-based compensation  —   —   311,677   —   —   —   311,677 
Restricted common stock grant  530,050   530   (530)  —   —   —   — 
Issuance of common stock for services rendered                            
Issuance of common stock for services rendered, shares                            
Restricted common stock forfeitures  (22,500)  (23)  23   —   —   —   — 
 Issuance of common stock through registered direct offering at $3.095 per share and accompanying warrants (net of offering expenses and placement agent discount)                            
Issuance of common stock through registered direct offering at $3.095 per share and accompanying warrants (net of offering expenses and placement agent discount) , shares                             
 Issuance of common stock through registered direct offering at $2.80 per share and accompanying warrants (net of offering expenses and placement agent discount)                            
Issuance of common stock through registered direct offering at $2.80 per share and accompanying warrants (net of offering expenses and placement agent discount) , shares                             
 Exercise of pre-funded common stock purchase warrants at $3.095 per share                            
Exercise of pre-funded common stock purchase warrants at $3.095 per share , shares                            
 Exercise of pre-funded common stock purchase warrants at $2.80 per share                            
Exercise of pre-funded common stock purchase warrants at $2.80 per share , shares                             
Issuance of pre-funded common stock purchase warrants in connection with the registered direct offerings                            
 Issuance of common stock purchase warrants at exercise price of $3.25 per share in connection with the registered direct offerings                            
Issuance of common stock upon conversion of secured convertible notes and interest  959,543   960   1,342,400   —   —   —   1,343,360 
 Issuance of common stock through underwritten public offering at $2.15 per share (net of offering expenses and underwriters’ discount)                            
 Issuance of common stock through underwritten public offering at $2.15 per share (net of offering expenses and underwriters’ discount) , shares                            
Issuance of common stock upon exercise of common stock purchase warrants                            
Issuance of common stock upon exercise of common stock purchase warrants, shares                            
Issuance of common stock upon exercise of stock options                            
Issuance of common stock upon exercise of stock options, shares                            
Issuance of common stock purchase warrants in connection with issuance of secured convertible notes                            
Issuance of common stock as compensation for acquisition                            
Issuance of common stock as compensation for acquisition, shares                            
Issuance of common stock through underwritten public offering at $1.15 per share (net of offering expenses and underwriters’ discount)  2,521,740   2,522   2,499,614   —   —   —   2,502,136 
Issuance of common stock purchase warrants in connection with issuance of unsecured promissory note payable  —   —   20,806   —   —   —   20,806 
Net loss  —   —   —   —   —   (2,334,110)  (2,334,110)
                             
Balance, March 31, 2020  16,067,928   16,068   87,390,377   (2,157,226)  —   (89,722,729)  (4,473,510)
                             
Stock-based compensation  —   —   376,738   —   —   —   376,738 
Restricted common stock grant  135,450   135   (135)  —   —   —   — 
Restricted common stock forfeitures  (12,750)  (13)  13   —   —   —   — 
Issuance of common stock upon conversion of secured convertible notes and interest  1,664,669   1,665   1,679,660   —   —   —   1,681,325 
Issuance of common stock through underwritten public offering at $1.65 per share (net of offering expenses and underwriters’ discount)  3,554,545   3,554   5,346,859   —   —   —   5,350,413 
Issuance of common stock through underwritten public offering (net of offering expenses and underwriters’ discount)  3,554,545   3,554   5,346,859   —       —   5,350,413 
Issuance of common stock through underwritten public offering at $2.15 per share (net of offering expenses and underwriters’ discount)  2,539,534   2,540   4,974,152   —   —   —   4,976,692 
Issuance of common stock through underwritten public offering (net of offering expenses and underwriters’ discount)  2,539,534   2,540   4,974,152   —       —   4,976,692 
Issuance of common stock upon exercise of common stock purchase warrants  2,693,867   2,694   5,200,428   —   —   —   5,203,122 
Issuance of common stock upon exercise of stock options  1,875   2   7,798               7,800 
Issuance of common stock purchase warrants in connection with issuance of secured convertible notes  —   —   721,141   —   —   —   721,141 
                             
Net loss  —   —   —   —   —   (497,894)  (497,894)
                             
Balance, June 30, 2020  26,645,118   26,645   105,697,031   (2,157,226)  —   (90,220,623)  13,345,827 
                             
Stock-based compensation  —   —   498,356   —   —   —   498,356 
Restricted common stock grant  181,091   181   (181)  —   —   —   — 
Issuance of common stock for services rendered  10,000   10   30,690   —   —   —   30,700 
Net income  —   —   —   —   —   527,442   527,442 
                             
Balance, September 30, 2020  26,836,209  $26,836  $106,225,896  $(2,157,226) $—  $(89,693,181) $14,402,325 
                             
Balance, December 31, 2020  26,834,709  $26,835  $106,501,396  $(2,157,226) $—  $(90,014,500) $14,356,505 
Stock-based compensation  —   —   326,164   —   —   —   326,164 
Restricted common stock grant  450,000   450   (450)  —   —   —   — 
Restricted common stock forfeitures  (7,500)  (8)  8   —   —   —   — 
Issuance of common stock through registered direct offering at $3.095 per share and accompanying warrants (net of offering expenses and placement agent discount)  2,800,000   2,800   6,726,200   —   —   —   6,729,000 
Issuance of common stock through registered direct offering at $2.80 per share and accompanying warrants (net of offering expenses and placement agent discount)  3,250,000   3,250   6,614,350   —   —   —   6,617,600 
Exercise of pre-funded common stock purchase warrants at $3.095 per share  7,200,000   7,200   22,276,800   —   —   —   22,284,000 
Exercise of pre-funded common stock purchase warrants  7,200,000   7,200   22,276,800   —       —   22,284,000 
Exercise of pre-funded common stock purchase warrants at $2.80 per share  11,050,000   11,050   30,928,950   —   —   —   30,940,000 
Exercise of pre-funded common stock purchase warrants  11,050,000   11,050   30,928,950   —       —   30,940,000 
Issuance of pre-funded common stock purchase warrants in connection with the registered direct offerings  —   —   (1,817,548)  —   —   —   (1,817,548)
Issuance of common stock purchase warrants at exercise price of $3.25 per share in connection with the registered direct offerings  —   —   (49,398,510)  —   —   —   (49,398,510)
Issuance of common stock purchase warrants at exercise price in connection with the registered direct offerings  —   —   (49,398,510)  —       —   (49,398,510)
Net income  —   —   —   —   —   21,721,858   21,721,858 
                             
Balance, March 31, 2021  51,577,209   51,577   122,157,360   (2,157,226)  —   (68,292,642)  51,759,069 
                             
Stock-based compensation  —   —   330,213   —   —   —   330,213 
Net loss  —   —   —   —   —   (5,382,487)  (5,382,487)
                             
Balance, June 30, 2021  51,577,209  51,577  122,487,573  (2,157,226)  —  (73,675,129) 46,706,795 
                             
Issuance of common stock through registered direct offering and accompanying warrants (net of offering expenses and placement agent discount)  -   -   -   —       —   - 

Issuance of common stock through registered direct offering accompanying warrants (net of offering expenses and placement agent discount)

  -   -   -   —       —   - 
Stock-based compensation  —   —   491,950   —   —   —   491,950 
Issuance of common stock as consideration for acquisition  

719,738

   720   989,640       —       990,360 
Restricted common stock grant  406,000   406   (406)      —         
Net income  —   —   —   —             (19,863)  8,068,799   8,048,936 
Net income  —   —   —   —             (19,863)  8,068,799   8,048,936 
                             
Balance, September 30, 2021  52,702,947  $52,703  $  123,968,757  $  (2,157,226) $(19,863) $(65,606,330) $56,238,041 
  Shares  Amount  Capital  stock  subsidiary  deficit  Total 
  Common Stock  Additional Paid In  Treasury  Noncontrolling interest in consolidated  Accumulated    
  Shares  Amount  Capital  stock  subsidiary  deficit  Total 
Balance, December 31, 2020  26,834,709  $26,835  $106,501,396  $(2,157,226)  —  $(90,014,500) $14,356,505 
Stock-based compensation  —   —   326,164   —   —   —   326,164 
Restricted common stock grant  450,000   450   (450)  —   —   —   — 
Restricted common stock forfeitures  (7,500)  (8)  8   —   —   —   — 
Issuance of common stock through registered direct offering at $3.095 per share and accompanying warrants (net of offering expenses and placement agent discount)  2,800,000   2,800   6,726,200   —   —   —   6,729,000 
Issuance of common stock through registered direct offering at $2.80 per share and accompanying warrants (net of offering expenses and placement agent discount)  3,250,000   3,250   6,614,350   —   —   —   6,617,600 
Exercise of pre-funded common stock purchase warrants at $3.095 per share  7,200,000   7,200   22,276,800   —   —   —   22,284,000 
Exercise of pre-funded common stock purchase warrants at $2.80 per share  11,050,000   11,050   30,928,950   —   —   —   30,940,000 
Issuance of pre-funded common stock purchase warrants in connection with the registered direct offerings  —   —   (1,817,548)  —   —   —   (1,817,548)
Issuance of common stock purchase warrants at exercise price of $3.25 per share in connection with the registered direct offerings  —   —   (49,398,510)  —   —   —   (49,398,510)
Net income  —   —   —   —   —   21,721,858   21,721,858 
                             
Balance, March 31, 2021  51,577,209  51,577  122,157,360  (2,157,226) —  (68,292,642) 51,759,069 
                             
Stock-based compensation  —   —   330,213   —   —   —   330,213 
Net loss  —   —   —   —   —   (5,382,487)  (5,382,487)
                             
Balance, June 30, 2021  51,577,209  $51,577  $122,487,573  $(2,157,226) $—  $(73,675,129) $46,706,795 
                             
Balance, December 31, 2021  50,904,391  $50,904  $124,426,379  $—  $56,453  $(68,670,497) $55,863,239 
Stock-based compensation  —   —   394,749   —   —   —   394,749 
Restricted common stock grant  715,000   715   (715)  —   —   —   — 
Restricted common stock forfeitures  (15,000)  (15)  15   —   —   —   — 
Repurchase and cancellation of common stock  (1,876,034)  (1,876)  —   —   —   (2,061,892)  (2,063,768)
Distribution to noncontrolling interest in consolidated subsidiary  —   —   —   —   (15,692)  —   (15,692)
Net loss  —   —   —   —   (98,094)  (6,600,148)  (6,698,242)
                             
Balance, March 31, 2022  49,728,357  49,728  124,820,428  —  (57,333) (77,332,537) 47,480,286 
                             
Stock-based compensation  —   —   381,602   —   —   —   381,602 
Restricted common stock forfeitures  (50,000)  (50)  50   —   —   —   — 
Repurchase and cancellation of common stock  (1,849,952)  (1,850)  —   —   —   (1,960,905)  (1,962,755)
Net income (loss)  —   —   —   —   383,326   (1,065,513)  (682,187)
                             
Balance, June 30, 2022  47,828,405  $47,828  $125,202,080  $—  $325,993  $(80,358,955) $45,216,946 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

5

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

(Unaudited)

  Six months ended June 30, 
  2022  2021 
Cash Flows From Operating Activities:        
Net income (loss) $(7,380,430) $16,339,371 
Adjustments to reconcile net income (loss) to net cash flows used in operating activities:        
Depreciation and amortization  1,024,238   145,459 
Stock-based compensation  776,350   656,378 
Change in fair value of warrant derivative liabilities  (5,561,789)  (21,688,835)
Provision for inventory obsolescence  192,622   361,437 
Provision for doubtful accounts receivable  (161,768)  — 
Gain on extinguishment of debt  —   (10,000)
Change in fair value of contingent consideration promissory note  (486,046)  — 
         
Change in operating assets and liabilities:        
(Increase) decrease in:        
Accounts receivable – trade  721,540   817,077 
Accounts receivable – other  (776,216)  (265,627)
Inventories  60,960   (1,774,922)
Prepaid expenses  1,848,058   (391,084)
Operating lease right of use assets  201,376   30,332 
Other assets  (4,799,982)  (616,005)
Increase (decrease) in:        
Accounts payable  1,994,602   (307,744)
Accrued expenses  (73,127)  79,290 
Income taxes payable  9,969   (7,231)
Operating lease obligations  (201,375)  (41,185)
Contract liabilities  1,678,503   523,516 
         
Net cash used in operating activities  (10,932,515)  (6,149,773)
         
Cash Flows from Investing Activities:        
Purchases of property, plant and equipment  (1,923,501)  (5,452,729)
Additions to intangible assets  (54,866)  (41,126)
Cash paid for acquisition, net of cash acquired  —   

(1,012,552

)
Cash paid for acquisition of Medical Billing Company  (1,153,627)  — 
Cash paid for asset acquisition of Medical Billing Company  (230,000)  — 
         
Net cash used in investing activities  (3,361,994)  (6,506,407)
         
Cash Flows from Financing Activities:        
Repurchase and cancellation of common stock  (4,026,523)  — 
Distribution to noncontrolling interest in consolidated subsidiary  (15,692)  — 
Net proceeds from sale of common stock in registered direct offerings  —   13,346,600 
Proceeds from issuance of common stock upon exercise of pre-funded warrants  —   53,224,000 
Principal payment on contingent consideration promissory notes  (216,822)  — 
         
Net cash (used in) provided by financing activities  (4,259,037)  66,570,600 
         
Net increase (decrease) in cash and cash equivalents  (18,553,546)  53,914,420 
Cash, cash equivalents, beginning of period  32,007,792   4,361,758 
         
Cash, cash equivalents, end of period $13,454,246  $58,276,178 
         
Supplemental disclosures of cash flow information:        
Cash payments for interest $27,059  $— 
         
Cash payments for income taxes $9,969  $7,231 
         
Supplemental disclosures of non-cash investing and financing activities:        
Issuance of contingent consideration promissory note for business acquired $855,000  $350,000 
         
Assets acquired in business acquisitions $190,631  $— 
         
Liabilities assumed in the business acquisition $387,005  $162,552 
         
Goodwill acquired in business acquisitions $2,100,000  $— 
         
Restricted common stock grant $715  $450 
         
Restricted common stock forfeitures $65  $8 
         
Amounts allocated to initial measurement of warrant derivative liabilities in connection with the warrants and pre-funded warrants $—  $51,216,058 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

 

5

DIGITAL ALLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Unaudited)

  2021  2020 
Cash Flows from Operating Activities:        
Net income (loss) $     24,388,307 $(2,304,562)
Adjustments to reconcile net income (loss) to net cash flows used in by operating activities:        
Depreciation and amortization  239,630   189,390 
Gain on extinguishment of debt  (10,000)  — 
Stock based compensation  1,148,327   1,186,771 
Change in fair value of warrant derivative liabilities  (33,274,039)  — 
Provision for inventory obsolescence  339,668   254,109 
Amortization of discount on unsecured promissory notes  —   86,867 
Change in fair value of short-term investments  28,210   — 
Change in fair value of secured convertible notes  —   1,300,252 
Change in fair value of proceeds investment agreement  —  (5,250,000)
Provision for doubtful accounts receivable  (527)   — 
Issuance of common stock for services rendered  —   30,700 
Debt issuance costs  —   34,906 
         
Change in operating assets and liabilities:        
(Increase) decrease in:        
Accounts receivable – trade  337,364  (728,917) 
Accounts receivable – other  111,768  (370,123)
Inventories  (1,767,724)  (967,324) 
Income tax refund receivable  —   44,650 
Prepaid expenses  (3,445,546)  (1,914,855)
Operating lease right of use assets  (27,875)  (669,662) 
Other assets  (752,324)  (110,679)
         
Increase (decrease) in:        
Accounts payable  

(475,256

)  (1,281,246) 
Accrued expenses  209,833  (129,593)
Income taxes payable  (5,331)  (4,776) 
Operating lease obligations  14,757   633,505)
Contract liabilities  709,977  (145,018)
         
Net cash used in operating activities  (12,230,781)  (10,115,605)
         
Cash Flows from Investing Activities:        
Purchases of property, building and equipment  (5,575,021)  (599,449)
Additions to other intangible assets  (239,139)  (40,277)
Additions to investments  —  (250,000) 
Cash paid for Nobility Healthcare Division acquisition, net of cash acquired  (1,012,552)   — 
Cash paid for Nobility Healthcare Division acquisition, net of cash acquired  (2,270,000)   — 
Cash paid for TicketSmarter acquisition, net of cash acquired  (8,361,808)  — 
Restricted cash related to TicketSmarter acquisition  (500,000)  — 
         
Net cash used in investing activities  (17,958,520)  (889,726)
         
Cash Flows from Financing Activities:        
Proceeds from issuance of common stock upon exercise of pre-funded warrants  53,224,000   — 
Net proceeds from sale of common stock in registered direct offerings  

13,346,600

   

—

 
Proceeds from unsecured promissory note payable, related party  

—

   

319,000

 
Proceeds from unsecured promissory note payable  —   100,000 
Proceeds from promissory notes payable  —   1,568,900 
Proceeds from issuance of common stock upon exercise of warrants  —   5,203,122 
Proceeds from issuance of secured convertible notes payable  —   1,500,000 
Proceeds from sale of common stock in underwritten public offering  —   12,829,241 
Proceeds from exercise of stock options  —   7,800 
Principal payment on subordinated notes payable  —  (400,000) 
Principal payment on secured convertible notes  —  (748,180) 
Principal payments on unsecured promissory note payable, related party  —  (319,000) 
Debt issuance costs  —  (34,906)
Principal payment on proceeds investment agreement  —  (1,250,000)
         
 Net cash provided by financing activities  66,570,600   18,775,977 
         
Net increase in cash and cash equivalents  36,381,299   7,770,646
Cash and cash equivalents, beginning of period  4,361,758   359,685 
         
Cash and cash equivalents, end of period $40,743,057  $8,130,331 
         
Supplemental disclosures of cash flow information:        
Cash payments for interest $—  $128,911 
         
Cash payments for income taxes $7,581  $4,776 
         
Supplemental disclosures of non-cash investing and financing activities:        
Issuance of contingent consideration earn-out agreement for business acquisition $4,244,400  $— 
         
Issuance of contingent consideration promissory note for business acquisitions $1,000,000  $— 
         
Assets assumed in business acquisitions $

7,366,399

  $— 
         
Liabilities assumed in business acquisitions $5,494,417  $— 
         
Common stock issued as consideration for business acquisitions $990,360  $— 
         
Restricted common stock grant $856  $845 
         
Restricted common stock forfeitures $8  $36 
         
Cashless exercise of common stock purchase warrants $0  $7 
         
Amounts allocated to initial measurement of warrant derivative liabilities in connection to the warrants and pre-funded warrants $51,216,058  $— 
         
Issuance of common stock upon conversion of secured convertible notes $—  $3,024,685 
         
Amounts allocated to common stock purchase warrants in connection with issuance of unsecured promissory note payable $—  $741,947 

See Notes to the Unaudited Condensed Consolidated Financial Statements.

6

 

 

DIGITAL ALLY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

Nature of OperationsOperations::

 

Digital Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare, LLC, TicketSmarter, Inc., and its majority-owned subsidiary Nobility Healthcare, LLC, collectively, “Digital Ally,” “Digital,” and the “Company”) produces digital video imaging, storage products, disinfectant and related safety products for use in law enforcement, security and commercial applications; also offering revenue cycle management solutions, ticket resale marketplace, and ticketing services. The Company’s products include, among others; 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. The Company added two new lines of branded products: (1) the ThermoVu® line, 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) the Shield™ disinfectant and cleanser line, which is for use against viruses and bacteria and which we began offering to the Company’s law enforcement and commercial customers beginning late in the second quarter of 2020. Both product lines are manufactured by third parties. In addition, the Company has active research and development programs to adapt its technologies to other applications. It 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. The Company sells its 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. Additionally, through our Digital Ally Healthcare, LLC subsidiary, the Company has expanded into the revenue cycle management solutions field, helping provide working capital and back-office services to healthcare organizations throughout the country. Lastly, through the Company’s recently formed TicketSmarter, Inc. subsidiary, it has entered the online ticketing platform through TicketSmarter.com, as a unique marketplace for buyers and sellers of tickets for live events throughout the country.

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

 

The business of 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., 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 Ticketing 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 Ticketing Segment acts as an intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms. The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Such required segment information is included in Note 18.

Basis of PresentationPresentation::

 

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and ninesix month periods ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022.

 

The balance sheet at December 31, 20202021 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.

 

For further information, refer to the audited financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2020, and the unaudited financial statements and footnotes included in the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2021.

7

COVID-19 pandemicpandemic/Supply Chain::

 

The COVID-19 pandemic represents acontinues to represent an evolving and fluid situation that presents a wide range of potential impacts of varying durations for different global geographies, including locations where the Company has offices, employees, customers, vendors and other suppliers and business partners.

Like most US-basedU.S.-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020. BySince that time, muchalthough the original effect of our first fiscal quarter was completed. During the remainder of 2020COVID-19 pandemic has eased, we have continued to operate in an uncertain economic environment that is characterized by, business slowdowns or shutdowns, labor shortages, supply chain challenges, changes in government spending and the first quarter of 2021, the Company observed decreases in demand from certain customers, including primarily law-enforcementrequirements, regulatory challenges, inflationary pressures and commercial customers. However, the Company is beginning to experience an increase in demand for the three months ended September 30, 2021, compared to the same period in 2020.market volatility.

 

Given the fact that the Company’s products are sold through a variety of distribution channels, the Company expects its sales will

We continue to experience more volatilityoperational challenges as a result of worldwide events including the changingRussia-Ukraine conflict, continued uncertainty associated with the pandemic, and less predictable operational needs of many customers as a result ofvolatility in global markets, which are compounded by the COVID-19 pandemic. The Company is aware that many companies, including many of its supplierscomplex integrated global supply chain for both vendors and customers, are reporting or predicting negative impacts from COVID-19 on future operating results. Although the Company observed significant declines in demand for its products from certain customers during 2020 and the first quarter of 2021, the Company believes that the impact of the COVID-19 remains too fluid and unknown, hindering the Company from determining the long-term demand for current products. The Company also cannot be certain how demand may shift over time as the impacts ofcustomers. As the COVID-19 pandemic may go through several phases ofdissipates at varying severitytimes and duration.

In light of broader macro-economic risks and already known impactsrates in different regions around the world, there could be a prolonged negative impact on certain industries that use the Company’s products and services, the Company has taken, and continue to take targeted steps to lower its operating expenses because of the COVID-19 pandemic. The Company continues to monitor the impacts of COVID-19 on its operations closely and this situation could change based on a significant number of factors that are not entirely within its control and are discussed in this and other sections of this quarterly report on Form 10-Q. The Company does not expect there to be material changes to its assets on its balance sheet or its ability to timely account for those assets. Further, in connection with the preparation of this quarterly report on Form 10-Q, the Company reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and have determined there to be no material impact at this time. The Company has also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business-related items.

To date, travel restrictions and border closures have not materially impacted its 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 the business over the long term. Travel restrictions impacting people can restrain our ability to assist its customers and distributors as well as impact its ability to develop new distribution channels, but at present the Company does not expect these restrictions on personal travel to be material to our business operations or financial results. The Company has taken steps to restrain and monitor its operating expenses and therefore it does not expect any such impacts to materially change the relationship between costs and revenues.

Like most companies, the Company has taken a range of actions with respect to how it operates to assure it complies with government restrictions and guidelines as well as best practices to protect the health and well-being of its employees and itsglobal supply chains. Our ability to continue operating itsoperations at specific facilities will be impacted by the interdependencies of the various participants of these global supply chains, which are largely beyond our direct control. A prolonged shut down of these global supply chains could have a material adverse effect on our business, effectively. To date, the Company has been able to operate its business effectively using these measuresresults of operations, cash flows and to maintain internal controls as documented and posted. The Company also has not experienced challenges in maintaining business continuity and does not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.financial condition.

 

87

 

 

The actions the Company has taken so far during the COVID-19 pandemic include, but are not limited to:

●requiring all employees who can work from homeIf our suppliers have increased challenges with their workforce (including as a result of illness, absenteeism, reactions to health and safety or government requirements), facility closures, timely access to necessary components, materials and other supplies at reasonable prices, access to work from home;
●increasing its IT networking capability to best assure employees can work effectively outside the office; and
●for employees who must perform essential functions in one of its offices:
●having employees maintain a distance of at least six feet from other employees whenever possible;
●having employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
●having employees stay segregated from other employees in the office with whom they require no interaction; and
●requiring unvaccinated employees to wear masks while they are in the office whenever possible.

The Company currently believes revenue for the year ending December 31, 2021 will still be impacted due to the conditions noted. In April 2020, the Company implemented a COVID-19 mitigation plan designed to further reduce its 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 which the Company continues to implement and develop throughout 2021. Based on the Company’s current cash position, its projected cash flow from operations and its cost reduction and cost containment efforts to date, the Company believes that it will have sufficient capital, and or have access to sufficient capital through publicfundamental support services (such as shipping and private equitytransportation), they may be unable to provide the agreed-upon goods and debt offerings to sustain operations forservices in a period of one year followingtimely, compliant and cost-effective manner. We have incurred and may in the date of this filing. Iffuture incur additional costs and delays in our business interruptions resulting from the COVID-19 pandemic, wereincluding as a result of higher prices, schedule delays or the need to identify and develop alternative suppliers. In some instances, we may be prolongedunable to identify and develop alternative suppliers, incurring additional liabilities under our current contracts and hampering new ones. Our customers have experienced, and may continue to experience, disruptions in their operations and supply chains as a result of the COVID-19 pandemic, which can result in delayed, reduced, or expandedcanceled orders, or collection risks, and which may adversely affect our results of operations. Similarly, current, and future restrictions or disruptions of transportation, such as reduced availability of air transport, port closures or delays, and increased border controls, delays or closures, can also impact our ability to meet demand and could materially adversely affect us.

The spread of COVID-19 caused us to modify our business practices (including employee travel, employee work locations, cancellation of physical participation in scope,meetings, events and conferences, and social distancing measures). To date, we eased many of these modifications. However, we may, in the future, reinstitute the same or similar changes or take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Although we managed to continue most of our operations, the future course of the COVID-19 pandemic is uncertain and we cannot assure that this global pandemic, including its economic impact, will not have a material adverse impact on our business, financial condition,position, results of operations andand/or cash flows would be negatively impacted. The Company will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.flows.

 

Basis of ConsolidationConsolidation::

 

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

 

The Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products. The Company formed Shield Products, LLC in May 2020 to facilitate the sales of its Shield™ line of disinfectant/cleanser products and ThermoVu® ThermoVu® line of temperature monitoring equipment. The Company formed Nobility Healthcare, LLC in June 2021 to facilitate the operations of its revenue cycle management solutions and back-office services for healthcare organizations. Lastly, the Company formed TicketSmarter, Inc. upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate theits global ticketing operations. The Company formed Worldwide Reinsurance Ltd., which is a captive insurance company domiciled in Bermuda. It will provide primarily liability insurance coverage to the Company for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Company formed Digital Connect, Inc. for travel and transportation purposes in 2022. The company formed Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for consumers.

 

Fair Value of Financial Instruments:

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

Revenue RecognitionRecognition::

 

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

 

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

98

 

Video Solutions

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

The Company sells its products and services to customers in the following manner:

●Product sales to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through its sales force, which is composed of its employees. Revenue is recorded when the product is shipped to the end customer.
●Product sales to international customers are made through independent distributors who purchase products from the Company at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Accordingly, upon application of steps one through five above, revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.
●Repair parts and services for domestic and international customers are generally handled by its inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.
●Service sales through the Company’s Nobility Healthcare subsidiary are driven through relationships with medium to large healthcare organizations, in which revenue is recognized upon execution of services. Through the Company’s TicketSmarter subsidiary, service sales are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction.

Sales taxes collected on products sold are excluded from revenues and are reported as accrued expenses in the accompanying balance sheets until payments are remitted.

 

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

 

Contracts with some of the Company’s customers contain multiple performance obligations that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”). The Company determined SSP for all the performance obligations using observable inputs, such as standalone sales and historical pricing. SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of service being provided. SSP also reflects the amount the Company would charge for the performance obligation if it were sold separately in a standalone sale. Multiple performance obligations consist of product, software, cloud subscriptions and extended warranties.

10

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

 

Revenue Cycle Management

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

Ticketing

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

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

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

9

Other

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the condensed consolidated balance sheets.Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. During the three months ended June 30, 2022, the Company recognized revenue of $0.4 million related to its contract liabilities. Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. Total contract liabilities consist of the following:

SCHEDULE OF CONTRACT LIABILITIES

  December 31, 2021  Additions/Reclass  Recognized Revenue  June 30, 2022 
Contract liabilities, current $1,665,519  $611,938  $333,075  $1,944,382 
Contract liabilities, non-current  2,687,786   2,174,949   775,309   4,087,426 
                 
  $4,353,305  $2,786,887  $1,108,384  $6,031,808 

 

Sales returns and allowances aggregated $117,552 and $45,298 for the six months ended June 30, 2022 and year ended December 31, 2021, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting these return rates.

Use of EstimatesEstimates::

 

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

 

Cash and cash equivalentsequivalents::

 

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

SCHEDULE OF SHORT TERM INVESTMENTS

  June 30, 2022 
  Adjusted Cost  Realized Gains  Realized Losses  Fair Value 
Demand deposits $5,841,857  $—  $—  $5,841,857 
Short-term investments with original maturities of 90 days or less (Level 1):                
Money market funds  7,612,389   —   —   7,612,389 
                 
  $13,454,246  $—  $—  $13,454,246 

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  December 31, 2021 
  Adjusted Cost  Unrealized Gains  Unrealized Losses  Fair Value 
Demand deposits $5,031,246  $—  $—  $5,031,246 
Short-term investments with original maturities of 90 days or less (Level 1):                
Money market funds  14,928,526   —   —   14,928,526 
Mutual funds  12,079,901   —   (31,881)  12,048,020 
                 
  $32,039,673  $—  $(31,881) $32,007,792 

 

The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000per bank. The Company minimizes this risk by placing its cash deposits with numerous major financial institutions. At SeptemberJune 30, 20212022 and December 31, 2020,2021, the uninsured balance amounted to $38,152,40911,682,011 and $3,653,19229,836,142, respectively.

Accounts Receivable:

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. One individual customer receivable balances exceeded 10% of total accounts receivable as of September 30, 2021 and December 31, 2020, which totaled $558,729 or 24% and $319,000 or 19% of total accounts receivable, respectively.

 

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

 

Goodwill and Other IntangiblesIntangibles:

 

Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired. The Company has just recently completed several acquisitions that generated goodwill that will be subject to impairment testing for the first time on December 31, 2021.

 

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

 

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

 

The Company determines the fair value of its reporting units using an income approach. Under the income approach, the Company determined fair value based on estimated discounted future cash flows of each reporting unit. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and EBITDA margins, discount rates and future market conditions, among others.

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

 

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company last assessed potential impairments of its long-lived assets as of December 31, 2020June 30, 2022 and concluded that there was no impairment.

Other intangible assets that have finite lives are amortized over their useful lives.

 

SegmentsIntangible assets include deferred patent costs and license agreements. Legal expenses incurred in preparation of Business:

Managementpatent application have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will be charged to expense at that time. The Company has determined that, dueentered into several sublicense agreements under which it has been assigned the exclusive rights to recent business acquisitions,certain licensed materials used in its operations are comprised of three reportable segments: Digital Ally, TicketSmarter,products. These sublicense agreements generally require upfront payments to obtain the exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and Nobility Healthcare. For the three and nine months ended September 30, 2021 and 2020, sales by segment were as follows:

SUMMARY OF SALES BY GEOGRAPHIC AREA

  2021  2020  2021  2020 
  

Three Months Ended

September 30,

  

Nine months ended

September 30,

 
  2021  2020  2021  2020 
Sales by segment:                
Digital Ally                
Product $1,356,454  $2,958,579  $4,988,364  $5,779,387 
Service and other  672,206   630,061   2,069,797   1,967,881 
Total Digital Ally  2,028,660   3,588,640   7,058,161   7,747,268 
                 
TicketSmarter                
Service and other  2,050,679   —   2,050,679   — 
Total TicketSmarter  2,050,679   —   2,050,679   — 
                 
Nobility Healthcare                
Service and other  560,483   —   560,483   — 
Total Nobility Healthcare  560,483   —   560,483   — 
                 
Total $4,639,822  $3,588,640  $9,669,323  $7,746,576 

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Sales to customers outside of the United States are denominated in U.S. dollars. All Company assets are physically located within the United States.amortizes such costs over their estimated useful life on a straight-line method.

 

Recent Accounting PronouncementsSegment Reporting:

 

The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s 3 operating segments are Video Solutions, Revenue Cycle Management, and Ticketing, each of which has specific personnel responsible for that business and reports to the CODM. Corporate expenses capture the Company’s corporate administrative activities and are also to be reported in the segment information. The Company’s captive insurance subsidiary provides services to the Company’s other business segments and not to outside customers; however, that subsidiary had no activity in the three months ended June 30, 2022 and 2021. Therefore, its operations will be eliminated in consolidation, and it is not considered a separate business segment for financial reporting purposes.

Contingent Consideration

In June 2016,circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the Financial Accounting Standards Board (“FASB”) issued Accounting Standards UpdateCodification (“ASU”ASC”) 2016-13, “Financial Instruments – Credit Losses”480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to improve information on credit losses for financial assetsthe fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and net investmentrecords changes in leases that are not accounted for atthe fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology withconsolidated statement of operations.

Repurchase and Cancellation of Shares

From time to time, the Company’s Board of Directors (the “Board”) may authorize share repurchases of common stock. Shares repurchased under Board authorizations are held in treasury for general corporate purposes and cancelled when it is determined appropriate by management. The Company accounts for repurchases of common stock under the cost method. Shares repurchased and cancelled during the period were recorded as a methodology that reflects expected credit losses. In April 2019 and May 2019,reduction to stockholders’ (deficit) equity. See further discussion of the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326,Company’s share repurchase program in Note 15 –Stockholders’ Equity.

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Non-Controlling Interests

Non-controlling interests in the Company’s Consolidated Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance onStatements represents the previously issued ASU. In November 2019,interest in subsidiaries held by our venture partner. The venture partner holds a noncontrolling interests in the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission (the “SEC”) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.Company’s consolidated subsidiary Nobility Healthcare, LLC. Since the Company is an SRC, implementation will not be required until January 1, 2023. The Company will continueconsolidates the financial statements of all wholly-owned and majority owned subsidiaries, the noncontrolling owners’ share of each subsidiary’s results of operations are deducted and reported as net income or loss attributable to evaluatenoncontrolling interest in the effect that adopting ASU 2016-13 will have on the Company’s consolidated financial statements.Consolidated Statements of Operations.

New Accounting Standards

 

In 2020, FASB issued ASU No. 2020-06 to simplify the accounting for convertible debt instruments as the current accounting guidance was determined to be unnecessarily complex and difficult to navigate. The ASU primarily does three things: (1) The ASU eliminates the beneficial conversion feature model and the cash conversion model. The elimination of these models will result in more convertible instruments (convertible debt instruments or convertible preferred stock instruments) being reported as a single liability instrument. The ASU also makes targeted improvements to the related disclosures, (2) The ASU eliminates certain settlement conditions that are required to qualify for derivative scope exception which will allow for less equity contracts to be accounted for as a derivative and (3) The ASU aligns the diluted EPS calculation for convertible instruments by requiring the use of the if-converted method and requiring share settlement be included in the calculation when the contract includes an option of cash or share settlement. ASU No. 2020-06 is effective for fiscal years beginning after December 15, 2021 with early adoption permitted for fiscal years beginning after December 15, 2020. Management hasThe adoption of this standard did not early-adopted this new standardhave a significant impact on the Company’s financial position and continues to evaluate the impactresults of adopting ASU 2020-06 will have on its consolidated financial statements.operations.

 

In 2020, FASB issued ASU No. 2020-01 which represents a consensus of the Emerging Issues Task Force and it clarifies certain items related to ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU (1) clarifies that when an entity is either applying the equity method or upon discontinuing the equity method it should consider observable price changes in orderly transactions for the identical or a similar investment with the same issuer for valuing basis of the investment and (2) clarifies that when determining the accounting for certain forward contracts and purchased options an entity should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. ASU No. 2020-01 is effective for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company adopted this update for the quarter ended March 31, 2021, with no material effect2021. The adoption of this standard did not have a significant impact on the financials.Company’s financial position and results of operations.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption of this standard did not have a significant impact on the Company’s financial position and results of operations.

 

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

1213

 

 

Warrant Derivative LiabilitiesIn August 2018, the FASB issued ASU No. 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40), or ASU 2018-15. ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement that is a service contract. The amendments under ASU 2018-15 are effective for interim and annual fiscal periods beginning after December 15, 2019, with early adoption permitted. The adoption of this standard did not have a significant impact on the Company’s financial position and results of operations,

 

In accordance withDecember 2019, the FASB ASC 815-40, Derivativesissued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and Hedging: Contractssimplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in an Entities Own Equity,ASU 2019-12 are effective for public business entities must consider whether to classify contracts that may be settled in its own stock, such as warrants to purchase sharesfor fiscal years beginning after Dec. 15, 2020. The adoption of Common Stock, as equity ofthis standard did not have a significant impact on the entity or as an asset or liability. If an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. We have determined because the terms of the warrants issued during the first quarter of 2021,Company’s financial position and remain outstanding, include a provision that entitles all the warrant holders to receive cash for their warrants in the event of a qualifying cash tender offer, while only certain of the holders of the underlying shares of common stock would be entitled to cash, our warrants should be classified as liability measured at fair value, with changes in fair value each period reported in earnings. Volatility in the price of our common stock may result in significant changes in the value of the derivatives and resulting gains and losses on our statementresults of operations.

NOTE 2. INVENTORIES

 

Inventories consisted of the following at SeptemberJune 30, 20212022 and December 31, 2020:2021:

SCHEDULE OF INVENTORIES

  September 30, 2021  December 31, 2020 
Raw material and component parts $3,068,418  $3,186,426 
Work-in-process  15,506   1,908 
Finished goods  10,827,344   6,974,291 
         
Subtotal  13,911,268   10,162,625 
Reserve for excess and obsolete inventory  (2,300,019)  (1,960,351)
         
Total $11,611,249  $8,202,274 
  

June 30, 2022

  December 31, 2021 
Raw material and component parts– video solutions segment $4,083,713  $3,062,046 
Work-in-process– video solutions segment  153   — 
Finished goods – video solutions segment  7,866,087   8,410,307 
Finished goods – ticketing segment  1,178,468   2,102,272 
Subtotal  13,128,421   13,574,625 
Reserve for excess and obsolete inventory– video solutions segment  (3,272,832)  (3,353,458)
Reserve for excess and obsolete inventory – ticketing segment  (449,635)  (561,631)
Total inventories $9,405,954  $9,659,536 

 

Finished goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such units totaled $156,261135,573 and $138,263153,976 as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.

 

NOTE 3. DEBT OBLIGATIONS

 

Debt obligations is comprised of the following:

SUMMARY OF SECURED CONVERTIBLE DEBENTURES AND PROCEEDS INVESTMENT AGREEMENTDEBT OBLIGATIONS

 September 30, 2021  December 31, 2020  

June 30, 2022

  December 31, 2021 
Economic injury disaster loan (EIDL) $150,000  $150,000  $150,000  $150,000 
Payroll protection program loan (PPP)  —   10,000 
Contingent consideration promissory note - Nobility Healthcare Division Acquisition  350,000   — 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition  650,000   —   211,867   317,212 
Contingent consideration earn-out Agreement – TicketSmarter Acquisitions  4,244,400   — 
        
Contingent consideration promissory note – Nobility Healthcare Division Acquisition  426,326   650,000 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition  481,151   — 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition  —   — 
Debt obligations  5,394,400   160,000   1,269,344   1,117,212 
Less: current maturities of debt obligations  4,547,421   11,727   514,664   389,934 
Debt obligations, long-term $846,979  $148,273  $754,680  $727,278 

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Debt obligations mature as follows as of SeptemberJune 30, 2021:2022:

SCHEDULE OF MATURITY OF DEBT OBLIGATIONS

  September 30, 2021 
2021 (October 1, 2021 to December 31, 2021) $4,245,882 
2022  403,049 
2023  403,166 
2024  203,286 
2025  3,412 
2026 and thereafter  135,605 
     
Total $5,394,400 

 

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  June 30, 2022 
2022 (July 1, 2022 to December 31, 2022) $257,317 
2023  514,722 
2024  355,295 
2025  3,412 
2026  3,542 
2027 and thereafter  135,056 
     
Total $1,269,344 

2020 Small Business Administration Notes.

 

On May 4, 2020, the Company issued a promissory note in connection with the receipt of the Paycheck Protection Program (“PPP”) Loan of $1,418,900(the (the “PPP Loan”) under the Small Business Administration’s (the “SBA”) PPP Program under the Coronavirus Aid, Relief, and Economic Security Act ( the(the “CARES Act”). The PPP Loan hashad a two-year term and bearsbore interest at a rate of 1.0% per annum. Monthly principal and interest payments were deferred for nine months after the date of disbursement and total $79,851per month thereafter. The PPP Loan could have been prepaid at any time prior to maturity with no prepayment penalties. The promissory note contained events of default and other provisions customary for a loan of this type. The PPP providesLoan provided that the PPP Loanit may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the majority of the PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. The Company used the majority of the PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. The Company applied for forgiveness of the PPP Loan andexpenses. On December 10, 2020, the Company was fully forgiven of its $1,418,900PPP Loan. Additionally, the Company was fully forgiven, during the three months ended June 30, 2021, of its $10,000EIDL advance received with the PPP Loan.

 

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

 

Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal and interest payments are deferred for twelvetwenty-four months after the date of disbursement and total $731per month thereafter. Such note may be prepaid in part or in full, at any time, without penalty. The Company granted the secured party a continuing interest in and to any and all collateral, including but not limited to tangible and intangible personal property.

 

Contingent Consideration Promissory Notes

 

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

 

15

The contingent consideration promissory noteJune Contingent Note is considered to be additional purchase price; therefore, the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition.acquisition with subsequent changes in fair value recorded as a gain or loss in the Consolidated Statements of Operations. Management has recorded the contingent consideration promissory note at its estimated fair value of $350,000at the acquisition date. Management will continue to estimate theTotal principal payments, since its inception, on this contingent consideration promissory note totaled $57,724. The estimated fair value of thisthe June Contingent Note at each reporting date withJune 30, 2022 is $211,868, representing an increase in its estimated fair value of $3,844 as compared to its estimated fair value as of March 31, 2022. Therefore, the change, if anyCompany recorded asa loss of $3,844 in the Consolidated Statements of Operations for the three months ended June 30, 2022. The Company recorded a gain or lossof $47,620 in the statementConsolidated Statements of operations duringOperations for the relevant period.six months ended June 30, 2022.

14

 

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

 

The August Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition with subsequent changes in fair value recorded as a gain or loss in the Consolidated Statements of Operations. Management recorded the contingent consideration promissory note at its estimated fair value of $650,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled $159,098. The estimated fair value of the August Contingent Note at June 30, 2022 is $426,326, representing a decrease in its estimated fair value of $172,091 as compared to is estimated fair value as of March 31, 2022. Therefore, the Company recorded a gain of $172,091 in the Consolidated Statements of Operations for the three months ended June 30, 2022. The Company recorded a gain of $64,576 in the Consolidated Statements of Operations for the six months ended June 30, 2022.

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

16

The January Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration promissory note at its estimated fair value of $650,000 750,000at the acquisition date. Management will continue to estimate theThe estimated fair value of thisthe January Contingent Payment Note at each reporting date withJune 30, 2022 is $481,151, representing a decrease in its estimated fair value of $268,849 as compared to is estimated fair value as of March 31, 2022. Therefore, the change, if anyCompany recorded as a gain or lossof $268,849 in the statementConsolidated Statements of operationsOperations for the three and six months ended June 30, 2022. There were no principal payments on this contingent consideration promissory note during the relevant period.

Contingent consideration earn-out Agreement – TicketSmarter Acquisitionthree months ended June 30, 2022.

 

On SeptemberFebruary 1, 2021, TicketSmarter, Inc., a subsidiary of the Company,2022, Nobility Healthcare issued aanother contingent consideration earn-out agreementpromissory note (the “TicketSmarter Earn-Out”“February Contingent Payment Note”) in connection with the Stock Purchase Agreementan asset purchase agreement between TicketSmarter, Inc., Goody Tickets, LLCNobility Healthcare and TicketSmarter, LLC (“TicketSmarter”a private company (the “February Sellers”) of $4,244,400105,000. The February Contingent Payment Note has a three. The TicketSmarter Earn-Out shall be payable with ninety percent (90%) readily available funds-year term and ten percent (10%)bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for seven months and are due in stock consideration.equal quarterly installments on the tenth business day of each quarter. The principal amount of the TicketSmarter Earn-OutFebruary Contingent Payment Note is subject to an earn-out adjustment, being the difference between the $440,0002,896,829 (the “Projected EBITDA” (the “February Projected Revenue”) and the actual EBITAcash basis revenue (the “Measurement“February Measurement Period EBITDA”Revenue”) generatedcollected by TicketSmarterthe February Sellers in its normal course of business from the clients existing on February 1, 2022, during the period from SeptemberMay 1, 20212022 through December 31, 2021April 30, 2023 (the “Measurement“February Measurement Period”). measured on a quarterly basis and annualized as of the relevant period. If the February Measurement Period EBITDARevenue is less than seventy percent (70%) of the February Projected EBITDA, thereRevenue, such amount will be zero contingent payment.subtracted from the principal balance of this February Contingent Payment Note on a dollar-for-dollar basis. If the February Measurement Period EBITDA is between seventy percent (70%) and one hundred percent (100%) of the Projected EBITDA, then a fractional amount of the contingent payment will be paid out. If the Measurement Period EBITDARevenue is more than the February Projected EBITDA,Revenue, such amount will be added to the full principal balance of this TicketSmarter Earn-Out will be paid out.February Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this TicketSmarter Earn-OutFebruary Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the earn-outprincipal balance will be to reduce the balancea reduction to zero. There are no limits to the increases to the principal balance of the February Contingent Payment Note as a result of the earn-out adjustments.

 

The contingent consideration earn-outFebruary Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration earn-outpromissory note at its estimated fair value of $4,244,400 105,000at the acquisition date. Management will continue to estimate theThe estimated fair value of this TicketSmarterthe February Contingent Note at each reporting date withJune 30, 2022 is $0, representing a reduction in its estimated fair value of $105,000 as compared to is estimated fair value as of March 31, 2022. Therefore, the change, if anyCompany recorded as a gain or lossof $105,000 in the statementConsolidated Statements of operationsOperations for the three and six months ended June 30, 2022. There were no principal payments on this contingent consideration promissory note during the relevant period.three months ended June 30, 2022.

 

NOTE 4. FAIR VALUE MEASUREMENT

 

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

 

15

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

 

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

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The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20212022 and December 31, 2020:2021:

SCHEDULE OF FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS 

 Level 1 Level 2 Level 3 Total 
 September 30, 2021  June 30, 2022 
 Level 1  Level 2  Level 3  Total  Level 1 Level 2 Level 3 Total 
Liabilities:                  
Warrant derivative liabilities $—  $—  $17,942,020  $17,942,020  $—  $—  $9,285,143  $9,285,143 
Contingent consideration promissory notes and earn-out agreement  —   —   5,244,400   5,244,400 
 $—  $—  $23,186,420  $23,186,420 
Contingent consideration promissory notes  —   —   1,119,344   1,119,344 
Liabilities, fair value $—  $—  $10,404,487  $10,404,487 

 

December 31, 2020
Level 1Level 2Level 3Total
Liabilities:
Warrant derivative liabilities$—$—$—$—
Contingent consideration promissory note————
$—$—$—$—
  Level 1  Level 2  Level 3  Total 
  December 31, 2021 
  Level 1  Level 2  Level 3  Total 
Liabilities:            
Warrant derivative liabilities $—  $—  $14,846,932  $14,846,932 
Contingent consideration promissory notes and contingent consideration earn-out agreement  —   —   967,212   967,212 
Liabilities, fair value $—  $—  $15,814,144  $15,814,144 

 

The following table represents the change in Level 3 tier value measurements for the nine monthsperiods ended SeptemberJune 30, 2021:2022:

SCHEDULE OF FAIR VALUE MEASUREMENTS CHANGE IN LEVEL 3 INPUTS 

  Contingent Consideration Promissory Note  Warrant Derivative Liabilities 
       
Balance, December 31, 2020 $—  $— 
         
Issuance of detachable warrants in the January 14, 2021 Offering  —   21,922,158 
         
Issuance of detachable warrants in the February 1, 2021 Offering  —   27,476,352 
         
Issuance of detachable pre-funded warrants in the January 14, 2021 Offering  —   378,615 
         
Issuance of detachable pre-funded warrants in the February 1, 2021 Offering  —   1,438,934 
         
Transition of derivative warrant liability to equity on pre-funded warrants  —   — 
         
Change in fair value of warrant derivative liabilities  —   (24,552,257)
         
Balance, March 31, 2021  —   26,663,802 
         
Issuance of contingent consideration promissory note - Nobility Healthcare Division Acquisition  350,000   — 
         
Change in fair value of financial instruments  —   2,863,422 
         
Balance, June 30, 2021 $350,000  $29,527,224 
         
Issuance of contingent consideration promissory note - Nobility Healthcare Division Acquisition  650,000   — 
         
Issuance of contingent consideration earn-out agreement - TicketSmarter Acquisition  4,244,400   — 
         
Change in fair value of financial instruments      (11,585,204)
         
Balance, September 30, 2021 $5,244,400  $17,942,020 
  Contingent Consideration Promissory Notes  Warrant Derivative Liabilities 
         
Balance, December 31, 2021 $967,212  $14,846,932 
         
Issuance of contingent consideration promissory note - Revenue Cycle Management Segment Acquisition  750,000   — 
         
Issuance of contingent consideration promissory note - Revenue Cycle Management Segment Acquisition  105,000   — 
         
Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions  (116,198)  — 
         
Change in fair value of contingent consideration promissory notes - Revenue Cycle Management Acquisitions  56,050   — 
         
Change in fair value of warrant derivative liabilities  —   (148,171)
         
Balance, March 31, 2022 $1,762,064  $14,698,761 
         
Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions  (100,624)  — 
         
Change in fair value of contingent consideration promissory notes - Revenue Cycle Management Acquisitions  (542,096)  — 
         
Change in fair value of warrant derivative liabilities  —   (5,413,618)
         
Balance, June 30, 2022 $1,119,344  $9,285,143 

 

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NOTE 5. ACCRUED EXPENSES

 

Accrued expenses comprisedconsisted of the following at SeptemberJune 30, 20212022 and December 31, 2020:2021:

SCHEDULE OF ACCRUED EXPENSES

 September 30, 2021  December 31, 2020  June 30,
2022		 December 31,
2021		 
Accrued warranty expense $14,278  $31,845  $16,389  $13,742 
Accrued litigation costs  250,000   250,000   247,984   250,000 
Accrued sales commissions  40,328   38,294   48,000   30,213 
Accrued payroll and related fringes  599,030   199,850   461,189   453,858 
Accrued sales returns and allowances  47,272   26,069   117,552   45,298 
Accrued sales taxes  46,002   53,627 
Accrued taxes  104,506   180,486 
Other  222,048   196,409   135,117   202,401 
        
Total accrued expenses $1,218,958  $796,094  $1,130,737  $1,175,998 

 

Accrued warranty expense was comprised of the following for the ninesix months ended SeptemberJune 30, 2021:2022:

SCHEDULE OF ACCRUED WARRANTY EXPENSE

    
Beginning balance $31,845  $13,742 
Provision for warranty expense  41,040   41,166 
Charges applied to warranty reserve  (58,607)  (38,519)
        
Ending balance $14,278  $16,389 

 

NOTE 6. INCOME TAXES

 

The effective tax rate for the three months ended SeptemberJune 30, 20212022 and 20202021 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of SeptemberJune 30, 20212022, primarily because of the Company’s history of operating losses.

 

The Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at SeptemberJune 30, 2021.2022. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to continue to provide a 100%100% valuation allowance on its net deferred tax assets. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. The Company has available to it approximately $76 81.4million (based on its December 31, 2021 tax return) in net operating loss carryforwards to offset future taxable income as of SeptemberJune 30, 2021.2022.

 

NOTE 7. PREPAID EXPENSES

Prepaid expenses were the following at June 30, 2022 and December 31, 2021:

SCHEDULE OF PREPAID EXPENSE

  June 30,
2022		  December 31,
2021		 
Prepaid inventory $6,710,710  $6,546,100 
Prepaid advertising  657,831   2,455,527 
Other  542,894   727,155 
Total prepaid expenses $7,911,435  $9,728,782 

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NOTE 7.8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment net consistsconsisted of the following:following at June 30, 2022 and December 31, 2021:

SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT NET

  

September 30, 2021

  

December 31, 2020

 
Land $789,734  $59,226 
Buildings  4,909,478   363,215 
Equipment  552,135   507,676 
Leasehold improvements  143,327   289,865 
  6,394,674   1,219,982 
Less: accumulated depreciation  (326,419)  (553,182)
         
Total property, plant and equipment, net $6,068,255  $666,800 

 

  Estimated
Useful Life		  June 30,
2022		  December 31,
2021		 
Building  30 years  $4,909,478  $4,909,478 
Land  —   789,734   789,734 
Office furniture, fixtures and equipment  3-20 years   2,013,281   493,652 
Warehouse and production equipment  3-5 years   78,321   65,948 
Demonstration and tradeshow equipment  2-5 years   131,838   82,337 
Building improvements  2-15 years   1,253,937   911,940 
Rental equipment  1-3 years   8,584   8,584 
Total cost      9,185,173   7,261,673 
Less: accumulated depreciation and amortization      (727,974)  (420,647)
             
Net property, plant and equipment     $8,457,199  $6,841,026 

On April 30, 2021 the Company closed on the purchase and sale agreement to acquire a 71,361 square feet commercial office building located in Lenexa, Kansas which is intended to serve as the Company’s future office and warehouse needs. The building contains approximately 30,000 square feet of office space and the remainder warehouse space. The total purchase price was approximately $5.3 million, the Company funded the purchase price with cash on hand, without the addition of external debt or other financing.

Depreciation expense for the ninesix months ended SeptemberJune 30, 2022 and June 30, 2021 and September 30, 2020 was $177,959 307,328and $115,19695,346, respectively, and is included in general and administrative expenses.

NOTE 8.9. OPERATING LEASESLEASE

 

On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which will servethe Company currently utilizes as one of its new principal executive office, assembly and primary business location.warehouse locations. The original lease agreement was amended on August 28, 2020 to correct the footage under lease and monthly payment amounts resulting from such correction. The lease terms, as amended, include no base rent for the first nine months and monthly payments ranging from $12,398to $14,741thereafter, with a termination date of December 20262026.. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its newthis location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and warehouse operating lease as of SeptemberJune 30, 20212022, was sixty-three fifty-four months.months. The Company’s previous office and warehouse space lease expired in April 2020 and the Company paid holdover rent for the time period until it moved to and commenced occupying the new space on June 15, 2020.

 

The Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes. The terms of the lease include 48monthly payments of $1,598with a maturity date of October 20232023.. The Company has the option to purchase the equipment at maturity for its estimated fair market value at that point in time. The remaining lease term for the Company’s copier operating lease as of SeptemberJune 30, 20212022, was 25 sixteen months.months.

 

On June 30, 2021, the Company completed the acquisition of a private medical billing company, through its majority owned subsidiary, Nobility Healthcare, LLC.revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the Seller’sseller’s office space. The lease terms include monthly payments ranging from $2,648to $2,774thereafter,, with a termination date of July 2024.The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on June 30, 2021. The remaining lease term for the Company’s office and warehouse operating lease as of SeptemberJune 30, 20212022, was thirty-fourtwenty-five months.

 

On August 31, 2021, the Company completed the acquisition of a private medical billing company, through its majority owned subsidiary, Nobility Healthcare, LLC.revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the Seller’sseller’s office space. The lease terms include monthly payments ranging from $11,579to $11,811thereafter,, with a termination date of March 2023.The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The remaining lease term for the Company’s office and warehouse operating lease as of SeptemberJune 30, 20212022, was eighteen monthsnine months.

.

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On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter LLC (“TicketSmarter Acquisition”), throughAcquisition, in its wholly owned subsidiary, TicketSmarter, Inc.ticketing segment. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter Inc.’s office space. The lease terms include monthly payments ranging from $7,211to $7,364thereafter,, with a termination date of December 2022.The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The remaining lease term for the Company’s office and warehouse operating lease as of SeptemberJune 30, 20212022 was fifteen monthssix months.

.

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

 

Lease expense related to the office spacesspace and copier operating leases were recorded on a straight-line basis over their respective lease terms. Total lease expense under the fivesix operating leases was approximately $119,230 and $144,443 274,302for, during the ninethree and six months ended SeptemberJune 30, 2021.2022, respectively.

 

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The weighted-average remaining lease term related to the Company’s lease liabilities as of June 30, 2022 was 3.5 years.

 

The discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8%.

 

The following sets forth the operating lease right of use assets and liabilities as of SeptemberJune 30, 2021:2022:

SCHEDULE OF OPERATING LEASES RIGHT OF USE ASSETS AND LIABILITIES

     
Assets:    
Operating lease right of use assets $1,109,463 
     
Liabilities:    
Operating lease obligations-Long-term portion $795,704 
Operating lease obligations-Current portion  384,222 
Total operating lease obligations $1,179,926 

 

Assets:   
Operating lease right of use assets $951,928 
     
Liabilities:    
Operating lease obligations-current portion $353,646 
Operating lease obligations-less current portion  666,477 
Total operating lease obligations $1,020,123 

The components of lease expense were as follows for the nine months ended September 30, 2021:

SCHEDULE OF COMPONENTS OF LEASE EXPENSES

Selling, general and administrative expenses$144,443

 

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

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

Year ending December 31:      
2021 (October 1, to December 31, 2021) $109,948 
2022  445,635 
2022 (July 1, to December 31, 2022) $250,285 
2023  264,329  305,627 
2024  191,059  245,761 
2025  173,333  196,462 
Thereafter  175,113   175,113 
Total undiscounted minimum future lease payments  1,359,417  1,173,248 
Imputed interest  (179,491)  (153,125)
Total operating lease liability $1,179,926  $1,020,123 

21

 

NOTE 9.10. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill and other intangibleIntangible assets net asconsisted of Septemberthe following at June 30, 20212022 and December 31, 2020 are as follows:2021:

SCHEDULE OF GOODWILL AND OTHER INTANGIBLE ASSETS

  September 30, 2021  December 31, 2020 
  Gross value  Accumulated amortization  Net carrying value  Gross value  Accumulated amortization  Net carrying value 
Amortized intangible assets:                        
Licenses $331,252  $61,668  $278,324  $104,099  $52,872  $51,227 
Patents and Trademarks  444,636   188,111   247,785   264,490   135,236   129,254 
                         
   775,888   249,779   526,109   368,589   188,108   180,481 
                         
Unamortized intangible assets:                        
Goodwill  15,884,308   —   15,884,308   —   —   — 
Patents and trademarks pending  44,529   —   44,529   212,083   —   212,083 
                         
Total $16,704,725  $249,779  $16,454,946  $580,672  $188,108  $392,564 

 

  June 30, 2022  December 31, 2021 
  Gross
value		  Accumulated
amortization		  Net
carrying
value		  Gross
value		  Accumulated
amortization		  Net
carrying
value		 
Amortized intangible assets:                        
Licenses (video solutions segment) $194,286  $73,866  $120,420  $194,286  $65,578  $128,708 
Patents and trademarks (video solutions segment)  493,945   303,485   190,460   493,945   233,471   260,474 
Sponsorship agreement network (ticketing segment)  5,600,000   933,333   4,666,667   5,600,000   373,333   5,226,667 
SEO content (ticketing segment)  600,000   125,000   475,000   600,000   50,000   550,000 
Personal seat licenses (ticketing
segment)		  201,931   5,583   196,348   201,931   2,244   199,687 
Client agreements (revenue cycle management segments)  792,079   —   792,079   —   —   — 
                         
   7,882,241   1,441,267   6,440,974   7,090,162   724,626   6,365,536 
                         
Indefinite life intangible assets:                        
Goodwill (ticketing and revenue cycle management segments)  11,574,468   —   11,574,468   9,931,547   —   9,931,547 
Trade name (ticketing segment)  600,000   —   600,000   600,000   —   600,000 
Patents and trademarks pending
(video solutions segment)		  60,027   —   60,027   5,430   —   5,430 
                         
Total $20,116,736  $1,441,267  $18,675,469  $17,627,139  $724,626  $16,902,513 

Patents and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of the final patent or trademark is denied, then the amount deferred will be immediately charged to expense.

Amortization expense for the three months ended June 30, 2022 and 2021 was $358,944 and $27,483, respectively, and $716,910 and $50,114, for the six months ended June 30, 2022 and 2021, respectively. Estimated amortization for intangible assets with definite lives for the next five years ending December 31 and thereafter is as follows:

SCHEDULE OF ESTIMATED AMORTIZATION FOR INTANGIBLE ASSETS

Year ending December 31:   
2022 (July 1, to December 31, 2022) $813,792 
2023  1,448,622 
2024  1,398,065 
2025  1,311,958 
2026 and thereafter  1,468,537 
Total $6,440,974 

22

NOTE 11. OTHER ASSETS

Other assets were the following at June 30, 2022 and December 31, 2021:

SCHEDULE OF OTHER ASSETS

  June 30,
2022		  December 31,
2021		 
Lease receivable $3,337,608  $1,921,021 
Sponsorship network  3,337,465   30,752 
Other  232,208   155,526 
Total other assets $6,907,281  $2,107,299 

NOTE 10.12. COMMITMENTS AND CONTINGENCIES

COVID-19 pandemic

 

The COVID-19 pandemic represents a fluid situation that presents a wide range 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 impacthave impacts on our business in March 2020. BySince that time, muchthe COVID-19 pandemic has dramatically impacted the global health and economic environment, including millions of the Company’s first fiscal quarter was completed. During the balance of 2020confirmed cases, business slowdowns or shutdowns, labor shortages, supply chain challenges, changes in government spending and the first quarter of 2021, the Company observed recent decreases in demand from certain customers, including primarily law-enforcementrequirements, regulatory challenges, inflationary pressures and commercial customers. However, we are beginning to experience an increase in demand during the quarters ended June 30, 2021 and September 30, 2021, compared to the same periods in 2020.

market volatility.

 

GivenWe operate within the fact thatcomplex integrated global supply chain for both vendors and customers. As the Company’s productsCOVID-19 pandemic dissipates at varying times and servicesrates in different regions around the world, there could be a prolonged negative impact on these global supply chains. Our ability to continue operations at specific facilities will be impacted by the interdependencies of the various participants of these global supply chains, which are sold throughlargely beyond our direct control. A prolonged shut down of these global supply chains could have a varietymaterial adverse effect on our business, results of distribution channels, the Company expects sales will experience more volatilityoperations, cash flows and financial condition.

If our suppliers have increased challenges with their workforce (including as a result of illness, absenteeism, reactions to health and safety or government requirements), facility closures, timely access to necessary components, materials and other supplies at reasonable prices, access to capital, and access to fundamental support services (such as shipping and transportation), they may be unable to provide the changingagreed-upon goods and less predictable operational needsservices in a timely, compliant and cost-effective manner. We have incurred and may in the future incur additional costs and delays in our business resulting from the COVID-19 pandemic, including as a result of manyhigher prices, schedule delays or the need to identify and develop alternative suppliers. In some instances, we may be unable to identify and develop alternative suppliers, incurring additional liabilities under our current contracts and hampering new ones. Our customers have experienced, and may continue to experience, disruptions in their operations and supply chains as a result of the COVID-19 pandemic. The Company is aware that many companies, including many current suppliers and customers, are reportingpandemic, which can result in delayed, reduced, or predicting negative impacts from COVID-19 on future operating results. Although the Company observed a slight increase in demand for products from certain customers during the quarter ended September 30, 2021, the Company believes that the impact of the COVID-19 remains too fluid and unknown, hindering the Company from determining the long-term demand for current products. The Company 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.

19

In light of broader macro-economiccanceled orders, or collection risks, and already known impacts on certain industries that use the Company’s productswhich may adversely affect our results of operations. Similarly, current, and services, the Company has taken,future restrictions or disruptions of transportation, such as reduced availability of air transport, port closures or delays, and continues to take targeted steps to lower its operating expenses because of the COVID-19 pandemic. The Company continues to monitor the impacts of COVID-19 on its operations closely and this situation could change based on a significant number of factors that are not entirely within its control and are discussed in this and other sections of this quarterly report on Form 10-Q. The Company does not expect there to be material changes to its assets onincreased border controls, delays or closures, can also impact our balance sheet or its ability to timely account for those assets. Further, in connection with the preparation of this quarterly report on Form 10-Qmeet demand and the financial statements contained herein, the Company reviewed the potential impacts of the COVID-19 pandemic on goodwill and intangible assets and have determined there to be no material impact at this time. The Company has also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business-related items.

To date, travel restrictions and border closures have notcould materially impacted its 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 the business over the long term. Travel restrictions impacting people can restrain its ability to assist its customers and distributors as well as impact its ability to develop new distribution channels, but at present the Company does not expect these restrictions on personal travel to be material to our business operations or financial results. The Company has taken steps to restrain and monitor its operating expenses and therefore it does not expect any such impacts to materially change the relationship between costs and revenues.

Like most companies, the Company has taken a range of actions with respect to how it operates to assure it comply with government restrictions and guidelines as well as best practices to protect the health and well-being of its employees and its ability to continue operating its business effectively. To date, the Company has been able to operate its business effectively using these measures and to maintain all internal controls as documented and posted. The Company also has not experienced challenges in maintaining business continuity and does not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.adversely affect us.

 

The actionsspread of COVID-19 caused us to modify our business practices (including employee travel, employee work locations, cancellation of physical participation in meetings, events and conferences, and social distancing measures). To date, we have taken so far duringeased many of these modifications. However, we may in the future reinstitute the same or similar changes or take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Although we managed to continue most of our operations, the future course of the COVID-19 pandemic include, but areis uncertain and we cannot assure that this global pandemic, including its economic impact, will not limited to:

●Requiring all employees who can work from home to work from home;
●Increasing its IT networking capability to best assure employees can work effectively outside the office; and
●For employees who must perform essential functions in one of its offices:
●Having employees maintain a distance of at least six feet from other employees whenever possible;
●Having employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;
●Having employees stay segregated from other employees in the office with whom they require no interaction; and
●Requiring unvaccinated employees to wear masks while they are in the office whenever possible.

The Company currently believes revenue for the year ending December 31, 2021 will still be impacted due to the conditions noted. In April 2020, the Company implementedhave a COVID-19 mitigation plan designed to further reduce its 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 which the Company continues to implement and develop throughout. Basedmaterial adverse impact on the Company’s current cash position, its projected cash flow from operations and its cost reduction and cost containment efforts to date, the Company believes that it 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, theour business, financial condition,position, results of operations andand/or cash flows would be negatively impacted. The Company will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.flows.

20

 

Litigation.Litigation

 

From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluatere-evaluate and update accruals as matters progress over time.

 

23

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.

While the ultimate resolution isresolutions are unknown, based on the information currently available, we do not expect that these lawsuitsthis lawsuit will individually, or in the aggregate, have a material adverse effect to our results of operations, financial condition and 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.

NOTE 11.13. STOCK-BASED COMPENSATION

 

The Company recorded pretaxpre-tax compensation expense related to the grant of stock options and restricted stock issued of $491,950 381,601and $498,356 330,213for the three months ended SeptemberJune 30, 2022 and 2021, and 2020$776,350 and $1,148,327 656,378and $1,186,771 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively.

 

As of SeptemberJune 30, 2021,2022, the Company had adopted nine separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”), (viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”) and (ix) the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”)... The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan and 2020 Plan are referred to as the “Plans.”

 

These Plans permit the grant of stock options or restricted stock to itsthe Company’s employees, non-employee directors and others for up to a total of 5,675,000 6,675,000shares of common stock. The 2005 Plan terminated during 2015 with 20,178 21,553shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding as of SeptemberJune 30, 20212022 total 7,0645,689. The 2006 Plan terminated during 2016 with 35,474 54,787shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding as of SeptemberJune 30, 20212022 total 30,12510,625. The 2007 Plan terminated during 2017 with 94,651shares not awarded or underlying options, which shares are now unavailable for issuance. There are 0 stock options granted under the 2007 Plan that remain unexercised and outstanding as of June 30, 2022. The 2008 Plan terminated during 2018 with 40,499shares not awarded or underlying options, which shares are now unavailable for issuance. There were no0 stock options granted under the 2008 Plan that remain unexercised and outstanding as of SeptemberJune 30, 2021.2022.

21

 

The Company believes that such awards better align the interests of our employees with those of its stockholders. Option

Stock option grants. The Board of Directors has granted stock options under the Plans. These option awards have been granted with an exercise price equal to the market price of itsthe Company’s stock at the date of grant with such option awards generally vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of common stock that are issuable under its Plans with the SEC. A total of 1,091,438 190,845shares remained available for awards under the various Plans as of SeptemberJune 30, 2021.2022.

24

On July 8, 2020, the Company’s board of directors approved the grant of options to purchase 300,000 shares of Common Stock at an exercise price of $1.67 per of which (i) options to purchase 75,000 shares of Common Stock were fully vested at the time of grant and (ii) options to purchase 225,000 shares of Common Stock are subject to vesting ratably on a quarterly basis through May 31, 2022.

 

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.

 

Activity inA summary of all stock option activity under the various Plans duringfor the ninesix months ended SeptemberJune 30, 2021:2022 is as follows:

SUMMARY OF STOCK OPTIONS OUTSTANDING

Options 

Number of

Shares

  

Weighted

Average

Exercise Price

  

Number of

Shares

 

Weighted

Average

Exercise Price

 
Outstanding at December 31, 2020  838,313  $3.20 
Outstanding at December 31, 2021  1,086,063  $2.37 
Granted  300,000   1.67   25,000   0.98 
Exercised  —   —   —   — 
Forfeited  (46,875)  (12.13)  (23,750)  (4.33)
Outstanding at September 30, 2021  1,091,438  $2.39 
Exercisable at September 30, 2021  866,438  $2.58 
Outstanding at June 30, 2022  1,087,313  $2.30 
Exercisable at June 30, 2022  999,813  $2.36 

 

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The total estimated grant date fair value stock options issued during the ninesix months ended SeptemberJune 30, 20212022 was $466,83122,768. Following are certain estimates and assumptions utilized as of the issuance date to determine the grant-date fair value of the stock options issued during 2021:2022:

SCHEDULE OF STOCK OPTION PLANS BY FAIR VALUE OF STOCK OPTIONS ASSUMPTION

Volatility – range  113.47%  111.67%
Risk-free rate  1.3%  1.8%
Contractual term  10.0 years   10.0 years 
Exercise price $1.67  $0.98 

 

The Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with an intrinsic value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant to cashless exercises during the ninesix months ended SeptemberJune 30, 20212022 and 2020.2021.

 

The aggregate intrinsic value of options outstanding was $-0- and $-0-, at June 30, 2022 and theDecember 31, 2021, respectively. The aggregate intrinsic value of options exercisable was $-0- and $-0-, at SeptemberJune 30, 20212022 and December 31, 2020.2021, respectively.

 

As of SeptemberJune 30, 2021,2022, the unrecognized portion of stock compensation expense on all existing stock options was $$-350,1230.-.

 

The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable options under the Company’s option plans as of SeptemberJune 30, 2021:2022:

SCHEDULE OF SHARES AUTHORIZED UNDER STOCK OPTION PLANS BY EXERCISE PRICE RANGE

  Outstanding options  Exercisable options    Outstanding options Exercisable options
Exercise price rangeExercise price range  Number of options  Weighted average remaining contractual life  Number of  options  Weighted average remaining contractual life 

Exercise price

range

 

Number of

options

 

Weighted average
remaining

contractual life

 

Number of

options

 

Weighted average

remaining

contractual life

               
$0.01 to $2.49   715,000   8.8 years   490,000   8.4 years 0.01 to $2.49 740,000 8.1 years 652,500 8.0 years
$2.50 to $3.49   310,313   6.6 years   310,313   6.6 years 2.50 to $3.49 310,313 5.8 years 310,313 5.8 years
$3.50 to $4.49   45,750   3.4 years   45,750   3.4 years 3.50 to $4.49  37,000 3.3 years  37,000 3.3 years
$4.50 to $6.99   15,000   0.3 years   15,000   0.3 years 
$7.00 to $9.52   5,375   0.1 years   5,375   0.1 years 
                           
    1,091,438   7.8 years   866,438   7.3 years    1,087,313 7.3 years  999,813 7.1 years

 

2225

 

 

Restricted stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to fourfive years corresponding to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may be forfeited upon the termination of service to or employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends.

 

A summary of all restricted stock activity under the equity compensation plansPlans for the ninesix months ended SeptemberJune 30, 20212022 is as follows:

SUMMARY OF RESTRICTED STOCK ACTIVITY

 

Number of

Restricted

shares

  

Weighted

average

grant date

fair

value

  

Number of Restricted

shares

 

Weighted

average

grant date fair

value

 
Nonvested balance, December 31, 2020  720,125  $1.69 
Nonvested balance, December 31, 2021  1,057,375  $1.87 
Granted  856,000   2.07   715,000   1.07 
Vested  (505,250)  (1.95)  (463,375)  (1.89)
Forfeited  (7,500)  (1.08)  (65,000)  (1.06)
Nonvested balance, September 30, 2021  1,063,375  $1.87 
Nonvested balance, June 30, 2022  1,244,000  $1.45 

 

The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of SeptemberJune 30, 2021,2022, there were $1,354,329 880,299of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next 60fifty-five months in accordance with their respective vesting scale.

 

The nonvested balance of restricted stock vests as follows:

SCHEDULE OF NON- VESTEDNON-VESTED BALANCE OF RESTRICTED STOCK

Years ended 

Number of

shares

  

Number of

shares

 
      
2021 (October 1, 2021 through December 31, 2021)  6,000 
2022  585,375 
2022 (July 1, 2022 through December 31, 2022)  119,500 
2023  358,000   663,000 
2024  54,000   279,000 
2025  30,000   80,000 
2026  30,000   72,500 
2027  30,000 

 

NOTE 12.14. COMMON STOCK PURCHASE WARRANTS

 

The Company has issued common stock purchase warrants in conjunction with various debt and equity issuances. The warrants are either immediately exercisable or have a delayed initial exercise date, no more than six months from their respective issue date and allow the holders to purchase up to 26,808,598 25,674,931shares of common stock at $2.60to $5.00 3.75per share as of SeptemberJune 30, 2021.2022. The warrants expire from December 30, 2021August 21, 2022 through September 18, 2026and under certain circumstances allow for cashless exercise.

 

On January 14, 2021 and February 1, 2021, the Company issued warrants to purchase a total of 42,550,000shares of Common Stock.common stock. The warrants issued on January 14, 2021 consist of (i) pre-funded warrants to purchase up to 7,200,000 shares of common stock and (ii) common stock purchase warrants to purchase up to an aggregate of 10,000,000 shares of common stock. The warrants issued on February 1, 2021 consist of (i) pre-funded warrants to purchase up to 11,050,000 shares of common stock and (ii) common stock purchase warrants (“February Warrants”) to purchase up to an aggregate of 14,300,000 shares of common stock. The warrant terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Furthermore, the Company revaluesre-values the fair value of warrant derivative liability as of the date the warrant is exercised with the resulting warrant derivative liability transitioned to equity.change in fair value of warrant derivative liabilities through the consolidated statement of operations.

26

 

On August 19, 2021, the Company entered into a Warrant Exchange Agreement (the “Exchange Agreement”) with the Investorscertain investors cancelling February Warrants exercisable for an aggregate of 7,681,540 shares of Common Stockcommon stock in consideration for its issuance of (i) new warrants (the “Exchange Warrants”) to the Investorssuch investors, exercisable for an aggregate of up to 7,681,540 shares of Common Stock.common stock. The Company also issued warrants (the “Replacement Original Warrants”) replacing the February Warrants for the remaining shares of Common Stockcommon stock exercisable thereunder, representing an aggregate of 6,618,460 shares of Common Stock,common stock, and extended the expiration date of the February Warrants to September 18, 2026.2026. The Exchange Warrants provide for an initial exercise price of $3.25 per share, subject to customary adjustments thereunder, and are immediately exercisable upon issuance for cash and on a cashless basis. On the date of the exchange, the Company calculated the fair value, using the Black-Scholes method, of the cancelled February Warrants and the newly issued Exchange Warrants, the difference in fair value measurement of the respective warrants was attributed to warrant modification expense in the consolidated statement of operations.

 

23

On the date of the exchange, the cancelled February Warrants and Exchange Warrants were valued at $11,818,644 and $12,114,424 using the original and modified expiry date of the warrants, respectively, using the Black-Scholes method. The difference of $295,780 was accordingly recorded as a warrant modification expense in the consolidated statement of operations during 2021.

SCHEDULE OF WARRANT MODIFICATION

  Original terms at August 19, 2021  Modified terms at August 19, 2021 
Volatility - range  109.3%  104.7%
Risk-free rate  0.78%  0.78%
Dividend  0%  0%
Remaining contractual term  4.5 years   5.1 years 
Exercise price $3.25  $3.25 
Common stock issuable under the warrants  14,300,000   14,300,000 

Fluctuations in the Company’s stock price is a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.

 

The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of SeptemberJune 30, 2021:2022:

 SCHEDULE OF FAIR VALUE OF THE WARRANT DERIVATIVE LIABILITIES

  Issuance date assumptions  September 30, 2021 assumptions 
Volatility - range  106.6 – 166.6%  105.2%
Risk-free rate  0.08 - 0.49%  0.98%
Dividend  0%  0%
Remaining contractual term  0.01 - 5 years   4.3 - 5 years 
Exercise price $2.80 - 3.25  $3.25 
Common stock issuable under the warrants  42,550,000   24,300,000 

  Issuance date assumptions  June 30, 2022 assumptions 
Volatility - range  106.6 – 166.6%  104.7%
Risk-free rate  0.08 - 0.49%  3.01%
Dividend  0%  0%
Remaining contractual term  0.01 - 5 years   3.5 – 4.2 years 
Exercise price $2.80 - 3.25  $3.25 
Common stock issuable under the warrants  42,550,000   24,300,000 

 

27

During the nine months ended September 30, 2021, holders of pre-funded warrants exercised a total of 18,250,000 warrants which were fair valued at $1,817,549 at their date of issuance and recorded as a derivative warrant liability. On the date of exercise such pre-funded warrants were fair valued at zero, which was transitioned to permanent equity during the nine months ended September 30, 2021. The Company reported the $1,817,549 change in fair value from their issuance date to their exercise date in the condensed statements of operations as the change in fair value of warrant derivative liabilities.

 

The following table summarizes information about shares issuable under warrants outstanding during the ninesix months ended SeptemberJune 30, 2021:2022:

 SUMMARY OF WARRANT ACTIVITY

  Warrants  

Weighted

average

exercise

price

 
Vested Balance, January 1, 2021  3,388,364  $6.24 
Granted  42,550,000   3.11 
Exercised  (18,250,000)  2.92 
Cancelled  (879,766)  13.43 
Vested Balance, September 30, 2021  26,808,598  $3.29 
  Warrants  

Weighted

average

exercise price

 
Vested Balance, January 1, 2022  26,008,598  $3.24 
Granted  —   — 
Exercised  —   — 
Forfeited/cancelled  (333,667)  3.51 
Vested Balance, June 30, 2022  25,674,931  $3.24 

 

The total intrinsic value of all outstanding warrants aggregated $-0- as of SeptemberJune 30, 20212022, and the weighted average remaining term is 52.2 45months.

 

The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase shares of common sharesstock as of SeptemberJune 30, 2021:2022:

 SUMMARY OF RANGE OF EXERCISE PRICES AND WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE OF WARRANTS

   Outstanding and exercisable warrants 
Exercise price  Number of warrants  

Weighted average remaining

contractual life

 
$2.60   465,712   1.8 years 
$3.00   316,800   1.5 years 
$3.25   24,300,000   4.7 years 
$3.36   733,333   1.2 years 
$3.65   167,000   0.7 years 
$3.75   25,753   0.9 years 
$5.00   800,000   0.2 years 
           
     26,808,598   4.4 years 

24

     Outstanding and exercisable warrants 
 Exercise price   Number of warrants   

Weighted average

remaining

contractual life

 
$2.60   465,712   1.1 years 
$3.00   316,800   0.8 years 
$3.25   24,300,000   3.9 years 
$3.36   566,666   0.7 years 
$3.75   25,753   0.1 years 
           
     25,674,931   3.8 years 

 

NOTE 13.15. STOCKHOLDERS’ EQUITY

 

Registered Direct OfferingsCancellation of Restricted Stock

During the six months ended June 30, 2022, the Company cancelled 65,000 restricted shares of common stock due to forfeiture reasons.

 

Stock Repurchase Program

On January 14,December 6, 2021, the board of directors of the Company consummated a registered direct offering (the “Offering”)authorized the repurchase of (i) 2,800,000 shares of common stock (“Shares”), (ii) pre-funded warrants to purchase up to $10.07,200,000 shares of Common Stock (the “Pre-Funded Warrants”), issuable to investors whose purchase of shares of Common Stock would otherwise result in such investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the holder, 9.99%) million of the Company’s outstanding Common Stockimmediately following the consummation of the Registered Offering (“Pre-Funded Warrants”); and (iii) common stock purchase warrants (“Warrants”) to purchase up to an aggregateunder the specified terms of a share repurchase program (the “Program”). During the three months ended June 30, 2022, the Company repurchased 10,000,000 1,849,952shares of Common Stock (the “Warrant Shares”)its common stock for $1,962,755, which are exercisable for a period of five years after issuance at an initial exercise price $3.25 per share, subject to certain adjustments, as provided in accordance with the Warrants. The Offering was conducted pursuant to a placement agency agreement, dated January 12, 2021, betweenProgram. Furthermore, during the six months ended June 30, 2022, the Company and Kingswood Capital Markets, divisionrepurchased 3,725,986 shares of Benchmark Investments, Inc.its common stock for $4,026,523, who acted as the exclusive placement agent in connectionaccordance with the Offering pursuant to a placement agency agreement. The Shares and accompanying Warrants in the Offering were sold at a combined offering price of $3.095 per Share and accompanying Warrant and the Pre-Funded Warrants and accompanying Warrants in the Offering were sold at a combined offering price of $3.085 per Pre-Funded Warrant and accompanying Warrant.Program.

 SCHEDULE OF STOCK REPURCHASE

The securities in the Offering were issued pursuant to a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (File No. 333-239419). The placement agency agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the placement agent. The placement agent received discounts and commissions of six percent (6%) of the gross cash proceeds received by the Company from the sale of the securities sold in the Offering and certain expenses.

Under the placement agency agreement, the Company and its officers and directors executed lock-up agreements whereby, subject to certain expectations, (a) the Company has agreed not to engage in the following for a period of 90 days from the date of the pricing of the Offering, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company.

Further, pursuant to the terms of the Securities Purchase Agreement the Company has granted to the Investors, for a period of 12 months after the closing of the Offering, the right to participate in subsequent offerings by the Company of Common Stock and Common Stock equivalents in an amount up to 50% of the amount of each such subsequent offering, on the same terms, conditions and price provided for in such subsequent offering.

The Company received approximately $28,941,000 ($29,013,000 upon full exercise of the prefunded warrants) in net proceeds from the Offering after deducting the discounts, commissions, and other estimated offering expenses payable by the Company. As of September 30, 2021, all pre-funded warrants have been fully exercised. The Company plans to use the net proceeds from the Offering for working capital, product development, order fulfillment and for general corporate purposes.

Period Total Number of
Shares
Purchased		  Average Price
Paid per
Shares		  Total Number of
Shares Purchased as
Part of Publicly
Announced
Program		  Maximum Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the
Program		 
December 2021  1,734,838  $1.14   1,734,838   — 
January 2022  697,093   1.11   697,093   — 
February 2022  692,984   1.12   692,984   — 
March 2022  485,957   1.06   485,957   — 
April 2022  595,476   1.14   595,476   — 
May 2022  716,911   1.08   716,911   — 
June 2022  537,565   0.96   537,565   — 
Total all plans  5,460,824  $1.10   5,460,824  $3,998,398 

 

2528

 

 

The Company received net proceeds from this offering as follows:

SCHEDULE OF NET PROCEEDS FROM OFFERING

DescriptionAmount
Net proceeds received:
Proceeds from the sale of 2,800,000 shares of Common Stock at $3.095 per share$8,666,000
Proceeds from the sale of pre-funded warrants to purchase 7,200,000 shares of Common Stock at $3.085 per share22,212,000
Less: Placement agent fees and other expenses of the offering(1,937,000)
Net proceeds of the offering$28,941,000

In conjunction with this Offering,On June 30, 2022, the Company issued prefunded Common Stock purchase warrants to purchase up to 7,200,000 shares Common Stock at $3.095 per share ($3.085 prefunded at closing) and Common Stock purchase warrants to purchase up to 10,000,000 sharesboard of Common Stock at $3.25 per share. The underlying warrant terms provide for net cash settlement outside the controldirectors of the Company under certain circumstanceselected to terminate the Program, effective immediately. The Program began in the event of tender offers. As such,December 2021, with the Company is required to treat these warrants as derivative liabilities which are valuedpurchasing a total of 5,460,824 shares at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statementsa cost of operations as the change in fair value of warrant derivative liabilities. Accordingly, the Company allocated a portion of the net proceeds of this offering to warrant derivative liabilities based on their estimated fair value as follows (See Notes 4 and 11):$6,001,602

SCHEDULE OF NET PROCEEDS FROM OFFERING

Description Amount 
    
Warrant derivative liabilities $21,922,158 
Pre-funded warrant derivative liabilities  378,615 
Total allocation of the net proceeds of the offering to warrant derivative liabilities $22,300,773 

through June 30, 2022.

Registered Direct Offering

Noncontrolling Interests

On February 1, 2021, the Company consummated an registered direct offering (the “Second Offering”) of (i) 3,250,000 shares of common stock (“Shares”), (ii) pre-funded warrants to purchase up to 11,050,000 shares of Common Stock (the “Pre-Funded Warrants”), issuable to investors whose purchase of shares of Common Stock would otherwise result in such investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the holder, 9.99%) of the Company’s outstanding Common Stockimmediately following the consummation of the Registered Offering (“Pre-Funded Warrants”); and (iii) common stock purchase warrants (“Warrants”) to purchase up to an aggregate of 14,300,000 shares of Common Stock (the “Warrant Shares”), which are exercisable for a period of five years after issuance at an initial exercise price $3.25 per share, subject to certain adjustments, as provided in the Warrants. The Second Offering was conducted pursuant to a placement agency agreement, dated January 28, 2021, between the Company and Kingswood Capital Markets, division of Benchmark Investments, Inc., who acted as the exclusive placement agent in connection with the Second Offering pursuant to a placement agency agreement. The Shares and accompanying Warrants in the Second Offering were sold at a combined offering price of $2.80 per Share and accompanying Warrant and the Pre-Funded Warrants and accompanying Warrants in the Offering were sold at a combined offering price of $2.79 per Pre-Funded Warrant and accompanying Warrant.

The securities in the Second Offering were issued pursuant to a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (File No. 333-239419). The placement agency agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the placement agent. The placement agent received discounts and commissions of six percent (6%) of the gross cash proceeds received by the Company from the sale of the securities sold in the Second Offering and certain expenses.

Under the placement agency agreement, the Company and its officers and directors executed lock-up agreements whereby, subject to certain exceptions, (a) the Company has agreed not to engage in the following for a period of 90 days from the date of the pricing of the Offering, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company.

26

Further, pursuant to the terms of the Securities Purchase Agreement the Company has granted to the Investors, for a period of 12 months after the closing of the Second Offering, the right to participate in subsequent offerings by the Company of Common Stock and Common Stock equivalents in an amount up to 50% of the amount of each such subsequent offering, on the same terms, conditions and price provided for in such subsequent offering.

The Company received approximately $owns a 37,447,100 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49($37,557,600 upon full exercise% of the prefunded warrants) in net proceeds from the Second Offering after deducting the discounts, commissions, and other estimated offering expenses payable by the Company. Asincome/loss of September 30, 2021, all pre-funded warrants have been fully exercised. The Company plans to use the net proceeds from the Second Offering for working capital, product development, order fulfillment and for general corporate purposes.

The Company received net proceeds from this offering as follows:

SCHEDULE OF NET PROCEEDS FROM OFFERING

Description Amount 
Net proceeds received:    
Proceeds from the sale of 3,250,000 shares of Common Stock at $2.80 per share $9,100,000 
Proceeds from the sale of pre-funded warrants to purchase 11,050,000 shares of
Common Stock at $2.79 per share		  30,829,500 
Less: Placement agent fees and other expenses of the offering  (2,482,400)
     
Net proceeds of the offering $37,447,100 

In conjunction with this Offering, the Company issued prefunded Common Stock purchase warrants to purchase up to 11,050,000 Shares Common Stock at $2.80 per share ($2.79 prefunded at closing) and Common Stock purchase warrants to purchase up to 14,300,000 shares of Common Stock at $3.25 per share. The underlying warrant terms provide for net cash settlement outside the control of the Company under certain circumstancesNobility Healthcare which is reflected in the eventstatement of tender offers. As such,(income) loss as “net (income) loss attributable to noncontrolling interests of consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $383,326 and $-0- for the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Accordingly, the Company allocated a portion of the net proceeds of this offering to warrant derivative liabilities based on their estimated fair value as follows (See Notes 4 and 11):

SCHEDULE OF NET PROCEEDS FROM OFFERING

Description Amount 
    
Warrant derivative liabilities $27,476,352 
Pre-funded warrant derivative liabilities  1,438,934 
Total allocation of the net proceeds of the offering to warrant derivative liabilities $28,915,286 

2021 Issuance of Restricted Common Stock.

On January 7, 2021, the board of directors approved the grant of 450,000 shares of common stock to officers of the Company. Such shares will generally vest one-half on January 7,three months ended June 30, 2022 and one half on January 7, 2023, provided that each grantee remains an officer or employee on such dates.

27

On September 20, 2021, the board of directors approved the grant of and $406,000 shares of common stock to employees of the Company. A total of 26,000285,232 shares vested immediately upon grant and the remaining $-380,0000 shares will generally vest in varying amounts over the next 5 years, provided that each grantee remains an employee on such vesting dates.

Issuance of Common Stock as Consideration- for the TicketSmarter Acquisition.

On September 2,six months ended June 30, 2022 and 2021, the Company issued a total of 719,738respectively. shares of common stock as a portion of the consideration paid for the acquisition of Goody Tickets, LLC and TicketSmarter, LLC. See Note 16.

 

NOTE 14.16. NET INCOMEEARNINGS (LOSS) PER SHARE

 

The calculation of the weighted average number of shares outstanding and income (loss)loss per share outstanding for the three and ninesix months ended SeptemberJune 30, 20202022 and 20192021 are as follows:

SCHEDULE OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING AND LOSS PER SHARE OUTSTANDING

  2021  2020  2021  2020 
  

Three Months Ended

September 30,

  

Nine months ended

September 30,

 
  2021  2020  2021  2020 
Numerator for basic and diluted income per share – Net income (loss) attributable to common stockholders $8,068,799  $527,442  $24,408,170 $(2,304,562)
                 
Denominator for basic loss per share – weighted average shares outstanding  51,809,435   26,613,109   49,404,794   19,861,694 
                 
Dilutive effect of shares issuable under stock options outstanding  —   14,832   —   — 
                 
Dilutive effect of shares issuable under common stock purchase warrants and convertible debt outstanding  —   —   —   — 
                 
Denominator for diluted income (loss) per share – adjusted weighted average shares outstanding  51,809,435   26,627,941   49,404,794   19,861,694 
                 
Net income (loss) per share attributable to common stockholders:                
Basic $0.16  $0.02  $0.49  $(0.12)
Diluted $0.16  $0.02  $0.49  $(0.12)

                 
  

Three Months Ended

June 30,

  Six Months Ended
June 30,		 
  2022  2021  2022  2021 
Numerator for basic and diluted income per share – Net income (loss) attributable to common stockholders $(1,065,513) $(5,382,487) $(7,665,662) $16,339,371 
                 
Denominator for basic loss per share – weighted average shares outstanding  48,657,440   51,513,691   49,787,562   48,177,399 
Dilutive effect of shares issuable under stock options and warrants outstanding  —   —   —   — 
                 
Denominator for diluted loss per share – adjusted weighted average shares outstanding  48,657,440   51,513,691   49,787,562   48,177,399 
                 
Net loss per share:                
Basic $(0.02) $(0.10) $(0.15) $0.34 
Diluted $(0.02) $(0.10) $(0.15) $0.34 

 

Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the period. For the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted income (loss) per share.

29

 

NOTE 15.17. DIGITAL ALLY HEALTHCARE VENTURE

 

On June 4, 2021, Digital Ally Healthcare, a wholly-owned subsidiary of the Company, entered into a venture with Nobility LLC (“Nobility”), an eight-year oldeight-year-old revenue cycle management (“RCM”) company servicing the medical industry, to form Nobility Healthcare, LLC (“Nobility Healthcare”). Digital Ally Healthcare is capitalizing the venture with $13.5million to support the venture’s business strategy to make acquisitions of RCM companies. Digital Ally Healthcare owns 51% of the venture that entitles it to 51% of the distributable cash as defined in the venture’s operating agreement plus a cumulative preferred return of 10% per annum on its invested capital. Nobility will receive a management fee and 49% of the distributable cash, subordinated to Digital Ally Healthcare’s preferred return. The venture comprises the Company’s revenue cycle management segment.

 

On June 30, 2021, Nobility Healthcarethe Company’s revenue cycle management segment completed the acquisition of a private medical billing company (the “Healthcare Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcarethe Company’s revenue cycle management segment agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $850,000. In addition to the Initial Payment Amount, Nobility Healthcarethe Company’s revenue cycle management segment agreed to issue a promissory note to the stockholders of the Healthcare Acquisition in the principal amount of $350,000that is subject to an earn-out adjustment. Lastly, includedManagement’s estimate of the fair value of this contingent promissory note at December 31, 2021 is $317,212. The gain associated with the adjustment in the agreement, Nobility Healthcareestimated fair value of this contingent promissory note is recorded as a gain in the Consolidated Statements of Operations for the year ended December 31, 2021. Lastly, the Company’s revenue cycle management segment agreed to pay in full$162,552 representing the principal and accrued interest balance due under a promissory note issued byto the selling shareholders prior to this agreement, including the principal and accrued interest, totaling $162,552 at theacquisition closing date. The CompanyCompany’s revenue cycle management segment anticipates the earn-outestimated fair value of the contingent promissory note to be paid in full and, therefore, the total aggregate purchase price of Elite was determined to be approximately $1,376,509. The totalTotal acquisition related costs of the Healthcare Acquisition aggregated $164,630, which was expensed as incurred. Subsequent to the acquisition date, the Company received further information regarding the pursedpurchased assets and assumed liabilities. As a result, the initial allocation of the purchase price was adjusted by increasing accounts receivable by $75,000 with a corresponding reduction of goodwill during the three monthsyear ended September 30,December 31, 2021.

 

28

The Company accounts for business combinations using the acquisition method.method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 8 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Healthcare Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Healthcare Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. Our assumptions and estimates are based upon information obtained from the management of the Company’s revenue cycle management segment. The acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

 

The purchase price of the Healthcare Acquisition was allocated to the tangible assets, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the Healthcare Acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company will continue to evaluate the fair value of the identified intangible assets. The preliminary and final estimated fair value of assets acquired, and liabilities assumed in the Healthcare Acquisition were as follows:

SCHEDULE OF PRELIMINARY FAIR VALUE OF ASSETS ADACQUIRED AND LIABILITIES ASSUMEDACQUISITION

         
  

Purchase price allocation

 
Description 

Preliminary

as allocated
June 30, 2021		  

 

Final

as allocated
June 30, 2022		 
Assets acquired:        
Tangible assets acquired, consisting of acquired cash, accounts receivable and right of use asset $174,351  $174,351 
Intangible assets acquired – Client Agreements $174,351  $174,351 
Intangible assets acquired – client agreements  —   457,079 
Goodwill  1,125,000   667,921 
Liabilities assumed consisting of a promissory note issued by the selling shareholders which was paid off at closing, net of lease liability assumed  77,158   77,158 
Liabilities assumed pursuant to stock purchase agreement  77,158   77,158 
Net assets acquired and liabilities assumed $1,376,509  $1,376,509 
Consideration:        
Cash paid at Healthcare Acquisition date $1,026,509  $1,026,509 
Contingent consideration earn-out agreement  350,000   350,000 
         
Total Healthcare Acquisition purchase price $1,376,509  $1,376,509 

30

Description Amount 
Assets acquired:    
Tangible assets acquired, including $13,957 of acquired cash $88,957 
Goodwill  

1,125,000

 
Liabilities assumed consisting of a promissory note issued by the Selling shareholders
which was paid off at closing		  162,552 
Total assets acquired and liabilities assumed $1,376,509 
Consideration:    
Cash paid at Healthcare Acquisition date $1,026,509 
Contingent consideration  350,000 
     
Total Healthcare Acquisition purchase price $1,376,509 

Definite-lived intangible assets consist of client agreements and are amortized on a straight-line basis over their ten-year estimated useful life. See Note 10. Goodwill and Other Intangible Assets.

For the period from the date of the Healthcare Acquisition to June 30, 2022, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through June 30, 2022, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values of client agreements and goodwill.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.

 

On August 31, 2021, Nobility Healthcarethe Company’s revenue cycle management segment completed the acquisition of another private medical billing company (the “Medical Billing Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcare agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $2,270,000. In addition to the Initial Payment Amount, Nobility Healthcarethe Company’s revenue cycle management segment agreed to issue a contingent promissory note to the stockholders of the Medical Billing Acquisition in the principal amount of $650,000that is subject to an earn-out adjustment. The CompanyCompany’s revenue cycle management segment anticipates the earn-outestimated fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price of the Medical Billing Acquisition was determined to be approximately $2,920,000. The totalTotal acquisition related costs of the Medical Billing Acquisition aggregated $5,602, which was expensed as incurred.

 

The Company accounts for business combinations using the acquisition method.method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Medical Billing Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Medical Billing Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

 

The purchase price of the Medical Billing Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the Medical Billing Acquisition. The Company expects to retain the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined, the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are materially different from the allocations as recorded on August 31, 2021. The preliminary estimated fair value of assets acquired, and liabilities assumed in the Medical Billing Acquisition were as follows:

SCHEDULE OF PRELIMINARY FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ACQUISITION

Description Amount 
Assets acquired:    
Tangible assets acquired $401,547 
Goodwill  2,920,000 
Liabilities assumed pursuant to stock purchase agreement  (401,547)
Total assets acquired and liabilities assumed $2,920,000 
Consideration:    
Cash paid at acquisition date $2,270,000 
Contingent consideration promissory note  650,000 
     
Total acquisition purchase price $2,920,000 

31

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.

On January 1, 2022, the Company’s revenue cycle management segment completed the acquisition of another private medical billing company (the “Medical Billing Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcare agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $1,153,626. In addition to the Initial Payment Amount, the Company’s revenue cycle management segment agreed to issue a contingent promissory note to the stockholders of the Medical Billing Acquisition in the principal amount of $750,000 that is subject to an earn-out adjustment. The Company’s revenue cycle management segment anticipates the estimated fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price was determined to be approximately $1,903,626. Total acquisition related costs aggregated $7,996, which was expensed as incurred.

The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Medical Billing Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Medical Billing Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

The purchase price of the Medical Billing Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the Medical Billing Acquisition. The Company expects to retain the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined, the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are materially different from the allocations as recorded on January 1, 2022. The preliminary estimated fair value of assets acquired, and liabilities assumed in the Medical Billing Acquisition were as follows:

 

SCHEDULE OF PRELIMINARY FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ACQUISITION

Description Amount  Amount 
Assets acquired:        
Tangible assets acquired $

202,901

  $190,631 
Goodwill 

2,920,000

   2,100,000 

Liabilities assumed pursuant to stock purchase agreement

  

(202,901

)  (387,005)
Total assets acquired and liabilities assumed $2,920,000  $1,903,626 
Consideration:        
Cash paid at acquisition date $2,270,000  $1,153,626 
Contingent consideration  650,000 
Contingent consideration promissory note  750,000 
        
Total acquisition purchase price $2,920,000  $1,903,626 

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.

 

2932

 

On February 1, 2022, the Company’s revenue cycle management segment completed an asset acquisition from another private medical billing company (the “Medical Billing Asset Acquisition”). In accordance with the asset purchase agreement, Nobility Healthcare agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $230,000. In addition to the Initial Payment Amount, the Company’s revenue cycle management segment agreed to issue a contingent promissory note to the stockholders of the Medical Billing Asset Acquisition in the principal amount of $105,000 that is subject to an earn-out adjustment. The Company’s revenue cycle management segment anticipates the estimated fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price was determined to be approximately $335,000. Total acquisition related costs aggregated $10,322, which was expensed as incurred.

In accordance with ASC 805, “Business Combinations”, the acquisition method of accounting is used, and recognition of the assets acquired is at fair value as of the acquisition dates. All acquisition costs were expensed as incurred. The consideration paid has been allocated to the assets acquired based on their estimated fair values at the acquisition date. The estimate of fair values for the intangible assets acquired were agreed to by both buyer and seller. The estimated fair value of intangible assets acquired in the Medical Billing Asset Acquisition were as follows:

SCHEDULE OF PRELIMINARY FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ACQUISITION

Description Amount 
Assets acquired:    
Intangible assets acquired – client agreements $335,000 
Total assets acquired and liabilities assumed $335,000 
Consideration:    
Cash paid at acquisition date $230,000 
Contingent consideration promissory note  105,000 
     
Total acquisition purchase price $335,000 

Definite-lived intangible assets consist of client agreements and are amortized on a straight-line basis over their ten-year estimated useful life. See Note 10. Goodwill and Other Intangible Assets.

The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations” and will be estimated on a quarterly basis.

 

NOTE 16.18. TICKETSMARTER ACQUISTIONACQUISITION

On September 1, 2021, Digital Ally, Inc. formed TicketSmarter, Inc. (“TicketSmarter”), through which the Company completed the acquisition of Goody Tickets, LLC, a Kansas limited liability company (“Goody Tickets”) and TicketSmarter, LLC, a Kansas limited liability company (“TicketSmarter LLC”), (such acquisitions, collectively, the “TicketSmarter Acquisition”). TicketSmarter, Inc. comprises the Company’s ticketing business segment. In accordance with the stock purchase agreement, the Company agreed to an initial payment (the “Initial Payment Amount”) of $9,403,600through a combination of cash and common stock. In addition to the Initial Payment Amount, the Company agreed to issue an earn-out agreement to the stockholders of Goody Tickets and TicketSmarter LLC in the contingent amount of $4,244,400that is subject to an earn-out adjustment based on actual EBITDA achieved in 2021, of which the Company gave a fair value of $3,700,000 on the date of acquisition. However, following the completion of 2021, it was determined that the actual EBITDA threshold for any earn-out adjustment to be paid was not met. Thus, in accordance with U.S. GAAP, the fair value of the contingent earn-out is reduced to zero, and the associated gain related to this revaluation is recorded in our Consolidated Statements of Operations for the year ended December 31, 2021. Lastly, included in the agreement, the Company agreed to place $500,000in escrow, subject to a working capital adjustment based on actual working capital amounts on the acquisition date as defined in the agreement, thisagreement. This amount was subject to disbursement 45 days following the close of the acquisition. The parties completed the working capital adjustment resulting in the Company retaining $297,726 of the escrow amount with the $202,274 released to the Sellers. The Company anticipates the earn-out amount to be paid in full, therefore, the total aggregate purchase price of the TicketSmarter Acquisition was determined to be approximately $13,850,274. sellers. The total acquisition related costs of the TicketSmarter Acquisition aggregated $40,625, which was expensed as incurred.

 

33

The Company accounts for business combinations using the acquisition method.method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the TicketSmarter Acquisition has been allocated to Goody Tickets’ and TicketSmarter LLC’s acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the TicketSmarter Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The TicketSmarter Acquisition was structured as a stock purchase,purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and is deductible for income tax purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

 

The purchase price of the TicketSmarter Acquisition was allocated to Goody Tickets’ and TicketSmarter LLC’s tangible assets, goodwill, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the TicketSmarter Acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company will continue to evaluate the fair value of the identified intangible assets. The preliminary estimated fair value of assets acquired, and liabilities assumed in the TicketSmarter Acquisition were as follows:

SCHEDULE OF PRELIMINARY FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED IN THE TICKET SMARTER ACQUISITION

         
  

Preliminary purchase price

allocation

 
  As allocated  As allocated 
Description September 30,
2021		  

December 31,

2021

 
Assets acquired:        
Tangible assets acquired, including $51,432 of cash acquired $7,139,930  $5,748,291 
Identifiable intangible assets acquired  —   6,800,000 
Goodwill  11,839,308   5,886,547 
Liabilities assumed  (5,128,964)  (5,128,964)
Net assets acquired and liabilities assumed $13,850,274  $13,305,874 
Consideration:        
Cash paid at TicketSmarter Acquisition date $8,413,240  $8,413,240 
Common stock issued as consideration for TicketSmarter Acquisition at date of acquisition  990,360   990,360 
Contingent consideration earn-out agreement  4,244,400   3,700,000 
Cash paid at closing to escrow amount  500,000   500,000 
Cash retained from escrow amount pursuant to settlement of working capital target  (297,726)  (297,726)
         
Total TicketSmarter Acquisition purchase price $13,850,274  $13,305,874 

 

Description Amount 
Assets acquired:    
Tangible assets acquired, including $51,432 of cash acquired $7,139,930 
Goodwill  11,839,308 
Liabilities assumed  (5,128,964)
Net assets acquired and liabilities assumed $13,850,274 
Consideration:    
Cash paid at TicketSmarter Acquisition date $8,413,240 
Common stock issued as consideration for TicketSmarter Acquisition at date of acquisition  990,360 
Contingent consideration earn-out agreement  4,244,400 
Cash paid at closing to escrow amount  500,000 
Cash retained from escrow amount pursuant to settlement of working capital target  (297,726)
     
Total TicketSmarter Acquisition purchase price $13,850,274 
34

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:

SCHEDULE OF COMPONENTS OF IDENTIFIABLE INTANGIBLE ASSETS ACQUIRED AND ESTIMATED USEFUL LIVES

  Cost  Amortization through
June 30,
2022		  

Estimated

useful life

Identifiable intangible assets:          
Trademarks $600,000  $—  indefinite
Sponsorship agreement network  5,600,000   933,333  5 years
Search engine optimization/content  600,000   125,000  4 years
           
  $6,800,000  $1,058,333   

For the period from the date of the TicketSmarter Acquisition to December 31, 2021, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through December 31, 2021, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values (primarily related to the sponsorship agreement network), the estimated fair value of the contingent earn-out agreement liability and goodwill. There were no adjustments to the allocation of the purchase price during the three and six months ended June 30, 2022.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 3, “Debt Obligations”.

NOTE 19. SEGMENT DATA

The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s three operating segments are Video Solutions, Revenue Cycle Management, and Ticketing, each of which has specific personnel responsible for that business and reports to the CODM. Corporate expenses capture the Company’s corporate administrative activities, and are also to be reported in the segment information. The Company’s captive insurance subsidiary provides services to the Company’s other business segments and not to outside customers. Therefore, its operations are eliminated in consolidation and it is not considered a separate business segment for financial reporting purposes.

The Video Solutions Segment encompasses our law, commercial, and shield divisions. This segment includes both service and product revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides working capital and back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Ticketing Segment acts as an intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms.

The Company’s corporate administration activities are reported in the corporate line item. These activities primarily include expense related to certain corporate officers and support staff, certain accounting staff, expense related to the Company’s Board of Directors, stock option expense for options granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.

35

Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2022, and June 30, 2021:

SCHEDULE OF SEGMENT REPORTING

  2022  2021   1   2 
  Three months ended June 30,  Six months ended June 30,
  2022  2021  2022 2021
Net Revenues:                               
Video Solutions $2,049,756  $2,493,671  $4,059,805  $5,029,501 
Revenue Cycle Management  2,120,738   —   4,024,695   

—

 
Ticketing  5,180,963   —   11,561,738   

—

 
Total Net Revenues $9,351,457  $2,493,671  $19,646,238  $

5,029,501

 
                 
Gross Profit:                
Video Solutions $759,010  $1,260,800  $1,027,440  $

2,072,683

 
Revenue Cycle Management  957,263   —   1,654,432   

—

 
Ticketing  2,805   —   976,824   

—

 
Total Gross Profit $1,719,078  $1,260,800  $3,658,696  $

2,072,683

 
                 
Operating Income (loss):                
Video Solutions $(1,130,749) $(296,601) $

(2,846,004

) $

(979,520

)
Revenue Cycle Management  247,301  —   

118,783

   

—

 
Ticketing  (2,320,694)  —   

(3,766,541

)  

—

 
Corporate  (3,457,110)  (2,320,283)  

(6,970,828

)  

(4,503,058

)
Total Operating Income (Loss) $(6,661,252) $(2,616,884) $

(13,464,590

) $

(5,482,578

)
                 
Depreciation and Amortization:                
Video Solutions $209,442  $87,830  $

385,516

  $

145,459

 
Revenue Cycle Management  

319,175

   —   

638,358

   — 
Ticketing  218   —   364   — 
Total Depreciation and Amortization $

528,835

  $87,830  $

1,024,238

  $

145,459

 

  

June 30,

2022

  

December 31,

2021

 
Assets (net of eliminations):        
Video Solutions $35,219,240  $25,983,348 
Revenue Cycle Management  1,678,775   934,095 
Ticketing  10,097,319   12,260,780 
Corporate  23,733,487   43,810,974 
Total Identifiable Assets $70,728,821  $82,989,197 

The segments recorded noncash items affecting the gross profit and operating income (loss) through the established inventory reserves based on estimates of excess and/or obsolete current and non-current inventory. The Company recorded a reserve for excess and obsolete inventory in the video solutions segment of $3,272,831 and a reserve for the ticketing segment of $449,635.

The segment net revenues reported above represent sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income, which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets.

 

NOTE 17.20. RELATED PARTY TRANSACTIONS

American Rebel Holding, Inc. Secured Promissory NotesTransactions with Managing Member of Nobility Healthcare

On October 1, 2020,January 27, 2022, the Board of Directors appointed Christian J. Hoffmann, III as a member of the Board, effective immediately. Mr. Hoffmann is a principal owner and manager of Nobility, LLC which is currently the managing member of our consolidated subsidiary Nobility Healthcare, LLC.

Nobility, LLC is currently the managing member of Nobility Healthcare, LLC. The Company has advanced a total of $158,384 in the form of a working capital loan to Nobility, LLC in order to fund capital expenditures necessary for the initial growth of the joint venture during 2021. The outstanding balance of the working capital loan was $138,384 as of June 30, 2022 and the Company advancedanticipates full repayment of this advance during the year ended December 31, 2022. During the six months ended June 30, 2022, the Company paid distributions to the noncontrolling in consolidated subsidiary totaling $250,000 15,692.

On August 1, 2022, Mr. Hoffmann resigned as a member of the Board, effective immediately. He remains as a principal owner and manager of Nobility, LLC which is currently the managing member of our consolidated subsidiary Nobility Healthcare, LLC.

to American Rebel Holdings,

NOTE 21. SUBSEQUENT EVENTS

Notice of Delisting

On July 7, 2022, Digital Ally, Inc. (AREB), a Nevada Corporation (the “Company”), received a written notification (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it was not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market, as set forth under a secured promissory note. The CEO, President and Chairman of AREB isNasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”), because the brotherclosing bid price of the Company’s CEO, President and Chairman. Such note bears interest at common stock, par value $80.001 per share (the “Common Stock”), was below $1.00% and is secured by all per share for the tangible and intangible assetsprevious thirty (30) consecutive business days. The Notice has no immediate effect on the listing of the Common Stock, which will continue to trade uninterrupted on the Nasdaq Capital Market under the ticker “DGLY.”

Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company that are not currently secured by other indebtedness. The Company also received warrantshas been granted 180 calendar days from the date of the Notice, or until January 3, 2023 (the “Compliance Period”), to purchase 1,250,000 shares of AREB common stockregain compliance with the Minimum Bid Price Requirement. If at an exerciseany time during the Compliance Period, the bid price of the Common Stock closes at or above $0.10 1.00per share for a minimum of ten (10) consecutive business days, Nasdaq will provide the Company with a five-year term. This note hadwritten confirmation of compliance with the Minimum Bid Price Requirement and the matter will be closed.

In the event the Company does not regain compliance with the Minimum Bid Price Requirement by January 3, 2023, the Company may be eligible for an original maturity dateadditional 180-calendar day grace period. To qualify, the Company will be required to meet the continued listing requirement for market value of January 2, 2021; however, additional provisionspublicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and will need to provide written notice to Nasdaq of its intent to regain compliance with such requirement during such second compliance period.

If the Company does not regain compliance within the note provided for an extensionallotted compliance period(s), including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Common Stock will be subject to delisting from the Nasdaq Capital Market.

Resignation of a Member of Board of Directors

On August 1, 2022, Mr. Hoffmann resigned as a member of the maturity date for fourteen months due to AREB’s failure to raise $300,000 in new debt or equity financing prior toBoard, effective immediately. He remains as a principal owner and manager of Nobility, LLC which is currently the original maturity date. Upon this extension, the AREB was obligated to make equal monthly paymentsmanaging member of principal and interest over the extended period of the note.our consolidated subsidiary Nobility Healthcare, LLC.

30

On October 21, 2020, the Company advanced $250,000 to AREB under a second secured promissory note. Such note bears interest at 8% and is secured by inventory manufactured and revenue/accounts receivable derived from a specific purchase order. The Company also received warrants to purchase 1,250,000 shares of AREB common stock at an exercise price of $0.10 per share with a five-year term. This note has a maturity date of April 21, 2021, subject to full repayment upon AREB closing on debt or equity financings of at least $600,000, and the receipt of revenue from the sale of inventory sold under the specific purchase order serving as collateral.On March 1, 2021, the Company advanced an additional $117,600 to AREB on terms similar to the previously issued notes.

On April 21, 2021, the parties agreed to the terms of a Debt Settlement Agreement and Mutual Release regarding the following: (a) the secured promissory note dated October 1, 2020; (b) the secured promissory note dated October 21, 2020; and (c) an advance made by the Company on March 1, 2021. The parties arranged for a lump sum payment aggregating $639,956 to liquidate all outstanding debt including accrued interest for the two delinquent notes and the advance which lump-sum payment was made on April 21, 2021.

*************************************

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

This quarterly report on Form 10-Q (the “Report”) of Digital Ally, Inc. (the “Company”, “we”, “us”, or “our”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “anticipate,“feel,” “forecast,” “intend,” “estimate,“may,” “may,“outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “could,” “will,” “plan,” “future,” “continue,“would,” and othersimilar expressions that are predictions of or indicate future events and trends and that do not relateintended to historical matters identify forward-looking statements.statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.

 

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

 

Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including during fiscal 2020 and 2019; (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 products 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)(7) our ability to produce our products in a cost-effective manner; (10)(8) competition from larger, more established companies with far greater economic and human resources; (11)(9) our ability to attract and retain quality employees; (12)(10) risks related to dealing with governmental entities as customers; (13)(11) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (14)(12) characterization of our market by new products and rapid technological change; (15)(13) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVU HD and DVM-250 products; (16)(14) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (17)(15) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (18) our dependence on key personnel; (19) our reliance on third-party distributors and sales representatives for part of our marketing capability; (20)(16) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (21)(17) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (22)(18) our ability to generate more recurring cloud and service revenues; (23)(19) risks related to our license arrangements; (24)(20) the fluctuation of our revenues and operatingoperation results may fluctuate unexpectedly from quarter to quarter; (25)(21) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (26)(22) the issuance or sale of substantial amounts of our common stock, par value $0.001 per share (the “Common Stock”),or the perception that such sales may occur in the future, which may have a depressive effect on the market price of the outstanding shares of our Common Stock; (27)securities; (23) potential dilution from the possible issuance of Common Stock subject tocommon stock underlying outstanding options and warrants that may dilute the interest of stockholders; (28) our nonpayment of dividends and lack of plans to pay dividends in the future; (29) 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)warrants; (24) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our Common Stock; (31)common stock; (25) the likely high volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; (32) whether such technology will have a significant impact on(26) our revenues inability to integrate and realize the long-term; and (33) indemnificationanticipated benefits from acquisitions; (27) our ability to maintain the listing of our officers and directors.common stock on the Nasdaq Capital Market.

 

3237

 

 

Current Trends and Recent Developments for the Company

 

Segment 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 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 through 2020 and into 2021. 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 late inand the second quartersale of 2020.Shield disinfectant and personal protective products. This segment generates revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the term of the subscription, typically 3 or 5 years.

Revenue Cycle Management Operating Segment - We have recently entered the revenue cycle management (“RCM”) business late in the second quarter of 2021 with the formation of our wholly owned subsidiary, Digital Ally Healthcare, Inc. and its majority-owned subsidiary Nobility Healthcare, LLC (“Nobility Healthcare”).Healthcare. Nobility Healthcare LLC completed its first acquisition on June 30, 2021, when it acquired a private medical billing company, and a second acquisition on August 31, 2021 upon the completion of its acquisition of another private medical billing company, along with two more acquisitions completed during the three months ended March 31, 2022, in which we will assist in providing working capital and back-office services to healthcare organizations throughout the country. Additionally,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.

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Ticketing Operating Segment - We have also recently 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, we have entered into the2021. 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 ticketing 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.

Results of Operations

Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2022, and June 30, 2021:

  Three months ended
June 30,		  Six months ended
June 30,		 
  2022  2021  2022  2021 
Net Revenues:                
Video Solutions $2,049,756  $2,493,671  $4,059,805  $5,029,501 
Revenue Cycle Management  2,120,738   —   4,024,695   — 
Ticketing  5,180,963   —   11,561,738   — 
Total Net Revenues $9,351,457  $2,493,671  $19,646,238  $5,029,501 
                 
Gross Profit:                
Video Solutions $759,010  $1,260,800  $1,027,440  $

2,072,683

 
Revenue Cycle Management  957,263   —   1,654,432   — 
Ticketing  2,805   —   976,824   — 
Total Gross Profit $1,719,078  $1,260,800  $3,658,696  $2,072,683 
                 
Operating Income (loss):                
Video Solutions $(1,130,749) $(296,601) $(2,846,004) $(979,520)
Revenue Cycle Management  247,301   —   118,783   — 
Ticketing  (2,320,694)  —   (3,766,541)  — 
Corporate  (3,457,110)  (2,320,283)  (6,970,828)  (4,503,058)
Total Operating Income (Loss) $(6,661,252) $(2,616,884) $(13,464,590) $(5,482,578)
                 
Depreciation and Amortization:                
Video Solutions $209,442  $87,830  $385,516  $145,459 
Revenue Cycle Management  319,175   —   638,358   — 
Ticketing  218   —   364   — 
Total Depreciation and Amortization $528,835  $87,830  $1,024,238  $145,459 

  

June 30,

2022

  

December 31,

2021

 
Assets (net of eliminations):        
Video Solutions $35,219,240  $25,983,348 
Revenue Cycle Management  1,678,775   934,095 
Ticketing  10,097,319   12,260,780 
Corporate  23,733,487   43,810,974 
Total Identifiable Assets $70,728,821  $82,989,197 

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Segment net revenues reported above represent only sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income (loss), which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets.

Consolidated Results of Operations

 

We experienced operating losses for the first second, and third quartershalf of 20212022 and all quarters during 2020.2021. The following is a summary of our recent operating results on a quarterly basis:

 

 For the Three Months Ended: 
 

September 30,

2021

  

June 30,

2021

  

March 31,

2021

  

December 31,

2020

  

September 30,

2020

  

June 30,

2022

 

March 31,

2022

 

December 31,

2021

 

September 30,

2021

 

June 30,

2021

 
Total revenue $4,639,822  $2,493,671  $2,535,829  $2,798,291  $3,558,640  $9,351,457  $10,294,781  $11,744,112  $4,639,822  $2,493,671 
Gross profit (loss)  1,400,570   1,260,800   811,882   1,182,160  1,222,648 
Gross profit  1,719,078   1,939,619   2,190,523   1,400,570   1,260,800 
Gross profit margin %  30.2%  50.6%  32.0%  43.0%  34.1%  18.4%  18.8%  18.7%  30.2%  50.6%
Total selling, general and administrative expenses  4,999,543   3,877,684   3,677,575   2,931,334   3,066,606   8,380,330   8,742,957   7,869,883   4,999,543   3,877,684 
Operating loss  (3,598,973)  (2,616,884)  (2,865,693)  (1,749,174)  (1,843,958)
Operating loss %  (77.6)%  (105.0)%  (113.0)%  (63.2)%  (51.4)%
Operating income (loss)  (6,661,252)  (6,803,338)  (5,679,360)  (3,598,973)  (2,616,884)
Operating income (loss) %  (71.2)%  (66.1)%  (48.4)%  (77.6)%  (104.9)%
Net income (loss) attributable to common stockholders $8,068,799  $(5,382,487) $21,721,858  $(321,318) $527,442  $(1,065,513) $(6,698,242) $1,122,791  $8,068,799 $(5,382,487)

 

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)settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; and (6) most recently,(7) the impact of COVID-19 on the economy and our business.businesses; and (8) the completion of corporate acquisitions. We reported a net incomeloss of $8,068,799$1,065,513 on revenues of $4,639,822$9,351,457 for the thirdsecond quarter of 2021. The income recognized in the third quarter 2021, first quarter 2021, and in the third quarter 2020 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.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses other than the following:

 

We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 8,9, “Operating Leases,” to our condensed consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.

 

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For the Three Months Ended SeptemberJune 30, 20212022 and 20202021

 

Results of Operations

 

Summarized immediately below and discussed in more detail in the subsequent sub-sectionssubsections is an analysis of our operating results for the three months ended SeptemberJune 30, 20212022 and 2020,2021, represented as a percentage of total revenues for each respective year:such quarter:

 

 

Three months ended

September 30,

  

Three Months Ended

June 30,

 
 2021  2020  2022 2021 
Revenue  100%  100%  100%  100%
Cost of revenue  70%  66%  82%  49%
                
Gross profit  30%  34%  18%  51%
Selling, general and administrative expenses:                
Research and development expense  11%  11%  6%  18%
Selling, advertising and promotional expense  33%  22%  30%  35%
General and administrative expense  65%  52%  54%  102%
                
Total selling, general and administrative expenses  108%  85%  90%  156%
                
Operating loss  (78)%  (51)%  (71)%  (105)%
                
Change in fair value of proceeds investment agreement  —%  66%
Change in fair value of short-term investments  —%  —%
Change in fair value of contingent consideration promissory notes  

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%  —%
Change in fair value of derivative liabilities  250%  —%  58%  (115)%
Other income and interest expense, net  2%  —%
Other income and interest income (expense), net  —%  4%
                
Income before income tax benefit  173%  15%
Income (loss) before income tax benefit  (7)%  (216)%
Income tax (provision)  —%  —%  —%  —%
                
Net income  173%  15%
Net income/(loss)  (7)%  (216)%
                
Net loss attributable to noncontrolling interests of consolidated subsidiary  1%  —%   (4)%  —%
                
Net income (loss) attributable to common stockholders  174%  15%  (11)%  (216)%
                
Net income (loss) per share attributable to common stockholders information:        
Net income/(loss) per share information:        
Basic $0.16  $0.02  $(0.02) $(0.10)
Diluted $0.16  $0.02  $(0.02) $(0.10)

 

Revenues

We sellRevenues by Type and by Operating Segment

Our operating segments generate two types of revenues:

Product revenues primarily include video operating segment hardware sales of in-car and body-worn cameras, along with sales of our ThermoVuTM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale of tickets by our ticketing operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our ticketing segment until their sale.

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Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video recordingsolutions segment. Our ticketing operating segments’ secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services provided to medical providers throughout the country.

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

 

 ●Product salesSales to domestic customers are made directdirectly to the end customer (typically a law enforcement agency or a commercial customer) through itsour sales force, which is composedcomprised of itsour employees. Revenue is recorded when the product is shipped to the end customer.
   
 ●Product salesSales to international customers are made through independent distributors who purchase products from the Companyus at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Accordingly, upon application of steps one through five above, revenueRevenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.
   
 ●Repair parts and services for domestic and international customers are generally handled by itsour inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.

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

 ●Service sales through Nobility Healthcare are drivenOur revenue cycle management operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying service revenue is recognized upon execution of services. ThroughService revenues are generally determined as a percentage of the amount of medical billings collected by the customer.

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

●Our ticketing operating segment generates product revenues from the sale of tickets directly to consumers for a particular event that the ticketing operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter service sales are driven largely in part toby the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction.transaction completed through this platform.

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

 

Nobility Healthcare offers leading-edge revenue cycle management solutions to mediumThe Omicron variant of COVID-19 and large healthcare organizations throughout the country. Nobility Healthcare’s customers are spread across a wide range of practices and specialties, including radiology, oncology, orthopedics, pediatrics, internal medicine, and cardiology.

TicketSmarter is a ticket resale marketplace with seats offered at over 125,000 live events, with over 48 million tickets for sale through its TicketSmarter.com platform. TicketSmarter is committed to developing meaningful relationships with conferences, teams, and charities across the country.

The COVID-19 pandemicnationwide inflationary concerns had an impact on all of our operating segment revenue streams infor the third quarter 2021 and we expectthree months ended June 30, 2022. In particular, it to adversely affect our revenues during the remainder of 2021. The COVID-19 pandemic had a negative impact generally on our video solutions operating segment legacy products and, in particularspecifically, our commercial event recorder hardware (DVM-250 Plus) and in-car hardware for law enforcement (DVM-800) during the quarter. TheTicketing operating segment revenues also continue to be negatively impacted due to the continued public caution surrounding the COVID-19 pandemic had a positive impact generallyand the impacts of inflation on our new ShieldTM disinfectant/sanitizer and ThermoVU® product lines.consumer’s discretionary spending.

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Revenues for each of the third quarters of 2021 and 2020 were derived from the following sources:

Product revenues by operating segment is as follows:

  Three months ended September 30, 
  2021  2020 
DVM-800  11%  21%
ThermoVU/Shield  1%  31%
FirstVu HD  5%  11%
Cloud service revenue  6%  6%
Extended warranty revenue  6%  —%
EVO-HD  4%  6%
Repair and service  1%  10%
TicketSmarter sales  12%  —%
TicketSmarter TNP sales  33%  —%
Nobility Healthcare RCM  10%  —%
Nobility Healthcare credentialing and services  2%  —%
Accessories and other revenues  9%  15%
         
   100%  100%

  Three Months Ended June 30, 
  2022  2021 
Product Revenues:        
Video Solutions $1,404,242  $1,719,332 
Revenue Cycle Management  —   — 
Ticketing  805,939   — 
Total Product Revenues $2,210,181  $1,719,332 

 

Product revenues for the three months ended SeptemberJune 30, 2022 and 2021 were $2,210,181 and 2020 were $1,356,454 and $2,958,579$1,719,332 respectively, a decreasean increase of $1,602,125 (54%$490,849 (29%), due to the following factors:

 

 ●Revenues generated by the new ticketing operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The Companynew ticketing operating segment generated $805,939 in product revenues for the three months ended June 30, 2022, compared to $-0- for the three months ended June 30, 2021. This product revenue relates to the resale of tickets purchased for live events, including sporting events, concerts, and theatre, then sold through various platforms to customers.

●The Company’s video segment operating segment generated revenues totaling over $39,075$1,404,242 during the three months ended SeptemberJune 30, 2022 compared to $1,719,332 for the three months ended June 30, 2021 compareddue to $1,128,849 for the same period in 2020 from its newslowing sales of our ThermoVuTM product lines. Late in the second quarter of 2020, thelines related to our COVID-19 response. The Company launched two product lines in direct response to the increased safety precautions that organizations and individuals are taking due to the COVID-19 pandemic. ThermoVu® ThermoVu™ was launched as 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®ThermoVu™ has optional features such as facial recognition to improve facility security by restricting access based on temperature and/or facial recognition reasons. ThermoVu®ThermoVu™ provides an instant pass/fail audible tone with its temperature display and controls access to facilities based on such results. We believe that it can be widelyThermoVuTM has been applied in schools, dental offices, hospitals, office buildings, subway stations, airports and other public venues. The Company also launched its Shield™ disinfectant/sanitizer product lines to fulfill demand by current customers and others for a disinfectant and sanitizer that is less harsh than many of the traditional products now widely distributed. The Shield™ Cleanser product line contains a cleanser with no harsh chemicals or fumes.

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The Company began offering the Shield™ line of disinfecting products to its first responder customers including police, fire and paramedics late in the second quarter of 2020. Commercial customers such as cruise lines, taxi-cab and para transit may also be good candidates for the products. The Company is considering enhancing the line of disinfectant productsbeginning to experience decreased demand for additional related products including hardware to efficiently and effectively dispense the disinfectants. The Company is hopeful that its law enforcement and commercial customers will adopt this newthese product offering to combat the spread oflines as the COVID-19 virus as well as other bacteria and viruses.pandemic begins to subside.
   
 ●

In general, we haveour video solutions operating segment has experienced pressuredecreased demand on ourits product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined during the three months ended September 30, 2021 compared to the same period in 2020,due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. We introduced our EVO-HD latenew body-worn cameras, the FirstVu Pro and FirstVu II, in the secondfourth quarter of 2019 with the goal of enhancing our product line features to meet these competitive challenges2021, and we startedhave begun to see increased traction with these products in late 2019 but sales in 2020 were hampered duethe first and second quarters of 2022. The Company hopes the interest throughout the marketplace continues to grow for these new products as the COVID-19 pandemic. We expect customers and potential customersmarket is able to review and test the EVO-HD prior to committing to thisthese new product platform, all of which has been delayed due to the COVID-19 pandemic. We experienced continued interest in our EVO-HD, which resulted in increased revenues during the third quarter of 2021 and believe that customers are recognizing and are attracted to its advanced features.

●

The COVID-19 pandemic has continued to delay the shipment of certain law enforcement orders since the first quarter of 2020 as police forces and governments deal with its impact. In addition, our salesmen were generally unable to meet with and demonstrate our products to our law enforcement customers because of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our products to potential customers is generally important in order to obtain new customers or upgrade existing customers. Our product sales to law enforcement decreased in the third quarter of 2021 compared to the same period in 2020, as the impact of the COVID-19 pandemic continues to impact our business.products.

The COVID-19 pandemic impact remains relevant, as the shipment of commercial orders in the third quarter of 2021 remain slow, as cruise lines, taxi cabs, paratransit and other commercial customers continue to deal with its impact. In addition, our salesmen were generally unable to meet with and demonstrate our products to our commercial customers because of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our products to potential customers is generally required in order to obtain new customers or upgrade existing customers. Our product sales to commercial customers decreased in the third quarter of 2021 compared to the same period in 2020 due to the impact of the COVID-19 pandemic.

   
 ●ManagementOur video solutions operating segment management has been focusing on migrating customers, and in particular commercial customers, from a “hardware sale”hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service.service fee. In that respect, we introduced in the second quarter of 2020 a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. We have noticed significant interestThis program has continued to gain traction, resulting in decreased product revenues and success with this program, as we experienced a vast increase in our subscription contracts during the third quarter of 2021 compared to the same period in 2020.increased service revenues. We expect this program to continue to hold traction,gain momentum, resulting in recurring revenues over a span of three to five years.

 

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Service and other revenues by operating segment is as follows:

 

  Three Months Ended June 30, 
  2022  2021 
Service and Other Revenues:        
Video Solutions $645,514  $774,339 
Revenue Cycle Management  2,120,738   — 
Ticketing  4,375,024   — 
Total Service and Other Revenues $7,141,276  $774,339 

 

Service and other revenues for the three months ended SeptemberJune 30, 2022 and 2021 were $7,141,276 and 2020 were $3,283,368 and $630,061,$774,339, respectively, which is an increase of $2,653,307 (421%$6,366,937 (822%), due to the following factors:

 

 ●Cloud revenues generated by the video solutions operating segment were $264,594$365,599 and $217,535$247,085 for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $47,059 (22%$118,514 (48%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of our new cloud-based EVO-HD in-car system. However,system and our next generation body-worn camera products, which contributed to our increased cloud revenues in the falloutthree months ended June 30, 2022. We expect this trend to continue throughout 2022 as the migration from the COVID-19 pandemic and related business shut-downs adversely affectedlocal storage to cloud storage continues in our commercial customers usage of cloud services and offset increases in cloud revenues.customer base.

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 ●RevenuesVideo solutions operating segment revenues from extended warranty services were $298,840$163,639 and $322,887$232,614 for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is a decrease of $24,047 (7%$68,975 (30%). We have many customers that have purchased extended warranty packages, primarily in our DVM-800 premium service program. However, the continued effects from the COVID-19 pandemic and related restrictions on travelhave adversely affected our sales of DVM-800 hardware systems resulting in a decrease in their sales overin the three months ended SeptemberJune 30, 20212022 compared to the same period in 2020.
●Installation service revenues were $22,087 and $51,423 for the three months ended September 30, 2021 and 2020, respectively, which is a decrease of $29,336 (57%). Installation revenues tend to vary more than other service revenue types and are dependent on larger customer implementations. The decrease in installation revenues in the three months ended September 30, 2021 compared to the same period 2020 was attributable to the continued effects related to the COVID-19 pandemic. Additionally, our newer products require less installation services, as the products are further along in the set-up process prior to leaving the warehouse.

●Revenues from building rental income were $143,827 and $-0- for the three months ended September 30, 2021 and 2020, respectively, an increase of $143,827 (100%). The Company completed the purchase of an office/warehouse building in May 2021, in which current tenants were under a lease agreement. The agreement closed August 30, 2021.
   
 ●Revenues from TicketSmarter services were $2,050,679Our new ticketing operating segment generated service revenues totaling $4,375,024 and $-0- for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $2,050,679$4,375,024 (100%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021, thus resulting in the new revenue stream for the Company. TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. This increase reflects just one month of revenues within the new wholly-owned subsidiary, presentingWe expect our ticketing operating segment to continue to present a strong revenue outlook moving forward.
   
 ●Revenues from Nobility Healthcare services were $560,484Our new revenue cycle management operating segment generated service revenues totaling $2,120,739 and $-0- for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $560,484$2,120,739 (100%). The CompanyOur revenue cycle management operating segment has completed thefour acquisitions of a private medical billing company onsince formation in June 30, 2021 and another private medical billing company on August 31,of 2021, thus resulting in the new service revenue stream foradded in the third quarter of 2021 for the Company. Nobility Healthcare providedthree months ended June 30, 2022. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. This increase reflects three months of the first acquired medical billing company revenues and just one month of the second acquired medical billing company revenues within the new wholly-owned subsidiary, presentingWe expect our revenue cycle management segment to continue to present a strong revenue outlook moving forward.

 

Total revenues for the three months ended SeptemberJune 30, 2022 and 2021 were $9,351,458 and 2020 were $4,639,822 and $3,588,640$2,493,671, respectively, an increase of $1,051,182 (29%$6,857,786 (275%), due to the reasons noted above.

 

Cost of Product Revenue

 

CostOverall cost of product revenue on units sold for the three months ended SeptemberJune 30, 2022, and 2021 was $2,070,476 and 2020 was $1,197,217 and $2,177,676,$1,017,659, respectively, a decreasean increase of $980,459 (45%$1,052,817 (103%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended June 30, 2022, and 2021 were 93.7% and 59.2%, respectively. Cost of products sold by operating segment is as follows:

  Three Months Ended June 30, 
  2022  2021 
Cost of Product Revenues:        
Video Solutions $1,029,403  $1,017,659 
Revenue Cycle Management  —   — 
Ticketing  1,041,073   — 
Total Cost of Product Revenues $2,070,476  $1,017,659 

The decrease in cost of goods sold for our video solutions segment products is due to numerous factors in the period during 2020 that were not relevant to the same period in 2021. In the 2020 period, the Company experienced a move to its new warehouse facility, and a significant manufacturing slow down caused by the COVID-19 pandemic causing unfavorable overhead and labor variances for production in the second quarter of 2020, which management had decided to expense as a period cost. For the same period in 2021, the Company did not experience these factors, but further reduced the inventory reserve. Additionally, the decrease in cost of product revenues correlates directly correlated with the decrease in revenuesproduct sales for the three months ended SeptemberJune 30, 20212022 compared to the same periodthree months ended June 30, 2021. In addition, the video solutions segment recorded valuation allowances for its older product lines and a portion of its Shield products during the second quarter of 2022, directly increasing cost of goods sold for the period. Cost of product sold as a percentage of product revenues for the video solutions segment increased to 73.3% for the three months ended June 30, 2022 as compared to 59.2% for the three months ended June 30, 2021.

The increase in 2020.ticketing operating segment cost of product sold is due to the acquisition of TicketSmarter in the third quarter of 2021, resulting in an increase to cost of product revenue of $1,041,073 for the three months ended June 30, 2022, compared to $-0- for the three months ended June 30, 2021. Cost of product sold as a percentage of product revenues for the ticketing solutions was 129.2% for the three months ended June 30, 2022. The Ticketing Segment recorded an allowance for unsold and under-market tickets during the first quarter of 2022 due to event cancellations and restrictions imposed on the size and type of gatherings related to the Omicron variant.

 

3744

 

Cost of service and other revenues for the three months ended September 30, 2021 and 2020 was $2,042,035 and $188,316, respectively, an increase of $1,853,719 (984%). The increase in service and other cost of goods sold is due to the expansion in service revenue streams through the acquisitions, and in particular, the TicketSmarter acquisition, completed during the three months ended September 30, 2021, of which would not be relevant for comparison to the same period in 2020. Our cost of service revenues as a percentage of revenues generated by TicketSmarter and the Nobility Healthcare are at a much higher percentage than our traditional law enforcement/commercial video sales. TicketSmarter and the Nobility Healthcare revenues represented 45% of total revenues for the three months ended September 30, 2021 which resulted in a substantially higher cost of revenues for the three months ended September 30, 2021 compared to the 2020 period.

Total cost of sales as a percentage of revenues was 70% for the three months ended September 30, 2021 compared to 66% for the three months ended September 30, 2020. We believe our gross margins will improve during the remainder of 2021 as we increase revenues (in particular service and other revenues), shipping costs moderate and continue to reduce product warranty issues.

 

We had $2,300,019recorded $3,722,467 and $1,960,351$3,915,089 in reserves for obsolete and excess inventories at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. Total raw materials and component parts were $3,068,418$4,083,713 and $3,186,426$3,062,046 at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, a decreasean increase of $118,008 (4%$1,021,667 (33%). Finished goods balances were $10,827,344$9,044,555 and $6,974,291$10,512,577 at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, an increasea decrease of $3,853,053 (55%$1,468,022 (14%). which was attributable to a decrease in finished goods from our newly acquired ticketing segment. The slight increasesmall decrease in the inventory reserve is primarily due to scrappingthe reduction in finished goods and movement of older version inventory component parts that were mostly or fully reserved during the three months ended September 30, 2021. The remaining reserve for inventory obsolescence is generally provided for the level of component parts of the older versions of our PCB boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products.excess inventory. We believe the reserves are appropriate given our inventory levels at Septemberas of June 30, 2022.

Cost of Service Revenue

Overall cost of service revenue sold for the three months ended June 30, 2022, and 2021 was $5,561,903 and $215,212, respectively, an increase of $5,346,691 (2,484%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended June 30, 2022, and 2021 were 77.9% and 27.8%, respectively. Cost of service revenues by operating segment is as follows:

  Three Months Ended June 30, 
  2022  2021 
Cost of Service Revenues:        
Video Solutions $261,363  $215,212 
Revenue Cycle Management  1,163,476   — 
Ticketing  4,137,084   — 
Total Cost of Service Revenues $5,561,903  $215,212 

The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 40.5% for the three months ended June 30, 2022 as compared to 27.8% for the three months ended June 30, 2021.

The increase in revenue cycle management operating segment cost of service revenue is due to the four acquisitions of medical billing companies completed since June 2021. Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 54.9% for the three months ended June 30, 2022.

The increase in ticketing operating segment cost of service revenues is due to the 2021 acquisition of TicketSmarter, resulting in an increase to cost of service revenue of $4,137,084 for the three months ended June 30, 2022, compared to $-0- for the three months ended June 30, 2021. Cost of service revenues as a percentage of service revenues for the ticketing segment was 94.6% for the three months ended June 30, 2022.

 

Gross Profit

 

GrossOverall gross profit for the three months ended SeptemberJune 30, 2022 and 2021 was $1,719,078 and 2020 was $1,400,570 and $1,222,648$1,260,800, respectively, an increase of $177,922 (15%$458,278 (36.3%). Gross profit by operating segment was as follows:

   

Three Months Ended June 30,

 
   

2022

   

2021

 
         
Gross Profit:        
Video Solutions $759,010  $1,260,800 
Revenue Cycle Management  957,263   — 
Ticketing  2,805   — 
Total Gross Profit $1,719,078  $1,260,800 

The overall increase is commensurate withattributable to the large overall increase in product and service revenues duringfor the three months ended SeptemberJune 30, 2021 compared2022 and an increase in the overall cost of sales as a percentage of overall revenues to 81.6% for the same period in 2020.three months ended June 30, 2022 from 49.4% for the three months ended June 30, 2021. Our goal is to improve our margins over the longer-termlonger term based on the expected margins ofgenerated by our new recent healthcare billingrevenue cycle management and TicketSmarter acquisitionsticketing operating segments together with our traditional video business including sales tractionsolutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVUFirstVu Pro, FirstVu II, FirstVu HD, ThermoVuTM, ShieldTM 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.pandemic and current inflationary concerns. 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. Lastly, we will continue to seek to further improve our margins through sensible and advantageous acquisitions as evidenced during the three months ended September 30, 2021.

45

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $4,999,543$8,380,330 and $3,066,606$3,877,684 for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $1,932,938 (63%$4,502,646 (116.1%). The increase was primarily attributable to the recent acquisitions completed in the third quarter of 2021. Our selling, general and administrative expenses as a percentage of sales decreased to 90% for the three months ended June 30, 2022 compared to 156% in the same period in 2021. The significant components of selling, general and administrative expenses are as follows:

 

  

Three months ended

September 30,

 
  2021  2020 
Research and development expense $492,221  $405,082 
Selling, advertising and promotional expense  1,511,682   789,854 
Professional fees and expense  142,726   118,344 
Executive, sales, and administrative staff payroll  846,000   506,219 
Other  2,006,914   1,247,107 
         
Total $4,999,543  $3,066,606 

38

  

Three months ended

June 30,

 
  2022  2021 
Research and development expense $540,222  $460,999 
Selling, advertising and promotional expense  2,763,045   870,183 
General and administrative expense  5,077,063   2,546,502 
         
Total $8,380,330  $3,877,684 

 

Research and development expense. We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $492,221$540,222 and $405,082$460,999 for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $87,139 (22%$79,223 (17.2%). Most of our engineers are dedicated to research and development activities for new products, primarily the ThermoVu®, ShieldTM,new generation of body-worn cameras, EVO-HD FirstVu II 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 body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources.

 

Selling, advertising and promotional expenses. Selling, advertising and promotional expensesexpense totaled $1,511,682$2,763,045 and $789,854$870,183 for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $721,828 (91%$1,892,862 (217.5%). The increase primarily reflects the impact of our recent acquisition of TicketSmarter which relies heavily on digital advertising to promote the use of its ticketing services. TicketSmarter is expected to remain very involved in digital promotionalPromotional and advertising space, as it is necessary to its recognition and customer trust, being a part of the live event and sports realm.

Salesman salaries and commissionsexpenses represent the primary componentscomponent of these costs and were $405,398 and $336,867 for the three months ended September 30, 2021 and 2020, respectively, which is an increase of $68,531 (20%). The effective commission rate was 8.7% for the three months ended September 30, 2021 compared to 9.4% for the three months ended September 30, 2020. We reduced the number of salesmen in our law enforcement and commercial channels beginning in the first and second quarters of 2020, which had a full effect on the third quarter 2020. In addition, we are utilizing third-party distributors as a major component of our new ShieldTM and ThermoVU® sales channel.

Promotional and advertising expenses totaled $1,106,284$2,361,235 during the three months ended SeptemberJune 30, 20212022, compared to $452,987$373,968 during the three months ended SeptemberJune 30, 2020, which is2021, an increase of $653,297 (144%$1,987,267 (531.4%). The increase is primarily attributable to the 2022 sponsorship of NASCAR and IndyCar seasons resumingIndyCar. Additionally, TicketSmarter remains active in the 2021, as they were conversely suspended during the same period in 2020. Additionally, trade shows are beginning to take place in the third quarter of 2021, compared to the third quarter of 2020, when they were suspended as a resultsponsorship and advertising. TicketSmarter accounted for $1,394,622 of the COVID-19 pandemic.

Professional feestotal promotional and advertising expense. Professional fees and expenses totaled $142,726 and $118,344 for the three months ended SeptemberJune 30, 2021 and 2020, respectively, which is an increase of $24,382 (21%). The increase in professional fees is primarily attributable to increased legal and broker fees associated with the Company’s numerous acquisitions during the period, paired with other current due diligence items and opportunities the Company is exploring. Additionally, increased board fees, audit fees, and service fees are attributable to this increase.2022.

 

Executive, salesGeneral and administrative staff payroll. expenseExecutive, sales. General and administrative staff payroll expenses totaled $846,000$5,077,063 and $506,219$2,546,502 for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $339,781 (67%$2,530,561 (99.4%). The primary reason for the increase in executive, salesgeneral and administrative staff payroll wasexpenses in the recent acquisitions of the medical billing companies and TicketSmarter which occurred in 2021 and therefore had no impact on 2020 expenses. In addition, a return to regular staff levelsthree months ended June 30, 2022 compared to the same period in 2020, during which period2021 is primarily attributable to an increase in administrative salaries, as payroll continues to increase with the Company experienced a reduction in technical support staffing in response tonew acquisition completed by the COVID-19 pandemicCompany’s healthcare venture during the third quarterfirst half of 2020, as the COVID-19 pandemic had 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. Additionally, this trend is expected to continue because of the acquisitions completed during the three months ended September 30, 2021, which resulted in additional payroll expenses with expanded executive positions, sales,2022. General and administrative staff numbers comparedexpense also increased due to 2020.

Other. Other selling, generala substantial increase in depreciation and administrativeamortization, rent expenses, totaled $2,006,914 and $1,248,107legal and professional expenses for the three months ended SeptemberJune 30, 2021 and 2020, respectively, which is an increase of $758,807 (61%). The increase in other expenses in the three months ended September 30, 20212022 compared to the same period in 2020 is primarily attributable to2021, as a result of the increased expenses related tonumerous acquisitions completed by the acquisitions, and associated operating expenses, completed during three months ended September 30, 2021,Company that were not relevant to the same period of 2020. Additionally, an increase in travel costs as COVID-19 restrictions begin to ease, as well as substantially increased insurance costs compared to the same period in 2020. The increased insurance costs are primarily in general liability and related coverages which premiums have been increased to address exposure to the COVID-19 pandemic.2021.

 

3946

 

 

Operating Loss

 

For the reasons stated above, our operating loss was $3,598,973$6,661,252 and $1,843,957$2,616,884 for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $1,755,016 (95%$4,044,368 (154.5%). Operating loss as a percentage of revenues worsenedimproved to 78%71% in the three months ended SeptemberJune 30, 20212022 from 51%105% in the same period in 2020.2021.

 

Interest Income

 

Interest income increased to $90,036$32,233 for the three months ended SeptemberJune 30, 2022, from $90,774 in the same period of 2021, from $11,339 for the three months ended September 30, 2020, which reflectedreflects our higherchange cash and cash equivalent levels in the thirdsecond quarter 2021of 2022 compared to the thirdsecond quarter of 2020.2021. The Company held significant cash and cash equivalents throughout the second quarter of 2021, allowing a full three months of interest income due to the two completed two registered direct offerings in the first quarter of 2021 which yielded net proceeds of approximately $66.4 million which balances have earned increased interest income when compared to the first quarter of 2020. Additionally, this increase is a result of interest incurred on debt that the Company has issued, as well as interest incurred on leased products.million.

 

Interest Expense

 

We incurred interest expense of $5,675$8,501 and $4,940$1,365 during the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The increase was attributable to utilizing a portion of the net proceeds from the registered direct offerings to eliminate substantially all interest-bearing debt balances outstanding in the three months ended September 30, 2021 as compared to the same period in 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. Additionally, the increase is attributable to the contingent earn-out notes associated with the twofour Nobility Healthcare acquisitions, currently at a total balance of $1,000,000 between$1,119,344 for the twofour notes, with interest rates of 3.00% per annum.

Change in Fair Value of Proceeds Investment Agreement

We recorded a gain representing the change in fair value of proceeds investment agreement (the “PIA”) totaling $-0- and $2,365,000 during the three months ended September 30, 2021 and 2020, respectively.

We elected to account for the PIA that we entered into with Brickell Key Investments LP (“BKI”) in July of 2018 on its fair value basis. Therefore, we determined the fair value of the 2018 PIA as of September 30, 2020, and June 30, 2020 to be $-0- and $3,615,000, respectively. The change in fair value from June 30, 2020 to September 30, 2020 was $3,615,000, which was recognized as a gain in the Condensed Consolidated Statement of Operations for the three months ended September 30, 2020.

 

Change in Fair Value of Short-Term Investments

 

We recognized a loss on change in fair value of short-term investments totaling $21,656$-0- and $-0-$1,590 during the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less.

Change in Fair Value of Contingent Consideration Promissory Notes

During the three months ended June 30, 2022, The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $542,096 and $-0- during the three months ended June 30, 2022 and 2021, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment.

Change in Fair Value of Derivative Liabilities

 

During the first quarter of 2021, the Company issued detachable warrants to purchase a total of 42,550,00042,500,000 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 from March 31, 2022, to June 30, 2021 to September 30, 20212022, totaled $11,585,204$5,413,618 which was recognized as a gain in the thirdsecond quarter of 2021.2022. The Company determined the fair value of such warrants as of their issuance date,March 31, 2022, and as of SeptemberJune 30, 2021,2022, to be $51,216,058$14,698,761 and $17,942,019,$9,285,143, respectively.

 

40

IncomeLoss before Income Tax Benefit

 

As a result of the above results of operations, we reported incomea loss before income tax benefit of $8,048,936$682,187 and $527,442$5,382,487 for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an improvementincrease of $7,521,494 (1,426%$4,700,300 (87.3%).

 

Income Tax Benefit

 

We did not record an income tax expense related to our income for the three months ended SeptemberJune 30, 20212022 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of SeptemberJune 30, 2021.2022. We had approximately $76,070,000$81.4 million of net operating loss carryforwards and $1,795,000$1.8 million of research and development tax credit carryforwards as of SeptemberJune 30, 20212022 available to offset future net taxable income.

 

47

Net incomeLoss

 

As a result of the above results of operations, we reported a net income including noncontrolling interestsloss of $8,048,936$682,187 and $527,442$5,382,487 for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an improvementincrease of $7,521,494 (1,426%$4,700,300 (87.3%).

Net loss attributableIncome Attributable to noncontrolling interestsNoncontrolling Interests of consolidated subsidiaryConsolidated Subsidiary

 

The Company owns a 51% ofequity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income/lossincome 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 lossincome attributable to noncontrolling interests of consolidated subsidiary of $19,863$383,326 and $-0- for the three months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively.

 

Net Income attributableLoss Attributable to common stockholdersCommon Stockholders

 

As a result of the above, we reported a net incomeloss attributable to common stockholders of $8,068,799$1,065,513 and $527,442$5,382,487 for the years three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an improvementincrease of $7,541,357 (1,430%$4,316,974 (80.2%).

Basic and Diluted IncomeLoss per Share

 

BasicThe basic and diluted incomeloss per share was $0.16$0.02 and $0.02$0.10 for the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. Basic incomeloss per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended SeptemberJune 30, 20212022 and 2020,2021, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted incomeloss per share.

 

For the NineSix Months ended SeptemberEnded June 30, 20212022 and 20202021

 

Results of Operations

 

Summarized immediately below and discussed in more detail in the subsequent sub-sectionssubsections is an analysis of our operating results for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, represented as a percentage of total revenues for each respective year:such quarter:

 

 

Nine months ended

September 30,

  

Six Months Ended

June 30,

 
 2021  2020  2022 2021 
Revenue  100%  100%  100%  100%
Cost of revenue  64%  63%  81%  59%
                
Gross profit  36%  37%  19%  41%
Selling, general and administrative expenses:                
Research and development expense  15%  16%  5%  18%
Selling, advertising and promotional expense  31%  25%  28%  29%
General and administrative expense  84%  72%  54%  103%
                
Total selling, general and administrative expenses  130%  113%  87%  150%
                
Operating loss  (94)%  (76)%  (69)%  (109)%
                
Change in fair value of proceeds investment agreement  —%  (68)%
Change in fair value of secured convertible notes  —%  (17)%
Change in fair value of contingent consideration promissory notes  2%  —%
Change in fair value of derivative liabilities  344%  —%  28%  431%
Other income and interest expense, net  2%  (5)%
        
Other income and interest income (expense), net  1%  3%
Income (loss) before income tax benefit  252%  (30)%  (38)%  325%
Income tax (provision)  —%  —%  —%  —%
                
Net income (loss)  252%  (30)%
Net income/(loss)  (38)%  325%
                
Net loss attributable to noncontrolling interests of consolidated subsidiary  0%  —%  (1)%  —%
                
Net income (loss) attributable to common stockholders  252%  (30)%  (39)%  325%
                
Net income (loss) per share attributable to common sotkcholders information:        
Net income/(loss) per share information:        
Basic $0.49  $(0.12) $(0.15) $0.34 
Diluted $0.49  $(0.12) $(0.15) $0.34 

 

4148

 

Revenues

We sell our video recording products and services to law enforcement and commercial customers in the following manner:

●Product sales to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through its sales force, which is composed of its employees. Revenue is recorded when the product is shipped to the end customer.
●Product sales to international customers are made through independent distributors who purchase products from the Company at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Accordingly, upon application of steps one through five above, revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.
●Repair parts and services for domestic and international customers are generally handled by its inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.
●Service sales through Nobility Healthcare are driven through relationships with medium to large healthcare organizations, in which revenue is recognized upon execution of services. Through TicketSmarter, service sales are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction.

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

Nobility Healthcare offers leading-edge revenue cycle management solutions to medium and large healthcare organizations throughout the country. Nobility Healthcare’s customers are spread across a wide range of practices and specialties, including radiology, oncology, orthopedics, pediatrics, internal medicine, and cardiology.

 

TicketSmarterProduct revenues by operating segment is a ticket resale marketplace with seats offered at over 125,000 live events, with over 48 million tickets for sale through its TicketSmarter.com platform. TicketSmarter is committed to developing meaningful relationships with conferences, teams, and charities across the country.as follows:

The COVID-19 pandemic had an impact on all of our revenue streams during the nine months ended September 30, 2021 and we expect it to adversely affect our revenues during the remainder of 2021. The COVID-19 pandemic had 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 ShieldTM disinfectant/sanitizer and ThermoVU® product lines.

42

 

Revenues for each of the nine months ended September 30, 2021 and 2020 were derived from the following sources:

  Nine months ended September 30, 
  2021  2020 
DVM-800  18%  25%
ThermoVU/Shield  2%  16%
FirstVu HD  9%  12%
Cloud service revenue  8%  9%
Extended warranty revenue  8%  —%
EVO-HD  12%  7%
Repair and service  3%  14%
TicketSmarter sales  6%  —%
TicketSmarter TNP sales  16%  —%
Nobility Healthcare RCM  5%  —%
Nobility Healthcare credentialing and services  1%  —%
Accessories and other revenues  12%  17%
   100%  100%
  Six Months Ended June 30, 
  2022  2021 
Product Revenues:        
Video Solutions $2,740,472  $3,631,910 
Revenue Cycle Management  —   — 
Ticketing  1,879,769   — 
Total Product Revenues $4,620,241  $3,631,910 

 

Product revenues for the ninesix months ended SeptemberJune 30, 2022 and 2021 were $4,620,241 and 2020 were $4,988,364 and $5,778,695$3,631,910 respectively, which is an increase of $790,331 (14%$988,331 (27%), due to the following factors:

 

 ●Revenues generated by the new ticketing operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The new ticketing operating segment generated $1,879,769 in product revenues for the six months ended June 30, 2022, compared to $-0- for the six months ended June 30, 2021. This product revenue relates to the resale of tickets purchased for live events, including sporting events, concerts, and theatre, then sold through various platforms to customers.

●The CompanyCompany’s video segment operating segment generated revenues totaling over $244,982$2,740,472 during the ninesix months ended SeptemberJune 30, 2022 compared to $3,631,910 for the six months ended June 30, 2021 compareddue to $1,182,513 for the same period in 2020 from its newslowing sales of our ThermoVuTM product lines. Late in the second quarter of 2020, thelines related to our COVID-19 response. The Company launched two product lines in direct response to the increased safety precautions that organizations and individuals are taking due to the COVID-19 pandemic. ThermoVu®ThermoVu™ was launched as 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®ThermoVu™ has optional features such as facial recognition to improve facility security by restricting access based on temperature and/or facial recognition reasons. ThermoVu®ThermoVu™ provides an instant pass/fail audible tone with its temperature display and controls access to facilities based on such results. We believe that it can be widelyThermoVuTM has been applied in schools, dental office, hospitals, office buildings, subway stations, airports and other public venues. The Company also launched its Shield™ disinfectant/sanitizer product lines to fulfill demand by current customers and others for a disinfectant and sanitizer that is less harsh than many of the traditional products now widely distributed. The Shield™ Cleanser product line contains a cleanser with no harsh chemicals or fumes.

The Company began offering the Shield™ line of disinfecting products to its first responder customers including police, fire and paramedics late in the second quarter of 2020. Commercial customers such as cruise lines, taxi-cab and para transit may also be good candidates for the products. The Company is considering enhancing the line of disinfectant products for additional related products including hardwarebeginning to efficiently and effectively dispense the disinfectants. The Company is hopeful that its law enforcement and commercial customers will adopt this newexperience decreased demand on these product offering to combat the spread oflines as the COVID-19 virus as well as other bacteria and viruses.pandemic begins to subside.

   
 ●In general, we haveour video solutions operating segment has experienced pressuredecreased demand on ourits product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined in the nine months ended September 30, 2021 compared to the same period of 2020, due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. We introduced our EVO-HD latenew body-worn cameras, the FirstVu Pro and FirstVu II, in the secondfourth quarter of 2019 with the goal of enhancing our product line features to meet these competitive challenges2021, and we startedhave begun to see increased traction with these products in late 2019 but sales in 2020 were hampered duethe first six months of 2022. The Company hopes the interest throughout the marketplace continues to grow for these new products as the COVID-19 pandemic. We expect customers and potential customersmarket is able to review and test the EVO-HD prior to committing to thisthese new product platform, all of which has been delayed due to the COVID-19 pandemic. We experienced substantial increases in EVO-HD revenues during the nine months ended September 30, 2021 and believe that customers are recognizing and are attracted to its advanced features.products.

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 ●

The COVID-19 pandemic has continued to delay the shipment of certain law enforcement orders since the first quarter of 2020 as police forces and governments deal with its impact. In addition, our salesmen were generally unable to meet with and demonstrate our products to our law enforcement customers because of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our products to potential customers is generally important in order to obtain new customers or upgrade existing customers. Our product sales to law enforcement increased during the nine months ended September 30, 2021 compared to the same period in 2020, as the impact of the COVID-19 pandemic was at its peak.

The COVID-19 pandemic impact remains relevant, as the shipment of commercial orders during the nine months ended September 30, 2021 remain slow, as cruise lines, taxi cabs, paratransit and other commercial customers continue to deal with its impact. In addition, our salesmen were generally unable to meet with and demonstrate our products to our commercial customers because of travel and other restrictions imposed by cities and states due to the COVID-19 pandemic. In person demonstration of our products to potential customers is generally required in order to obtain new customers or upgrade existing customers. Our product sales to commercial customers increased in the nine months ended September 30, 2021 compared to the same period in 2020 despite the impact of the COVID-19 pandemic.

●Managementvideo solutions operating segment management has been focusing on migrating customers, and in particular commercial customers, from a “hardware sale”hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service.service fee. In that respect, in the second quarter of 2020 we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. We have noticed significant interestThis program has continued to gain traction, resulting in decreased product revenues and success with this program, as we experienced a vast increase in our subscription contracts during the nine months ended September 30, 2021 compared to the same period in 2020.increased service revenues. We expect this program continues to hold traction,continue to gain momentum, resulting in recurring revenues over a span of three to five yearsyears.

Service and other revenues by operating segment is as follows:

  Six Months Ended June 30, 
  2022  2021 
Service and Other Revenues:        
Video Solutions $1,319,333  $1,397,591 
Revenue Cycle Management  4,024,695   — 
Ticketing  9,681,969   — 
Total Service and Other Revenues $15,025,997  $1,397,591 

 

Service and other revenues for the ninesix months ended SeptemberJune 30, 2022 and 2021 were $15,025,997 and 2020 were $4,680,959 and $1,967,881,$1,397,591, respectively, which is an increase of $2,713,078 (138%$13,628,406 (975%), due to the following factors:

 

 ●Cloud revenues generated by the video solutions operating segment were $753,332$627,874 and $725,667$488,738 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $27,665 (4%$139,136 (28.5%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of our new cloud-based EVO-HD in-car system. However,system and our next generation body-worn camera products, which contributed to our increased cloud revenues in the falloutsix months ended June 30, 2022. We expect this trend to continue throughout 2022 as the migration from the COVID-19 pandemic and related business shut-downs affectedlocal storage to cloud storage continues in our commercial customers usage of cloud services and offset increases in cloud revenues.customer base.
   
 ●RevenuesVideo solutions operating segment revenues from extended warranty services were $786,147$363,130 and $990,961$487,307 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is a decrease of $204,814 (21%$124,177 (25.5%). We have many customers that have purchased extended warranty packages, primarily in our DVM-800 premium service program. However, the affectscontinued effects from the COVID-19 pandemic and related restrictions on travelhave adversely affected our sales of DVM-800 hardware systems resulting in a decrease in their sales overin the ninesix months ended SeptemberJune 30, 20212022 compared to the same period in 2020.
●Installation service revenues were $141,618 and $137,856 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $3,762 (3%). Installation revenues tend to vary more than other service revenue types and are dependent on larger customer implementations. The slight increase in installation revenues in the nine months ended September 30, 2021 compared to the same period 2020 was attributable to the resumption of previous projects pending install due to the effects related to the COVID-19 pandemic.

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●Revenues from building rental income were $290,012 and $-0- for the nine months ended September 30, 2021 and 2020, respectively, an increase of $290,012 (100%). The Company completed the purchase of an office/warehouse building during the nine months ended September 30, 2021, in which current tenants were under a lease agreement. The agreement closed at the end of August 2021.
   
 ●Revenues from TicketSmarter services were $2,050,679Our new ticketing operating segment generated service revenues totaling $9,681,969 and $-0- for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $2,050,679$9,681,969 (100%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021, thus resulting in the new revenue stream for the Company. TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. This increase reflects just one month of revenues within the new wholly-owned subsidiary, presentingWe expect our ticketing operating segment to continue to present a strong revenue outlook moving forward.
   
 ●Revenues from Nobility Healthcare services were $560,484Our new revenue cycle management operating segment generated service revenues totaling $4,024,695 and $-0- for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $560,484$4,024,695 (100%). The CompanyOur revenue cycle management operating segment has completed thefour acquisitions of the first medical billing company onsince formation in June 30, 2021 and the second medical billing company on August 31,of 2021, thus resulting in the new service revenue stream added in the third quarter of 2021 for the Company. Nobility Healthcare providedsix months ended June 30, 2022. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. This increase reflects three months of the first medical billing company revenues and just one month of the second medical billing company revenues within the new wholly-owned subsidiary, presentingWe expect our revenue cycle management segment to continue to present a strong revenue outlook moving forward.

 

Total revenues for the ninesix months ended SeptemberJune 30, 2022 and 2021 were $19,646,238 and 2020 were $9,669,323 and $7,746,576,$5,029,501, respectively, which is an increase of $1,922,747 (25%$14,616,737 (291%), due to the reasons noted above.

 

Cost of Product Revenue

 

Cost

Overall cost of product revenue on units sold for the ninesix months ended SeptemberJune 30, 2022, and 2021 was $4,892,527 and 2020 was $3,776,185 and $4,332,450,$2,578,969, respectively, which is a decreasean increase of $556,265 (13%$2,313,558 (89.7%). Overall cost of goods sold for products as a percentage of product revenues for the six months ended June 30, 2022, and 2021 were 105.8% and 71.0%, respectively. Cost of products sold by operating segment is as follows:

  Six Months Ended June 30, 
  2022  2021 
Cost of Product Revenues:        
Video Solutions $2,507,118  $2,578,969 
Revenue Cycle Management  —   — 
Ticketing  2,385,409   — 
Total Cost of Product Revenues $4,892,527  $2,578,969 

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The decrease in cost of goods sold for our video solutions segment products is due to numerous factors in the period during 2020 that were not relevant to the same period in 2021. In the 2020 period, the Company experienced a move to its new warehouse facility, and a significant manufacturing slow down caused by the COVID-19 pandemic causing unfavorable overhead and labor variances for production in the second quarter of 2020, which management had decided to expense as a period cost. For the same period in 2021, the Company did not experience these factors, but further reduced the inventory reserve. Additionally, the decrease in cost of product revenues correlates directly correlated with the decrease in product sales for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. In addition, the video solutions segment recorded valuation allowances for its older product lines and a portion of its Shield products during the first six months of 2022, directly increasing cost of goods sold for the period. Cost of product sold as a percentage of product revenues for the threevideo solutions segment increased to 91.5% for the six months ended SeptemberJune 30, 20212022 as compared to 71.0% for the same period in 2020.six months ended June 30, 2021.

 

Cost of service and other revenues for the nine months ended September 30, 2021 and 2020 was $2,419,884 and $533,690, respectively, which is an increase of $1,886,194 (353%). The increase in service and otherticketing operating segment cost of goodsproduct sold is due to the expansionacquisition of TicketSmarter in servicethe third quarter of 2021, resulting in an increase to cost of product revenue streams throughof $2,385,409 for the acquisitions and in particular the TicketSmarter acquisition completed during the ninesix months ended SeptemberJune 30, 2021,2022, compared to $-0- for the six months ended June 30, 2021. Cost of which would not be relevant for comparison to the same period in 2020. Our cost of service revenuesproduct sold as a percentage of revenues generated by TicketSmarter and the Nobility Healthcare are at a much higher percentage than our traditional law enforcement/commercial video sales. TicketSmarter and the Nobility Healthcare revenues represented 28% of totalproduct revenues for the nineticketing solutions was 126.9% for the six months ended SeptemberJune 30, 2021 which resulted in a substantially higher cost2022. The Ticketing Segment recorded an allowance for unsold and under-market tickets during the first quarter 2022 due to event cancellations and restrictions imposed on the size and type of revenues for the nine months ended September 30, 2021 comparedgatherings related to the 2020 period.

Total cost of sales as a percentage of revenues was 64% for the nine months ended September 30, 2021 compared to 63% for the nine months ended September 30, 2020. We believe our gross margins will improve during the remainder of 2021 if we can increase revenues (in particular service and other revenues), shipping costs moderate and continue to reduce product warranty issues.Omicron variant.

 

We had $2,300,019recorded $3,722,467 and $1,960,351$3,915,089 in reserves for obsolete and excess inventories at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. Total raw materials and component parts were $3,068,418$4,083,713 and $3,186,426$3,062,046 at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, a decreasean increase of 118,008 (4%$1,021,667 (33%). Finished goods balances were $10,827,344$9,044,555 and $6,974,291$10,512,577 at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, an increasea decrease of $3,853,053 (55%$1,468,022 (14%). which was attributable to a decrease in finished goods from our newly acquired ticketing segment. The slight increasesmall decrease in the inventory reserve is primarily due to scrappingthe reduction in finished goods and movement of older version inventory component parts that were mostly or fully reserved during the three months ended September 30, 2021. The remaining reserve for inventory obsolescence is generally provided for the level of component parts of the older versions of our PCB boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products.excess inventory. We believe the reserves are appropriate given our inventory levels at Septemberas of June 30, 2022.

Cost of Service Revenue

Overall cost of service revenue sold for the six months ended June 30, 2022, and 2021 was $11,095,015 and $377,849, respectively, an increase of $10,717,166 (2,836%). Overall cost of goods sold for services as a percentage of service revenues for the six months ended June 30, 2022, and 2021 were 73.8% and 27.0%, respectively. Cost of service revenues by operating segment is as follows:

  Six Months Ended June 30, 
  2022  2021 
Cost of Service Revenues:        
Video Solutions $525,247  $377,849 
Revenue Cycle Management  2,370,263   — 
Ticketing  8,199,505   — 
Total Cost of Service Revenues $11,095,015  $377,849 

The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 39.8% for the six months ended June 30, 2022 as compared to 27.0% for the six months ended June 30, 2021.

 

The increase in revenue cycle management operating segment cost of service revenue is due to the four acquisitions of medical billing companies completed since June 2021. Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 58.9% for the six months ended June 30, 2022.

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The increase in ticketing operating segment cost of service revenues is the due to the 2021 acquisition of TicketSmarter, resulting in an increase to cost of service revenue of $8,199,505 for the six months ended June 30, 2022, compared to $-0- for the six months ended June 30, 2021. Cost of service revenues as a percentage of service revenues for the ticketing segment was 84.7% for the six months ended June 30, 2022.

Gross Profit

 

GrossOverall gross profit for the ninesix months ended SeptemberJune 30, 2022 and 2021 was $3,658,696 and 2020 was $3,473,254 and $2,880,436,$2,072,683, respectively, which is an increase of $592,818 (21%$1,586,013 (76.5%). Gross profit by operating segment was as follows:

   Six Months Ended June 30, 
   

2022

   

2021

 
         
Gross Profit:        
Video Solutions $1,027,440  $2,072,683 
Revenue Cycle Management  1,654,432   — 
Ticketing  976,824   — 
Total Gross Profit $3,658,696  $2,072,683 

The overall increase is commensurate withattributable to the 25%large overall increase in total revenues andfor the gross margin percentage decrease to 36% during the ninesix months ended SeptemberJune 30, 2021, from 37% during2022 and an increase in the nineoverall cost of sales as a percentage of overall revenues to 81.4% for the six months ended SeptemberJune 30, 2020.2022 from 58.8% for the six months ended June 30, 2021. Our goal is to improve our margins over the longer-termlonger term based on the expected margins ofgenerated by our new recent healthcare billingrevenue cycle management and TicketSmarter acquisitionsticketing operating segments together with our traditional video business including sales tractionsolutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, and FirstVUFirstVu Pro, FirstVu II, FirstVu HD, ThermoVuTM, ShieldTM 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.pandemic and current inflationary concerns. 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. Lastly, we will continue to seek to further improve our margins through sensible and advantageous acquisitions as evidenced during the nine months ended September 30, 2021.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $12,554,807$17,123,286 and $8,794,912$7,555,261 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $3,543,513 (40%$9,568,025 (126.6%). The increase was primarily attributable to the recent acquisitions completed in the third quarter of 2021. Our selling, general and administrative expenses as a percentage of sales decreased to 87% for the six months ended June 30, 2022 compared to 150% in the same period in 2021. The significant components of selling, general and administrative expenses are as follows:

 

 

Nine months ended

September 30,

  

Six months ended

June 30,

 
 2021 2020  2022 2021 
Research and development expense $1,402,185  $1,250,528  $1,038,222  $909,964 
Selling, advertising and promotional expense 2,978,620 1,958,884   5,542,448   1,466,938 
Professional fees and expense 1,008,290 701,602 
Executive, sales, and administrative staff payroll 2,204,168 1,737,869 
Other  4,961,544  3,146,029 
General and administrative expense  10,542,616   5,178,359 
             
Total $12,554,807 $8,794,912  $17,123,286  $7,555,261 

 

Research and development expense. We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $1,402,185$1,038,222 and $1,250,528$909,964 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $151,657 (12%$128,258 (14.1%). Most of our engineers are dedicated to research and development activities for new products, primarily the ThermoVu®, ShieldTM,new generation of body-worn cameras, EVO-HD FirstVu II 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 body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources.

 

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Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $2,978,620$5,542,448 and $1,958,884$1,466,938 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $1,019,736 (52%$4,075,510 (277.8%). The increase primarily reflects the impact of our recent acquisition of TicketSmarter which relies heavily on digital advertising to promote the use of its ticketing services. TicketSmarter is expected to remain very involved in digital promotionalPromotional and advertising space, as it is necessary to its recognition and customer trust, being a part of the live event and sports realm.

Salesman salaries and commissionsexpenses represent the primary componentscomponent of these costs and were $1,301,165 and $1,289,699 fortotaled $4,750,298 during the ninesix months ended SeptemberJune 30, 2021 and 2020, respectively, which is a, increase of $11,466 (1%). The effective commission rate was 13.5% for2022, compared to $571,171 during the ninesix months ended SeptemberJune 30, 2021, compared to 16.6% for the nine months ended September 30, 2020.

Promotional and advertising expenses totaled $1,677,455 during the nine months ended September 30, 2021 compared to $669,185 during the nine months ended September 30, 2020, which is an increase of $1,008,270 (151%$4,179,127 (731.7%). The increase is primarily attributable to the 2022 sponsorship of NASCAR and IndyCar seasons resumingIndyCar. Additionally, TicketSmarter remains in the 2021, as they were conversely suspended during the same period in 2020. Additionally, trade shows are beginning to take place in the second quarter of 2021, compared to the second quarter of 2020, when they were suspended as a resultsponsorship and advertising. TicketSmarter accounted for $2,852,888 of the COVID-19 pandemic.total promotional and advertising expense for the six months ended June 30, 2022.

46

 

Professional feesGeneral and administrative expense. Professional fees General and administrative expenses totaled $1,008,290$10,542,616 and $701,602$5,178,359 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increase of $306,688 (44%$5,364,258 (103.6%). The increase in professional fees is primarily attributable to increased legal fees surroundinggeneral and administrative expenses in the two registered direct offerings during the ninesix months ended SeptemberJune 30, 2021, along with increased legal and broker fees associated with the Company’s numerous acquisitions during the period, paired with other current due diligence items and opportunities the Company is exploring. Additionally, increased board fees, audit fees, and service fees attribute to this increase.

Executive, sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled $2,204,168 and $1,737,869 for the nine months ended September 30, 2021 and 2020, respectively, which is an increase of $466,299 (27%). The primary reason for the increase in executive, sales and administrative staff payroll was the recent acquisitions of the medical billing companies and TicketSmarter which occurred in 2021 and therefore had no impact on 2020 expenses. In addition, a return to regular staff levels2022 compared to the same period in 2020,2021 is primarily attributable to an increase in whichadministrative salaries, as payroll continues to increase with the Company experienced a reduction in technical support staffing in response tonew acquisition completed by the COVID-19 pandemicCompany’s healthcare venture during the second quarterfirst half of 2020, as2022. General and administrative expense also increased due to a substantial increase in depreciation and amortization, rent expenses, and legal and professional expenses for the COVID-19 pandemic had 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. Additionally, this trend is expected to continue because of the acquisitions completed during the ninesix months ended SeptemberJune 30, 2021, which resulted in additional payroll expenses with expanded executive positions, sales, and administrative staff numbers compared to 2020. Additionally, the acquisitions completed during the nine months ended September 30, 2021, resulted in additional payroll expenses with expanded executive positions, sales, and administrative staff numbers.

Other. Other selling, general and administrative expenses totaled $4,961,544 and $1,985,198 for the nine months ended September 30, 2021 and 2020, respectively, which is an increase of $2,976,346 (150%). The increase in other expenses in the nine months ended September 30, 20212022 compared to the same period in 2020 is primarily attributable to2021, as a result of the increased expenses related tonumerous acquisitions completed by the acquisitions, and associated operating expenses, completed during the nine months ended September 30, 2021,Company that were not relevant to the same period of 2020. Additionally, an increase in travel costs as COVID-19 restrictions begin to ease, as well as substantially increased insurance costs compared to the same period in 2020. The increased insurance costs are primarily in general liability and related coverages which premiums have been increased to address exposure to the COVID-19 pandemic.2021.

 

Operating Loss

 

For the reasons stated above, our operating loss was $9,081,553$13,464,590 and $5,914,476$5,482,578 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increasea decrease of $3,167,077 (54%$7,982,012 (145.6%). Operating loss as a percentage of revenues worsenedimproved to 94%69% in the ninesix months ended SeptemberJune 30, 20212022 from 76%109% in the same period in 2020.2021.

 

Interest Income

 

Interest income increaseddecreased to $222,497$103,595 for the ninesix months ended SeptemberJune 30, 20212022, from $33,208$132,461 in the same period of 2020,2021, which reflectedreflects our increasechange in cash and cash equivalent levels in the nine months ended September 30, 2021second quarter of 2022 compared to the same period in 2020.second quarter of 2021. The Company held significant cash and cash equivalents throughout the second quarter of 2021, allowing a full six months of interest income due to the two completed two registered direct offerings in the nine months ended June 30,first quarter of 2021 which yielded net proceeds of approximately $66.4 million which balances have earned increased interest income when compared to the same period in 2020. Additionally, this increase is a result of interest incurred on debt that the Company has issued, as well as interest incurred on leased products.million.

 

Interest Expense

 

We incurred interest expense of $8,466$25,511 and $338,136$2,793 during the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The decrease was attributable to utilizing a portion of the net proceeds from the registered direct offerings to eliminate substantially all interest-bearing debt balances outstanding in the nine months ended September 30, 2021 as compared to the same period in 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. Additionally, the increase is attributable to the contingent earn-out notes associated with the twofour Nobility Healthcare acquisitions, currently at a total balance of $1,000,000 between$1,119,344 for the twofour notes, with interest rates of 3.00% per annum.

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Secured Convertible Notes Issuance Expenses

We recognized secured convertible note issuance expenses of $-0- and $34,906 during the nine months ended September 30, 2021 and 2020, respectively.

We elected to account for and record our $1.667 million principal amount of the 2020 Convertible Notes issued in April 2020 on a fair value basis. Accordingly, we were required to expense the related issuance costs to other expense in the condensed consolidated statements of operations. Such costs totaled $34,906 for the nine months ended September 30, 2020. The issuance costs primarily included related legal and accounting fees. No similar debt issuances occurred during the nine months ended September 30, 2021.

Gain on Extinguishment of debt

We recognized a gain on extinguishment of debt totaling $10,000 and $-0- during the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021 the Company was notified that its $10,000 EIDL advance received with the PPP Loan was fully forgiven.

Change in Fair Value of Secured Convertible Notes

We recognized a loss on change in fair value of Secured Convertible Notes totaling $-0- and $1,300,252 during the nine months ended September 30, 2021 and 2020, respectively.

We elected to account for the secured convertible notes that were issued on April 17, 2020 on their fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date of April 17, 2020 and through June 12, 2020, when they were paid 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 the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020.

We elected to account for the secured convertible notes that were issued in August 2019 on their fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date on December 31, 2019 until they were paid in full on March 3, 2020. The change in fair value from December 31, 2019 to their pay-off date was $412,445, which was recognized as a charge in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020.

Change in Fair Value of Proceeds Investment Agreement

We recognized a gain on the change in fair value of the PIA of $-0- and $5,250,000 during the nine months ended September 30, 2021 and 2020, respectively.

We elected to account for the PIA that we entered into with BKI in July of 2018 on its fair value basis. Therefore, we determined the fair value of the 2018 PIA as of September 30, 2020, and December 31, 2019 to be $-0- and $5,250,000, respectively. The change in fair value from December 31, 2019 to September 30, 2020 was $5,250,000, which was recognized as a gain in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020.

 

Change in Fair Value of Short-Term Investments

 

We recognized a loss on change in fair value of short-term investments totaling $28,210$84,818 and $-0-$6,554 during the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less.

Change in Fair Value of Contingent Consideration Promissory Notes

During the six months ended June 30, 2022, The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $486,046 and $-0- during the six months ended June 30, 2022 and 2021, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment.

4853

 

Change in Fair Value of Derivative Liabilities

 

During the nine months ended September 30,first quarter of 2021, the Company issued detachable warrants to purchase a total of 42,550,00042,500,000 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 from their issuance dateDecember 31, 2021, to SeptemberJune 30, 20212022, totaled $33,274,039$5,561,789 which was recognized as a gain in the period ended September 30, 2021.second quarter of 2022. The Company determined the fair value of such warrants as of their issuance date,December 31, 2021, and as of SeptemberJune 30, 2021,2022, to be $51,216,058$14,846,932 and $17,942,019,$9,285,143, respectively.

 

Income/(Loss) before Income Tax Benefit

 

As a result of the above results of operations, we reported an income/(loss) before income tax benefit of $24,388,307($7,380,430) and ($2,304,562)$16,339,371 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, which is an increasea decrease of $26,692,869 (1,158%$23,719,802 (145.2%).

 

Income Tax Benefit

 

We did not record an income tax benefitexpense related to our lossesincome for the ninesix months ended SeptemberJune 30, 2021,2022 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of SeptemberJune 30, 2021.2022. We had approximately $76,070,000$81.4 million of net operating loss carryforwards and $1,795,000$1.8 million of research and development tax credit carryforwards as of SeptemberJune 30, 20212022 available to offset future net taxable income.

 

Net income/(loss)

As a result of the above, we reported net income including noncontrolling interests of $24,388,307 and ($2,304,562) for the nine months ended September 30, 2021 and 2020, respectively, an improvement of $26,692,869 (1,158%).

Net loss attributable to noncontrolling interests of consolidated subsidiary

The Company owns 51% of its consolidated subsidiary, Nobility Healthcare, LLC. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income/loss of Nobility Healthcare, LLC 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 $19,863 and $-0- for the nine months ended September 30, 2021 and 2020, respectively.

Net Income/(Loss) attributable to common stockholders

 

As a result of the above results of operations, we reported a net income/(loss) of $24,408,170$(7,380,430) and ($2,304,562)$16,339,371 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, respectively, an increasea decrease of $26,712,732 (1,159%$23,719,802 (145.2%).

 

Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary

The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income of Nobility Healthcare which is reflected in the statement of income as “net income attributable to noncontrolling interests of consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $285,232 and $-0- for the six months ended June 30, 2022 and 2021, respectively.

Net Income/(Loss) Attributable to Common Stockholders

As a result of the above, we reported a net income/(loss) attributable to common stockholders of ($7,665,662) and $16,339,371 for the years six months June 30, 2022 and 2021, respectively, a decrease of $24,005,033 (146.9%).

Basic and Diluted Income/(Loss) per Share

 

BasicThe basic and diluted income/(loss)loss per share was $0.49($0.15) and ($0.12)$0.34 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. Basic income (loss)loss per share is based upon the weighted average number of common shares outstanding during the period. For the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted income (loss)loss per share.

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Liquidity and Capital Resources

 

Overall:

 

Management’s Liquidity Plan. The Company has historically raised capital in the form of equity and debt instruments from private and public sources to supplement its needs for funds to support its business operational and strategic plans. In recent years the Company has accessed the public and private capital markets to raise funding through the issuance of debt and equity. The Company believes, that through the outlets mentioned, it has the ability to generate and obtain adequate amounts of capital to meet its requirements and plans for capital in the short-term and long-term. In that regard, the Company had raised net proceeds of approximately $66.4 million in registered direct offerings of Common Stock,common stock, pre-funded warrants and warrants during the nine months ended September 30, 2021. Furthermore, the Company has minimalCompany’s only remaining interest-bearing debt at SeptemberJune 30, 2021 in that of2022 is $150,000 remaining due on the promissory notes under the SBA’s PPP and EIDL program, andprograms, along with the twofour acquired private medical billing companies and TicketSmartercompanies’ contingent consideration promissory notes, and agreement, as more fully described in Note 3, “Debt Obligations”. TheWe believe that the net proceeds offrom the registered direct offerings arewill be sufficient to fund our operations during the remainder of 20212022 and management believes that it now has adequate liquidity for the foreseeable future from the recently completed2021 registered direct offerings in 2021. Such offerings were completed through utilization ofofferings. However, should those funds not be sufficient, the Company’s shelf-registration statement on Form S-3 (File No. 333-239419), which was initially filed with the U.S. SecuritiesCompany will explore numerous equity and Exchange Commission (the “SEC) on June 25, 2020 and was declared effective on July 2, 2020 (the “Shelf Registration Statement”).debt instruments to obtain sufficient funds needed to support its business operations.

 

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Shelf Registration Statement on Form S-3 - The Shelf Registration Statement allowsManagement believes that it has adequate funding to support its business operations for the Company to offer and sell, from time to time in one or more offerings, any combination of our shares of Common Stock, debt securities, debt securities convertible into Common Stock or other securities in any combination thereof, rights to purchase shares of Common Stock or other securities in any combination thereof, warrants to purchase shares of Common Stock or other securities in any combination thereof or units consisting of Common Stock or other securities in any combination thereof having an aggregate initial offering price not exceeding $125,000,000. The Company utilized the Shelf Registration Statement for two recent offerings of its securities,foreseeable future as more fully described in Note 12a result of the notes to the Company’s condensed consolidated financial statements, “Stockholders’ Equity”, raising approximately $66.4 million in net proceeds during the nine months ended September 30, 2021.funds raised through these offerings.

 

Cash, cash equivalents: As of SeptemberJune 30, 2021,2022, we had cash and cash equivalents with an aggregate balance of $40,743,057, which is an increase$13,454,246, a decrease from a balance of $4,361,758$32,007,792 at December 31, 2020.2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $36,381,299$18,553,546 net increasedecrease in cash during the ninesix months ended SeptemberJune 30, 2021:2022:

 

 ●Operating activities:$12,230,781 10,932,515 of net cash used in operating activities. Net cash used in operating activities was $12,230,781$10,932,515 and $10,115,605$6,149,773 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, an increase of $2,115,176.$4,782,742. The decrease is attributable to the net loss incurred for the first six months of 2022, the non-cash gain attributable to the change in value of the warrant derivative liability, and the usage of cash to increase was primarily the result of increased inventory levelsaccounts receivable, prepaid expenses, and additional working capital andother operating assets for the various acquisitions completed during the ninesix months ended SeptemberJune 30, 20212022 compared to the same period of 2020.in 2021.
    
 ●Investing activities:$17,958,5203,361,994 of net cash used in investing activities. Cash used in investing activities was $17,958,520$3,361,994 and $889,726$6,506,407 for the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020 respectively. The increase was primarilyDuring the resultsix months ended June 30, 2022, we made capital expenditures for: (i) building improvements of the acquisitions of two acquired medical billing companiesnewly purchased office and TicketSmarter, which were closed during the nine months ended September 30, 2021, together with the office/warehouse building, purchaseand transportation assets; (ii) patent applications on our proprietary technology utilized in our new products and included in intangible assets; and (iii) the Company completed during the nine months ended September 30, 2021.closing of a business and asset acquisition.
    
 ●Financing activities:$66,570,6004,259,037 of net cash provided byused in financing activities. Cash used in financing activities was $4,259,037 and cash provided by financing activities was $66,570,600 and $18,775,977 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. During Januarythe first six months of 2022, the Company repurchased its common stock on the open market pursuant to the stock repurchase plan, and made principal payments on contingent consideration promissory notes. During 2021, we received net proceedsraised substantial funds through the completion of $28,941,000 ($29,013,000 upon full exercise of the prefunded warrants) from the issuance of shares of common stock, warrants and pre-funded warrants through atwo registered direct offering. In addition, during February 2021, we received net proceedsofferings of $37,447,100 ($37,557,600 upon full exercise of the prefunded warrants) from the issuance of shares ofour common stock, warrants and pre-funded warrants through a registered direct offering.stock.

 

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The net result of these activities was an increase in cash of $36,381,299 to $40,743,057 for the nine months ended September 30, 2021.

 

Commitments:

 

We had $40,743,057$13,454,245 of cash and cash equivalents and net positive working capital $34,702,688$15,733,652 as of SeptemberJune 30, 2021.2022. Accounts receivable and other receivables balances represented $3,977,464$4,965,309 of our net working capital at SeptemberJune 30, 2021.2022. We believe we will be able to collect our outstanding receivables on a timely basis and reduce the overall level during the remainderbalance of 2021,2022, which wouldcould provide positive cash flow to support our operations in 2021.during 2022. Inventory represents $11,611,249$9,405,954 of our net working capital at SeptemberJune 30, 2021,2022, and finished goods represented $10,827,344$9,044,555 of total inventory at SeptemberJune 30, 2021.2022. We are actively managing the level of inventory and our goal is to reduce such level during the balance of 20212022 by our sales activities, thereby increasingthe increase of which should provide additional cash flow to help support our operations during 2021.2022.

50

 

Capital ExpendituresExpenditures:. On April 30, 2021 the Company closed on the purchase and sale agreement to acquire a 71,361 square feet commercial office/warehouse building located in Lenexa, Kansas which is intended to serve as the Company’s future office and warehouse needs. The building contains approximately 30,000 square feet of office space and the remainder warehouse space. The total purchase price was approximately $5.3 million, the Company funded the purchase price with cash on hand, without the addition of external debt or other financing. The Company will be incurring capital expenditures to renovate the building to suit its office/warehouse needs during the balance of 2021.

 

The Company has also completed its first medical billing company acquisitionWe had the following material commitments for a total purchase price of approximately $1.4 million during the nine months ended September 30, 2021. The medical billing company purchase price included a contingent consideration promissory note payable to the sellers with an estimated fair value of $350,000 as of September 30, 2021. Management expects to continue its roll-up strategy in the RCM (medical billing services) industry during the balance of 2021 and beyond.

In addition, the Company completed its second medical billing company acquisition for a total purchase price of approximately $2.9 million during the nine months ended September 30, 2021. The second medical billing company purchase price includes a contingent consideration promissory note payable to the sellers with an estimated fair value of $650,000 as of September 30, 2021. Management expects to continue its roll-up strategy in the RCM (medical billing services) industry during the balance of 2021 and beyond.

Lastly, the Company completed the business acquisitions of Goody Tickets and TicketSmarter for a total purchase price of approximately $13.9 million during the nine months ended September 30, 2021. The TicketSmarter purchase price includes a contingent consideration earn-out payable to the sellers with an estimated fair value of $4,244,400 as of September 30, 2021.

Lease commitments. On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which will serve as its new principal executive office and primary business location. The original lease agreement was amended on August 28, 2020 to correct the footage under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 2026. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and warehouse operating lease as of September 30, 2021 was sixty-three months.

The Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes. The terms of the lease include 48 monthly payments of $1,598 with a maturity date of October 2023. The Company has the option to purchase such equipmentcapital expenditures at maturity for its estimated fair market value at that point in time. The remaining lease term for the Company’s copier operating lease as of September 30, 2021 was 25 months.

On June 30, 2021, the Company completed the acquisition of is first medical billing company, through its majority owned subsidiary, Nobility Healthcare. Upon completion of this acquisition, the Company became responsible for the operating lease for the Seller’s office space. The lease terms include monthly payments ranging from $2,648 to $2,774 thereafter, with a termination date of July 2024. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on June 30, 2021. The remaining lease term for the Company’s office and warehouse operating lease as of September 30, 2021 was thirty-four months.

On August 31, 2021, the Company completed the acquisition of its second acquired medical billing company, through its majority owned subsidiary, Nobility Healthcare, LLC. Upon completion of this acquisition, the Company became responsible for the operating lease for the Seller’s office space. The lease terms include monthly payments ranging from $11,579 to $11,811 thereafter, with a termination date of March 2023. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The remaining lease term for the Company’s office and warehouse operating lease as of September 30, 2021 was eighteen months.2022:

 

Stock Repurchase Program - On September 1,December 6, 2021, the Company completed the acquisitionboard of Goody Tickets, LLC and TicketSmarter, LLC (“TicketSmarter Acquisition”), through its wholly owned subsidiary, TicketSmarter. Upon completiondirectors of this acquisition, the Company became responsible forauthorized the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211repurchase of up to $7,364 thereafter, with a termination date of December 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession$10.0 million of the leased facilities on September 1, 2021. The remaining lease termCompany’s outstanding common stock under the specified terms of a share repurchase program (the “Program”). During the three months ended June 30, 2022, the Company repurchased 1,849,952 shares of its common stock for $1,962,755, in accordance with the Company’s office and warehouse operating lease asProgram. Furthermore, during the six months ended June 30, 2022, the Company repurchased 3,725,986 shares of September 30, 2021 was fifteen months.

its common stock for $4,026,523, in accordance with the Program.

 

On June 30, 2022, the board of directors of the Company elected to terminate the Program, effective immediately. The Program began in December 2021, with the Company purchasing a total of 5,460,824 shares at a cost of $6,001,602 through June 30, 2022.

Lease expense related to the office spaces and copier operating leases was recorded on a straight-line basis over the lease term. commitments. Total lease expense under the fivesix operating leases was approximately $144,443 for$119,230 and $274,302, during the ninethree and six months ended SeptemberJune 30, 2021.

2022, respectively. The discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date,following sets forth the operating lease right of use assets and liabilities reflect a weighted average discount rateas of 8%.June 30, 2022:

 

The following sets forth the operating lease right of use assets and liabilities as of SeptemberJune 30, 2021:2022:

 

Assets:    
Operating lease right of use assets $1,109,463 
     
Liabilities:    
Operating lease obligations-Long-term portion $795,704 
Operating lease obligations-Current portion  384,222 
Total operating lease obligations $1,179,926 

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Assets:   
Operating lease right of use assets $951,928 
     
Liabilities:    
Operating lease obligations-current portion $353,646 
Operating lease obligations-less current portion  666,477 
Total operating lease obligations $1,020,123 

 

The components of lease expense were as follows for the nine months ended September 30, 2021:

Selling, general and administrative expenses$

144,443

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

 

Year ending December 31:      
2021 (October 1, 2021 to December 31, 2021) $109,948 
2022 445,635 
2022 (July 1, to December 31, 2022) $250,285 
2023 264,329   305,627 
2024 191,059   245,761 
2025 173,333   196,462 
Thereafter  175,113   175,113 
Total undiscounted minimum future lease payments 1,359,417   1,173,248 
Imputed interest  (179,491)  (153,125)
Total operating lease liability $1,179,926  $1,020,123 

 

Debt Obligations. obligations – Outstanding debt obligations comprises the following:

 

 September 30, 2021  June 30,
2022		 December 31,
2021		 
Economic injury disaster loan (EIDL) $150,000  $150,000  $150,000 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition 350,000   211,867   317,212 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition 650,000   426,326   650,000 
TicketSmarter contingent consideration earn-out  4,244,400 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition  481,151   — 
Contingent consideration promissory note – Nobility Healthcare Division Acquisition  —   — 
Debt obligations $5,394,400   1,269,344   1,117,212 
Less: current maturities of debt obligations  514,664   389,934 
Debt obligations, long-term $754,680  $727,278 

 

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Debt obligations mature as follows as of SeptemberJune 30, 2021:2022:

 

  September 30, 2021 
2021 (October 1, 2021 to December 31, 2021) $4,245,882 
2022  403,049 
2023  403,166 
2024  203,286 
2025  3,412 
2026 and thereafter  135,605 
     
Total $5,394,400 

  

June 30,

2022

 
2022 (July 1, 2022 to December 31, 2022) $257,317 
2023  514,722 
2024  355,295 
2025  3,412 
2026  3,542 
2027 and thereafter  135,0564 
     
Total $1,269,344 

2020 Small Business Administration Notes.

On May 4, 2020, the Company issued a promissory note in connection with the receipt of the Paycheck Protection Program (“PPP”) loan of $1,418,900 (the “PPP Loan”) under the SBA’s PPP Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan had a two-year term and bore interest at a rate of 1.0% per annum. Monthly principal and interest payments were deferred for nine months after the date of disbursement and totaled $79,851 per month thereafter. The PPP Loan could have been prepaid at any time prior to maturity with no prepayment penalties. The promissory note contained events of default and other provisions customary for a loan of this type. The PPP provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company used the majority of the PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. The Company applied for forgiveness of the PPP Loan and December 10, 2020, the Company was fully forgiven of its $1,418,900 PPP Loan. Additionally, the Company was fully forgiven, during the nine months ended September 30, 2021, of its $10,000 EIDL advance received with the PPP Loan.

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

Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal and interest payments are deferred for twelve months after the date of disbursement and total $731 per month thereafter. Such note may be prepaid in part or in full, at any time, without penalty. The Company granted the secured party a continuing interest in and to any and all collateral, including but not limited to tangible and intangible personal property.

Medical Billing Company Contingent Consideration Promissory Note Payable.

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

The contingent consideration promissory note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded this Note at its estimated fair value of $350,000 at the acquisition date. Management will continue to estimate the fair value of this Note at each reporting date with the change, if any recorded as a gain or loss in the statement of operations during the relevant period.

Medical Billing Company Contingent Consideration Promissory Note Payable.

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

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The contingent consideration promissory note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded this Contingent Note at its estimated fair value of $650,000 at the acquisition date. Management will continue to estimate the fair value of this Contingent Note at each reporting date with the change, if any recorded as a gain or loss in the statement of operations during the relevant period.

TicketSmarter Contingent Consideration Earn-Out Agreement

On September 1, 2021, TicketSmarter issued a contingent consideration ern-out agreement (the “TicketSmarter Earn-Out”) in connection with the Stock Purchase Agreement between TicketSmarter, Inc., Goody Tickets, LLC and TicketSmarter, LLC of $4,244,400. The TicketSmarter Earn-Out, if earned, will be payable with ninety percent (90%) readily available funds and ten percent (10%) in stock consideration. The amount of the TicketSmarter Earn-Out is subject to an earn-out adjustment, being the difference between the $2,896,829 (the “Projected EBITDA”) and the actual EBITDA the “Measurement Period EBITDA”) generated by TicketSmarter in its normal course of business, during the period from September 1, 2021 through December 31, 2021. If the Measurement Period EBITDA is less than seventy percent (70%) of the Projected EBITDA, there will be zero contingent payment. If the Measurement Period EBITDA is between seventy percent (70%) and one hundred percent (100%) of the Projected EBITDA, then a fractional amount of the contingent payment will be paid out. If the Measurement Period EBITDA is more than the Projected EBITDA, the full balance of this TicketSmarter Earn-Out will be paid out. In no event will the principal balance of this TicketSmarter Earn-Out become a negative number. The maximum downward earn-out adjustment to the principal balance will reduce the TicketSmarter Earn-Out balance to zero.

The contingent consideration earn-out is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the TicketSmarter Earn-Out at its estimated fair value of $4,244,400 at the acquisition date. Management will continue to estimate the fair value of this TicketSmarter Earn-Out at each reporting date with the change, if any recorded as a gain or loss in the statement of operations during the relevant period.

Critical Accounting Policies and Estimates

 

Our significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to our consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies and estimates are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions:

 

 ●Revenue Recognition / Allowance for Doubtful Accounts;
   
 ●Allowance for Excess and Obsolete Inventory;
   
 ●Goodwill and other intangible assets;
●Warranty Reserves;
   
 ●

Goodwill impairment

●Fair value of warrant derivative liabilities;
   
 ●Stock-based Compensation Expense;
●Fair value of warrants;
●Fair value of assets and liabilities acquired in business combinations; and
   
 ●Accounting for Income Taxes.

 

5457

 

 

Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all five of the following conditions are met:

 

 (i)Identify the contract with the customer;
   
 (ii)Identify the performance obligations in the contract;
   
 (iii)Determine the transaction price;
   
 (iv)Allocate the transaction price to the performance obligations in the contract; and
   
 (v)Recognize revenue when a performance obligation is satisfied.

 

We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract when the customer order is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.

 

Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i) products, (ii) professional services, and (iii) extended warranties.

 

The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component.

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on the relative standalone selling price (“SSP”).

 

Revenue for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with customers.

Revenue for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to-end service fees. These service fees are reported as revenue monthly upon completion of our performance obligation to provide the agreed upon services.

Revenue for our ticketing segment is recorded on a gross or net basis based on management’s assessment of whether we are acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.

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

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

 

We review all significant, unusual, or nonstandard shipments of product or delivery of services as a routine part of our accounting and financial reporting process to determine compliance with these requirements. Extended warranties are offered on selected products, and when a customer purchases an extended warranty, the associated proceeds are treated as contract liability and recognized over the term of the extended warranty.

 

OurFor our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible, with less than $258,000 charged off as uncollectible on cumulative revenues of $246.1$248.0 million since we commenced deliveries during 2006. As of September 30, 2021, and December 31, 2020, we had provided a reserve for doubtful accounts of $123,224 and $123,224, respectively.

 

We periodically perform

For our ticketing segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction, thus leading to minimal risk for uncollectible accounts, to which we then consider a specific review of significant individual receivables outstanding for risk of loss due to uncollectability. Based on such review, we consider our reserve for doubtful accounts to be adequate as of September 30, 2021. However, should the balance due from any significant customer ultimately become uncollectible then our allowance for bad debts will not be sufficientbased on their individual circumstances. As we continue to coverlearn more about the charge-off andcollectability related to this recent acquisition, we will be requiredtrack historical bad debts and continue to record additional bad debt expense in our statement of operations.assess appropriate reserves.

 

55

For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves.

 

Allowance for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost.

 

Inventories consisted of the following at SeptemberJune 30, 20212022 and 2020:December 31, 2021:

 

  September 30, 2021  

December 31, 2020

 
Raw material and component parts $3,068,418  $3,186,426 
Work-in-process  15,506   1,908 
Finished goods  10,827,344   6,974,291 
         
Subtotal  13,911,268   10,162,625 
Reserve for excess and obsolete inventory  (2,300,019)  (1,960,351)
         
Total inventories $11,611,249  $8,202,274 
  June 30,
2022		  December 31,
2021		 
Raw material and component parts– video solutions segment $4,083,713  $3,062,046 
Work-in-process– video solutions segment  153   — 
Finished goods – video solutions segment  7,866,087   8,410,307 
Finished goods – ticketing segment  1,178,468   2,102,272 
Subtotal  13,128,421   13,574,625 
Reserve for excess and obsolete inventory– video solutions segment  (3,272,832)  (3,353,458)
Reserve for excess and obsolete inventory – ticketing segment  (449,635)  (561,631)
Total inventories $9,405,954  $9,659,536 

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We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk of inventory obsolescence due to changing technology and customer requirements. As reflected above, our inventory reserves represented 16.5%28.4% of the gross inventory balance at SeptemberJune 30, 2021,2022, compared to 19.3%28.8% of the gross inventory balance at December 31, 2020.2021. We had $2,300,019$3,722,467 and $1,960,351$3,915,089 in reserves for obsolete and excess inventories at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively. Total raw materials and component parts were $3,068,418and $3,186,426$4,083,713 and $3,062,046 at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, a decreasean increase of $118,008 (4%$1,021,667 (33.4%). Finished goods balances were $10,827,344$9,044,555 and $6,974,291$10,512,579 at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, an increasea decrease of $3,853,053 (55%$1,468,024 (14.0%). The increasedecrease in finished goods was primarily attributable to the TicketSmarter acquisition, which increased our finished goodsa reduction in ticketing inventory by $1,981,481 in ticket inventory. Additionally, the increase can also be attributedof $923,804 at June 30, 2022 compared to accumulating inventory for the new and expanding product lines.December 31, 2021. The slight increasedecrease in the inventory reserve is primarily due to scrapping of older version inventory component partsthe reduction in finished goods that were mostly or fully reserved during the three months ended September 30, 2021.had a reserve placed on them prior to sale. The remaining reserve for inventory obsolescence is generally provided for the level of component parts of the older versions of our PCBprinted circuit boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products. 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 at SeptemberJune 30, 2021.2022.

 

If actual future demand or market conditions are less favorable than those projected by management or there are significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established.

Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets.

Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets.

Determining an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset’s useful life.

The Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring changes or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value.

When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test.

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Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data.

Our most recent annual impairment test of goodwill was a qualitative analysis conducted as of December 31, 2021 that indicated no impairment. Subsequent to completing our 2021 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 — Nature of Business and Summary of Significant Accounting Policies and Note 10 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements provide additional information regarding the Company’s goodwill and other intangible assets.

 

Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were decreased to $14,278$10,582 as of SeptemberJune 30, 20212022 compared to $31,845$13,742 as of December 31, 20202021 as we beginbegan to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.

 

56

Goodwill Impairment - In connection with acquisitions, we apply the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill.

The Company has just recently completed several acquisitions that generated goodwill that will be subject to impairment testing for the first time on December 31, 2021. In accordance with ASC 350, Intangibles - Goodwill and Other, we will assess goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired.

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

Given the changing dynamics of our medical billing and ticket marketplace customers and the uncertainties regarding the effect on our business, there can be no assurance that the estimates and assumptions made for purposes of our goodwill impairment testing in 2021 will prove to be accurate predictions of the future. If our assumptions, including forecasted EBITDA of certain reporting units, are not achieved, we may be required to record additional goodwill impairment charges in future periods, whether in connection with our next annual impairment testing in the fourth quarter of 2021, or on an interim basis, if any such change constitutes a triggering event (as defined under ASC 350, Intangibles - Goodwill and Other) outside of the quarter when we regularly perform our annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

Warrant derivative liabilities. On January 14, 2021 and February 1, 2021, the Company issued warrants to purchase a total of 42,550,000 shares of Common Stock. The warrant terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Furthermore, the Company revalues the fair value of warrant derivative liability as of the date the warrant is exercised with the resulting warrant derivative liability transitioned to equity.

 

The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of SeptemberJune 30, 2021:2022:

 

  Issuance date assumptions  September 30, 2021
assumptions		 
Volatility - range  106.6 – 166.6 %  105.2%
Risk-free rate  0.08 - 0.49%  0.98%
Dividend  0%  0%
Remaining contractual term  0.01 - 5 years   4.3 - 5 years 
Exercise price $2.80 - 3.25  $3.25
Common stock issuable under the warrants  42,550,000   24,300,000 

  Issuance date assumptions  June 30, 2022 assumptions 
Volatility - range  106.6 – 166.6%  104.7%
Risk-free rate  0.08 – 0.49%  3.01%
Dividend  0%  0%
Remaining contractual term  0.01 – 5 years   3.5 – 4.2 years 
Exercise price $2.80 - 3.25  $3.25 
Common stock issuable under the warrants  42,550,000   24,300,000 

During the nine months ended September 30, 2021, holders of pre-funded warrants exercised a total of 18,250,000 warrants which were fair valued at $1,817,549 at their date of issuance and recorded as a derivative warrant liability. On the date of exercise such pre-funded warrants were fair valued at zero, which was transitioned to permanent equity during the nine months ended September 30, 2021. The Company reported the $1,817,549 change in fair value from their issuance date to their exercise date in the condensed statements of operations as the change in fair value of warrant derivative liabilities.

 

Stock-based Compensation Expense. We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were no25,000 stock options granted during the ninesix months ended SeptemberJune 30, 2021.2022.

61

 

If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect our estimates of fair values of our share-based compensation. Certain share-based payment awards, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. In addition, we account for forfeitures as they occur.

 

Accounting for Income Taxes. Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.

 

As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. As of June 30, 2022, we have fully reserved all of our deferred tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be decreased by $7,615,000 to a balance of $16,980,000 to fully reserve our deferred tax assets at December 31, 2020, cumulative valuation allowances in the amount of $24,595,000 were recorded in connection with the net deferred income tax assets.2021. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of December 31, 2020June 30, 2022, because of the overall net operating loss carryforwards available. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

 

57

As required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We have no recorded liability as of December 31, 2020June 30, 2022 representing uncertain tax positions.

 

We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized.

 

62

Inflation and Seasonality

 

Inflation

As inflation in the United States and abroad has not materiallyincreased and become more prominent, inflationary pressures adversely affected usall of the Company’s reporting segments’ gross margins during the pastfirst six months of fiscal year.year 2022, and are expected to persist for the remainder of fiscal year 2022 and beyond. We do not believe that our Video Solutions and Revenue Cycle Management segments business is seasonal in nature; however, we usuallythe Ticketing Segment is expected to generate higher revenues during the second half of the calendar year than in the first half due to the increased sporting events throughout the country during the second half of the calendar year in comparison to the first half.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not Applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) under the Exchange Act. The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of such disclosure controls and procedures for this quarterly report on Form 10-Q.Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 20212022 to provide reasonable assurance that material information required to be disclosed by the Company in this quarterly report on Form 10-QReport was recorded, processed, summarized and communicated to the Company’s management as appropriate and within the time periods specified in SEC rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during itsthe Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

The information regarding certain legal proceedings in which we are involved as set forth in Note 9 –Contingencies11 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report on Form 10-Q) is incorporated by reference into this Item 1.

 

In addition to such legal proceedings, we are faced with or involved in various other claims and legal proceedings arising in the normal course of our businesses. At this time, we do not believe any material losses under such other claims and proceedings to be probable. While the ultimate outcome of such claims or legal proceedings cannot be predicted with certainty, it is in the opinion of management, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

Item 1A. Risk FactorsFactors.

 

As a smaller reporting company, we are not required to provide the information required by this Item.

63

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Purchases of Equity Securities by the Issuer

On December 6, 2021, the board of directors of the Company announced the repurchase of up to $10.0 million of the Company’s outstanding common stock under the specified terms of a share repurchase program (the “Program”). During the three months ended June 30, 2022, the Company repurchased 1,849,952 shares of its common stock for $1,962,755, in accordance with the Program. Furthermore, during the six months ended June 30, 2022, the Company repurchased 3,725,986 shares of its common stock for $4,026,523, in accordance with the Program.

 

Pursuant to a securities purchase agreement, dated as of January 27, 2021, by and between the Company and certain investors (the “Purchase Agreement”), the Company issued common stock purchase warrants to such investors on February 1, 2021 (the “February Warrants”), which were initially issued and included for registration, along with the shares of Common Stock underlying such February Warrants and certain other securities, in a registered direct offering by the Company, pursuant to a prospectus supplement, dated January 27, 2021 (the “January 27th Prospectus Supplement”) to the Company’s effective registration statement on Form S-3 (File No. 333-239419), which was initially filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 25, 2020, and was declared effective on July 2, 2020 (the “Shelf Registration Statement”). On August 19, 2021, the Company cancelled February Warrants exercisable for up to 7,681,540 shares of Common Stock in consideration for its issuance of the Warrants to the investors. The Company also filed a supplement to the Prospectus Supplement removing the cancelled February Warrants and the shares of Common Stock exercisable thereunder from registration under the Shelf Registration Statement in order to provide additional availability for the issuance of securities under the Shelf Registration Statement. The Warrants were issued pursuant an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) because the investors had a pre-existing relationship with the Company, there was no general solicitation made, and the investors represented their sophistication.

Period Total Number of
Shares
Purchased		  Average Price
Paid per
Shares		  Total Number of
Shares Purchased as
Part of Publicly
Announced
Program		  Maximum Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the
Program		 
December 2021  1,734,838  $1.14   1,734,838   — 
January 2022  697,093   1.11   697,093   — 
February 2022  692,984   1.12   692,984   — 
March 2022  485,957   1.06   485,957   — 
April 2022  595,476   1.14   595,476   — 
May 2022  716,911   1.08   716,911   — 
June 2022  537,565   0.96   537,565   — 
Total all plans  5,460,824  $1.10   5,460,824  $3,998,398 

 

On September 2, 2021,June 30, 2022, the board of directors of the Company and TicketSmarter, LLC (“TicketSmarter”) on behalf of itself and its wholly owned subsidiary Goody Tickets, LLC, and members of TicketSmarter (“Sellers”), entered into a Unit Purchase Agreement (the “UPA”), pursuantelected to which,terminate the Company purchased all of the issued and outstanding membership interests of TicketSmarter, for aggregate consideration of approximately $14.1 million,(subject to adjustment) including cash of approximately $8.9 million and 719,738 shares of Company common stock with a value of approximately $990,360, which consideration was paid at closing. Such consideration includes up to approximately $4.2 million structured as contingent payment (the “Contingent Payment”)Program, effective immediately. The Program began in additional cash and shares of Common Stock if TicketSmarter achieves certain EBITDA milestones prior to March 31, 2022, as set forth in the UPA.

The UPA contains customary representations and warranties and covenants. The closing of the UPA and the acquisition also occurred on September 2, 2021. Mr. Jeffrey Goodman and Mr. Michael Goodman, will be employed by Digital TicketSmarter as Chief Executive Officer and Chief Operations Officer, respectively, and they each executed certain restricted stock grant agreementsDecember 2021, with the Company (collectively, the “Restricted Stock Grant Agreements”), whereby the Company issued 100,000 restrictedpurchasing a total of 5,460,824 shares at a cost of Common Stock and 50,000 shares of Common Stock to Mr. Jeffrey Goodman and Mr. Michael Goodman, respectively, subject to the terms and provisions of the Company’s 2020 Stock Option and Restricted Stock Plan. The restricted shares of Common Stock were valued based on the closing price of the Common Stock on the Nasdaq Stock Market on the day of grant. The restricted shares of Common Stock will vest in equal installments over a five-year period beginning on the first anniversary date each recipient began employment.$6,001,602 through June 30, 2022.

The issuance of the 719,738 restricted common shares and the total issuance of the 150,000 restricted common shares to Jefferey Goodman and Michael Goodman were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) because Jefferey Goodman and Michael Goodman had a pre-existing relationship with the Company, there was no general solicitation made, and the investors represented their sophistication. Furthermore, the creditor made representations that the securities issued to extinguish the obligations were taken for investment purposes and not with a view to resale.

 

Item 3. Defaults upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

Not applicable.

 

Item 6. Exhibits.

 

(a) Exhibits.

 

Exhibit NumberDescription
4.1Form of Common Stock Purchase Warrant (Exchange Warrant). (Incorporated by reference to the Company’s Current Report on Form 8-K filed August 19, 2021.)
 
4.2Form of Common Stock Purchase Warrant (Replacement Original Warrant). (Incorporated by reference to the Company’s Current Report on Form 8-K filed August 19, 2021.)
10.1Warrant Exchange Agreement, dated August 19, 2021, among Digital Ally, Inc. and the warrant holders who are signatories thereto. (Incorporated by reference to the Company’s Current Report on Form 8-K filed August 19, 2021.)
10.2Unit Purchase Agreement, dated September 2, 2021. (Incorporated by reference to the Company’s Current Report on Form 8-K filed September 9, 2021.)
31.1Certificate of Stanton E. Ross pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
   
31.231.2Certificate of Thomas J. Heckman pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended.
   
32.132.1Certificate of Stanton E. Ross pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
   
32.232.2Certificate of Thomas J. Heckman pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended.
   
99.1Press release of the Company entitled “Digital Ally Announces Acquisition of Growing National Event Ticket Marketplace” dated September 8, 2021.(Incorporated by reference to the Company’s Current Report on Form 8-K filed September 9, 2021.)
101.INSInline XBRL Instance Document.Document
   
101.SCH101.SCHInline XBRL Taxonomy Extension Schema Document. (Filed herewith.)Document
   
101.CAL101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)Document
   
101.DEF101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)Document
   
101.LAB101.LABInline XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)Document
   
101.PRE101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)Document
   
104104Cover Page Interactive Data File (embedded(Embedded within the Inline XBRL document)document and included in Exhibit)

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

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SignaturesSIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 19, 2021August 15, 2022

 

 DIGITAL ALLY, INC.,
  
 By:/s/ Stanton E. Ross
 Name:Stanton E. Ross
 Title:President and Chief Executive Officer
   
 By:/s/ Thomas J. Heckman
 Name:Thomas J. Heckman
 Title:Chief Financial Officer, Secretary and Treasurer (Principal Financial and Principal Accounting OfficerOfficer)

 

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