| NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature
of Operations: Digital
Ally, Inc. was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November
30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital
Ally, Inc. (such merged entity, the “Predecessor Registrant”). On
August 23, 2022 (the “ Effective Time Predecessor Registrant Registrant Merger Agreement Merger At
the Effective Time, pursuant to the Merger Agreement, (i) each outstanding share of Predecessor Registrant’s common stock, par
value $ 0.001 Predecessor Common Stock 0.001 Registrant Common Stock The
business of the Registrant, Digital Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products,
LLC, Digital Ally Healthcare, LLC (“Digital Ally Healthcare”), TicketSmarter, Inc. (“TicketSmarter”), Worldwide
Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc. (“Kustom 440”), Kustom Entertainment, Inc.,
and its majority-owned subsidiary Nobility Healthcare, LLC, collectively, “Digital Ally,” “Digital,” and the
“Company”), is divided into three reportable operating segments: 1) the Video Solutions Segment, 2) the Revenue Cycle Management
Segment and 3) the 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 Entertainment Segment acts as an intermediary between ticket buyers
and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell
through various platforms. The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information of those segments to be presented in financial statements.
Such required segment information is included in Note 18. Reverse
Stock Split On
February 6, 2023, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State
of the State of Nevada to effect a 1-for-20 reverse stock split Business
Combination In
June 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp.,
a Delaware corporation (Nasdaq: CLOE) (“Clover Leaf”), CL Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary
of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as
the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf in accordance
with the terms and conditions of the Merger Agreement, and Kustom Entertainment, Inc., a Nevada corporation, a wholly owned subsidiary
of the Company, with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary
ticketing technologies (“Kustom”). Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein
upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with
and into Kustom (the “Merger”), with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary
of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of Kustom immediately prior to the Closing shall no longer
be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right for the Company to receive the
Merger Consideration (as defined below). The
total consideration to be received by Company and its financial advisor at the Closing in connection with the Merger (the “Merger
Consideration”) will be a number of newly issued shares of Class A Common Stock, par value $ 0.0001 125,000,000 11.14 The
Company will also distribute to its stockholders and certain of its warrant holders 30% The
Closing is subject to the approval of Clover Leaf’s shareholders and the satisfaction or waiver of certain other customary closing
conditions. Basis
of Presentation The
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three- and six-month period ended June 30, 2024 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2024. The
balance sheet at December 31, 2023 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, 2023. Liquidity
and Going Concern During
the second quarter of 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provided U.S. GAAP guidance on
management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going
concern and about related footnote disclosures. Under this standard, the Company is required to evaluate whether there is substantial
doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s
ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the
Company’s ability to continue as a going concern within 12 months after the Company’s financial statements were issued (August
15, 2024). Management considered the Company’s current financial condition and liquidity sources, including current funds available,
forecasted future cash flows and the Company’s obligations due before August 15, 2024. The
Company has experienced net losses and cash outflows from operating activities since inception. For the six months ended June 30, 2024,
the Company had a net loss attributable to common stockholders of $ 8,953,819 3,408,757 36,504 3,208,817 The
Company has implemented an enhanced quality control program to detect and correct product issues before they result in significant rework
expenditures affecting its gross margins and has seen progress in that regard. The Company has also implemented a marketing and advertisement
reduction plan for its entertainment segment, which will focus on reducing and alleviating current obligations from its media marketing
agreements and place a hold on entering into any new agreements. The Company believes that its quality control, cost-cutting initiatives,
and new product introduction will eventually restore positive operating cash flows and profitability, although it can offer no assurances
in this regard. Management
has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and
concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year from the
date the unaudited condensed consolidated financial statements were issued. Basis
of Consolidation The
accompanying financial statements include the consolidated accounts of Digital Ally, its wholly-owned subsidiaries, Digital Ally International,
Inc., Shield Products, LLC, Digital Ally Healthcare, LLC, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu
Jets, 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™
line of temperature monitoring equipment. The Company formed Nobility Healthcare, LLC (“Nobility Healthcare”) in June 2021
to facilitate the operations of its revenue cycle management solutions and back-office services for healthcare organizations. The Company
formed TicketSmarter, Inc. upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its 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 Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for consumers, and Kustom
Entertainment, Inc. in 2023 to serve as the participant in the Business Combination. Fair
Value of Financial Instruments The
carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
notes payable approximate fair value because of the short-term nature of these items. Revenue
Recognition The
Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers The
Company has two different revenue streams, product and service, represented through its three segments. The Company reports all revenues
on a gross basis, other than service revenues from the Company’s entertainment and revenue cycle management segments, Revenues
generated by all segments are reported net of sales taxes. Video
Solutions The
Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the
customer. In situation 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 part of its consideration for the contract,
the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each contract, the Company
considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the
transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which
it expects to be entitled. As the Company’s standard payment terms are less than one year, it has elected the practical expedient
under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction
price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is
considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar
circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e. when the Company’s performance
obligations is 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 products. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for
product sales when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than
one year. Service
and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue is
recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services. Revenue for
extended warranty, cloud service or other software-based products is over the term of the contract warranty or service period. A time-elapsed
method is used to measure progress because the Company transfers control evenly over the contractual period. Accordingly, the fixed consideration
related to these revenues is generally recognized on a straight-line basis over the contract term, as long as the other revenue recognition
criteria have been met. The
Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined points
within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year
contract to future deliverables using management’s best estimate of selling price. Revenue
Cycle Management The
Company reports revenue cycle management revenues on a net basis, as its primary source of revenue is its end-to-end service fees which
is generally determined as a percentage of the invoice amounts collected. These service fees are reported as revenue monthly upon completion
of the Company’s performance obligation to provide the agreed upon service. Entertainment 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 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. Payment is due at the time of sale. Other Contract
liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately
as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts,
prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied.
During the six months ended June 30, 2024, the Company recognized revenue of $ 1.4 SCHEDULE OF CONTRACT LIABILITIES
June 30, 2024
December 31, 2023 Additions/ Reclass Recognized Revenue June 30, 2024
Contract liabilities, current $ 2,937,168 $ 767,131 $ (610,807 ) $ 3,093,492
Contract liabilities, non-current 7,340,459 412,632 (753,950 ) 6,999,141
$ 10,277,627 $ 1,179,763 $ (1,364,757 ) $ 10,092,633
June 30, 2023
December 31, 2022 Additions/ Reclass Recognized Revenue June 30, 2023
Contract liabilities, current $ 2,154,874 $ 1,246,212 $ (496,034 ) $ 2,905,052
Contract liabilities, non-current 5,818,082 1,223,497 (487,106 ) 6,554,473
$ 7,972,956 $ 2,469,709 $ (983,140 ) $ 9,459,525 Sales
returns and allowances aggregated $ 93,170 117,713 Use
of Estimates The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not
limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair
value of warrants, options, the recognition of revenue, inventory valuation reserve, fair value of assets and liabilities acquired in
a business combination, incremental borrowing rate on leases, the valuation allowance for deferred tax assets and other legal claims
and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which
the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period
that they are determined to be necessary. Cash
and cash equivalents Cash
and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less. SCHEDULE OF SHORT TERM INVESTMENTS
June
30, 2024
Adjusted
Realized
Realized
Fair
Demand
deposits $ 439,881 $ — $ — $ 439,881
Short-term
investments with original maturities of 90 days or less (Level 1):
Money
market funds 77,232 — — 77,232
$ 517,113 $ — $ — $ 517,113
December
31, 2023
Adjusted
Unrealized
Unrealized
Fair
Demand
deposits $ 545,207 $ — $ — $ 545,207
Short-term
investments with original maturities of 90 days or less (Level 1):
Money
market funds 135,342 — — 135,342
$ 680,549 $ — $ — $ 680,549 The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that
at times may be in excess of the federally insured limit of $ 250,000 136,717 29,700 Restricted
Cash Restricted
cash of $ 97,600 97,600 The
following table provides a reconciliation of cash and cash equivalents in the consolidated balance sheets to cash, cash equivalents and
restricted cash in the consolidated statements of cash flows: SCHEDULE OF RECONCILIATION OF CASH AND CASH EQUIVALENTS
June 30, 2024 December 31, 2023
Cash and cash equivalents $ 517,113 $ 680,549
Long-term restricted cash included in other assets 97,600 97,600
Total cash, cash equivalents and restricted cash in the statements of cash flows $ 614,713 $ 778,149 Accounts
Receivable Accounts
receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding
amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables
and considering a customer’s financial condition, credit history, and current economic conditions. Trade
receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days
beyond terms. No interest is charged on overdue trade receivables. Goodwill
and Other Intangibles Goodwill
Business Combinations Intangibles - Goodwill and Other Goodwill
impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially
recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and
all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. Traditionally,
goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying
amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there
is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to
measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. The Company has adopted ASU
2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the
Company compares the fair value of a reporting unit with its respective carrying value and recognized an impairment charge for the amount
by which the carrying amount exceeded the reporting unit’s fair value. The
Company determines the fair value of its reporting units using the market approach. Under the market approach, we estimate the fair value
based on multiples of comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying
similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing
comparable revenue and operating income multiples in estimating the fair value of the reporting unit. Long-lived
and Other Intangible Assets - Accounting for the Impairment or Disposal of Long-lived Assets 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, 2023 and
concluded that there was no impairment. Subsequent to completing our 2023 annual impairment test, no events or changes in circumstances
were noted that required an interim goodwill impairment test. Intangible
assets include deferred patent costs, license agreements, trademarks and trade names. Legal expenses incurred in preparation of patent
application have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications
that are not granted will be charged to expense at that time. The Company has entered into several sublicense agreements under which
it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements generally require
upfront payments to obtain the exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and
amortizes such costs over their estimated useful life on a straight-line method. Segment
Reporting The
accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial
statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified
as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision
maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess
performance. The Company’s three Contingent
Consideration In
circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities
from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of
the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value through the consolidated
statement of operations. Non-Controlling
Interests Non-controlling
interests in the Company’s Consolidated Financial Statements represent the interest in subsidiaries held by our venture partner.
The venture partner holds a noncontrolling interest in the Company’s consolidated subsidiary Nobility Healthcare, LLC. Since the
Company consolidates the financial statements of all wholly-owned and majority owned subsidiaries, the noncontrolling owners’ share
of each subsidiary’s results of operations are deducted and reported as net income or loss attributable to noncontrolling interest
in the Consolidated Statements of Operations. New
Accounting Standards In
November 2023, the FASB issued Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable
Segment Disclosures” (“ASU 2023-07”), which is intended to improve reportable segment disclosure requirements, primarily
through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December
15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The guidance is to
be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories
and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in
the period of adoption. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial
statements and related disclosures. In
December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”
(“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories
in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between
domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU
2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among
other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual
financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis,
but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated
financial statements and related disclosures. |
