| 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 14. Business
Combination In
June 2023, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp.,
a Delaware corporation (Nasdaq: CLOE) (“Clover Leaf”), CL Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary
of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as
the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf in accordance
with the terms and conditions of the Merger Agreement, and Kustom Entertainment, Inc., a Nevada corporation, a wholly owned subsidiary
of the Company, with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary
ticketing technologies (“Kustom”). Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein
upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with
and into Kustom, with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Clover Leaf. Upon
the Closing which is subject to the approval of Clover Leaf’s shareholders and the satisfaction or waiver of certain other customary
closing conditions, the common stock of the combined company was expected to be listed on the Nasdaq under a mutually agreed new ticker
symbol that reflects the name “Kustom Entertainment”. On
November 8, 2024, Clover Leaf and Kustom mutually agreed to terminate their previously announced Merger Agreement and Plan of Merger
effective as of November 7, 2024 by entering into a mutual termination and release agreement among the parties. The parties released
each other of all obligations related to the Merger Agreement. Basis
of Presentation The
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and nine-month period ended September 30, 2024 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2024. The
balance sheet as of 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 consolidated 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 (December
30 30 The
Company has experienced net losses and cash outflows from operating activities since inception. For the nine months ended September 30,
2024, the Company had a net loss attributable to common stockholders of $ 12,485,388 net cash used in operating
activities of $ 4,086,023 ,
$ 392,523 provided
by investing activities and $ 3,330,482 The
Company is pursuing a significant capital raise to provide funding for its short and long-term liquidity needs. The Company has implemented
an enhanced quality control program to detect and correct product issues before they result in significant rework expenditures affecting
its gross margins and has seen progress in that regard. The Company has also implemented a marketing and advertisement reduction plan
for its entertainment segment, which will focus on reducing and alleviating current obligations from its media marketing agreements and
place a hold on entering into any new agreements. The Company believes that its quality control, cost-cutting initiatives, and new product
introduction will eventually restore positive operating cash flows and profitability, although it can offer no assurances in this regard. Management
has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and
concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year from the
date the unaudited condensed consolidated financial statements were issued. Such factors raise substantial doubt about the Company’s ability
to sustain operations for at least one year from the issuance of these financial statements. The accompanying unaudited condensed consolidated
financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern. 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. Fair
Value of Financial Instruments The
carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated
notes payable approximate fair value because of the short-term nature of these items. Revenue
Recognition The
Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers 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 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 nine months ended September 30, 2024, the Company recognized revenue of $ 2.0 SCHEDULE OF CONTRACT LIABILITIES
September 30, 2024
December 31, 2023 Additions/ Reclass Recognized Revenue September 30, 2024
Contract liabilities, current $ 2,937,168 $ 1,689,038 $ (557,628 ) $ 4,068,578
Contract liabilities, non-current 7,340,459 761,421 (1,476,186 ) 6,625,694
$ 10,277,627 $ 2,450,459 $ (2,033,814 ) $ 10,694,272
September 30, 2023
December 31, 2022 Additions/ Reclass Recognized Revenue September 30, 2023
Contract liabilities, current $ 2,154,874 $ 2,133,969 $ (1,536,860 ) $ 2,751,983
Contract liabilities, non-current 5,818,082 1,943,313 (626,848 ) 7,134,547
$ 7,972,956 $ 4,077,282 $ (2,163,708 ) $ 9,886,530 Sales
returns and allowances aggregated $ 86,370 117,713 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. 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 0 29,700 Restricted
Cash Restricted
cash of $- 0 97,600 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 a weighting of the income and market valuation approaches. The income approach applies a fair value methodology to each reporting
unit based on discounted cash flows. This analysis requires significant judgments, including estimation of future cash flows, which is
dependent on internally-developed forecasts of revenue and profitability, estimation of the long-term rate of growth for our business,
estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital, which is risk-adjusted
to reflect the specific risk profile of the reporting unit being tested. 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 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 until the three months ended September 30, 2024, when events occurred that we considered triggering events. During the third
fiscal quarter of 2024, management determined that triggering events had occurred resulting from the additional decline in demand for
our services, prolonged economic uncertainty, the split-off transaction did not occur when and as expected and a further decrease in
our stock price. Therefore, we performed an interim impairment test as of September 30, 2024. Refer to Note 8. Goodwill and Other
Intangible Assets for additional details on the interim impairment test, valuation methodologies, and inputs used in the fair value
measurements. 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. | NOTE
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature
of Business: 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 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 23. 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, with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Clover Leaf. Upon
the Closing which is subject to the approval of Clover Leaf’s shareholders and the satisfaction or waiver of certain other customary
closing conditions, the common stock of the combined company is expected to be listed on the Nasdaq under a mutually agreed new ticker
symbol that reflects the name “Kustom Entertainment”. The
following is a summary of the Company’s Significant Accounting Policies: 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 Digital Connect, Inc. and BirdVu Jets, Inc. for travel and transportation purposes in 2022. The Company
formed Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for consumers, 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 subordinated
notes payable approximate fair value because of the short-term nature of these items. Revenue
Recognition The
Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers 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 year ended December 31, 2023, the Company recognized revenue of $2.6 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, 2023
December 31, 2022 Additions/Reclass Recognized Revenue December 31, 2023
Contract liabilities, current $ 2,154,874 $ 2,538,187 $ 1,755,893 $ 2,937,168
Contract liabilities, non-current 5,818,082 2,328,994 806,617 7,340,459
$ 7,972,956 $ 4,867,181 $ 2,562,510 $ 10,277,627
December 31, 2022
December 31, 2021 Additions/Reclass Recognized Revenue December 31, 2022
Contract liabilities, current $ 1,665,519 $ 1,478,479 $ 989,124 $ 2,154,874
Contract liabilities, non-current 2,687,786 4,560,600 1,430,304 5,818,082
$ 4,353,305 $ 6,039,079 $ 2,419,428 $ 7,972,956 Sales
returns and allowances aggregated $ 117,713 118,026 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, allowances for
doubtful accounts and other receivables, 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.
The following table shows the Company’s cash and cash equivalents by significant investment category as of December 31, 2023 and
2022: SCHEDULE
OF SHORT TERM INVESTEMNTS
December 31, 2023
Adjusted Realized Realized Fair Value
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
December 31, 2022
Adjusted Realized Realized Fair Value
Demand deposits $ 897,745 $ — $ — $ 897,745
Short-term investments with original maturities of 90 days or less (Level 1):
Money market funds 2,634,454 — — 2,634,454
$ 3,532,199 $ — $ — $ 3,532,199 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 29,700 2,495,189 Restricted
Cash Restricted
cash of $ 97,600 0 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
December 31, December 31,
Cash and cash equivalents $ 680,549 $ 3,532,199
Long-term restricted cash included in other assets 97,600 —
Total cash, cash equivalents and restricted cash in the statements of cash flows $ 778,149 $ 3,532,199 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 recognizes 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 assessed potential impairments of its long-lived assets as of December 31, 2023 and concluded
that there was no impairment. Long-lived
assets such as property, plant and equipment and purchased intangible assets subject to amortization are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived
asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by
that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an
undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is
determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party appraisals,
as considered necessary. Intangible
assets include deferred patent costs and license agreements and intangibles related to acquisitions. Legal expenses incurred in preparation of
patent application have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation
of applications that are not granted will be charged to expense at that time. The Company has entered into several sublicense
agreements under which it has been assigned the exclusive rights to certain licensed materials used in its products. These
sublicense agreements generally require upfront payments to obtain the exclusive rights to such material. The Company capitalizes
the upfront payments as intangible assets and amortizes such costs over their estimated useful life on a straight-line
method. Inventories Inventories
for the video solutions segment consist of electronic parts, circuitry boards, camera parts and ancillary parts (collectively, “components”),
work-in-process and finished goods. Finished goods that are manufactured and assembled by the Company are carried at the lower of cost
or net realizable value, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs
include material, labor and manufacturing overhead. Inventories for the entertainment segment consists of tickets to live events purchased,
which are held at lower of cost or net realizable value, and written-off after the event has occurred. Event tickets for the entertainment
segment are carried at lower of cost or net realizable value, and fully written off at the time the event occurs if the ticket is unsold
and remaining in inventory after the completion of the event. Management has established inventory reserves based on estimates of excess
and/or obsolete current inventory. Manufacturing
inventory for the video solutions segment is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated
future use of quantities on hand, which is determined based on past usage, planned changes to products and known trends in markets and
technology. Changes in support plans or technology could have a significant impact on obsolescence. To
support our world-wide service operations for the video solutions segment, we maintain service spare parts inventory, which consists
of both consumable and repairable spare parts. Consumable service spare parts are used within our service business to replace worn or
damaged parts in a system during a service call and are generally classified in current inventory as our stock of this inventory turns
relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part is still necessary to
support systems under service contracts, the part is considered to be non-current and included within non-current inventories within
our consolidated balance sheet. Consumables are charged to cost of goods sold when issued during the service call. As
these service parts age over the related product group’s post-production service life, we reduce the net carrying value of our
repairable spare part inventory on the consolidated balance sheet to account for the excess that builds over the service life. The post-production
service life of our systems is generally seven to twelve years and, at the end of twelve years, the carrying value for these parts in
our consolidated balance sheet is reduced to zero. We also perform periodic monitoring of our installed base for premature end of service
life events and expense, through cost of sales, the remaining net carrying value of any related spare parts inventory in the period incurred. Property,
plant and equipment Property,
plant and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance
and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful
life of the asset, which ranges from three to thirty years, other than the infinite useful life of land. Amortization expense on capitalized
leases is included with depreciation expense. The cost and accumulated depreciation related to assets sold or retired are removed from
the accounts and any gain or loss is credited or charged to income. Leases The
Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will
evaluate whether to account for the lease as an operating or finance lease. Operating leases are included in the right of use assets
(ROU) and operating lease liabilities on the consolidated balance sheet as of December 31, 2023. Finance leases would be included in
property, plant and equipment, net and long-term debt and finance lease obligations on the balance sheet. The Company had operating leases
for copiers, offices and warehouse space at December 31, 2023 but no financing leases. ROU
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the
operating lease liabilities if the operating lease does not provide an implicit rate. Lease terms may include the option to extend when
Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line
basis over the lease term. The
Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not
recognized for short term leases. Warranties The
Company’s video solutions segment products carry explicit product warranties that extend up to two years from the date of shipment.
The Company records a provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts
these provisions to reflect actual experience. Accrued warranty costs are included in accrued expenses. Extended warranties are offered
on selected products and when a customer purchases an extended warranty the associated proceeds are treated as contract liabilities and
recognized over the term of the extended warranty. Shipping
and Handling Costs Shipping
and handling costs video solutions segment for outbound sales orders totaled $ 51,061 70,749 Advertising
Costs Advertising
expense video solutions segment and entertainment segments includes costs related to trade shows and conventions, promotional material
and supplies, and media costs. Advertising costs are expensed in the period in which they are incurred. The Company incurred total advertising
expenses of approximately $ 5,773,965 7,668,641 Income
Taxes Deferred
taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The
Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
No. 740 - Income Taxes that provides a framework for accounting for uncertainty in income taxes and provided a comprehensive model to
recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax
return. It initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained
upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit
that is greater than 50% likely The
Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense
in the Consolidated Statements of Operations. There was no no The
Company is subject to taxation in the United States and various states. As of December 31, 2023, the Company’s tax returns filed
for 2020, 2021 and 2022 and to be filed for 2023 are subject to examination by the relevant taxing authorities. With a few exceptions,
as of December 31, 2023, the Company is no longer subject to Federal, state, or local examinations by tax authorities for taxable years
prior to 2020. Research
and Development Expenses The
Company expenses all research and development costs as incurred, which is generally incurred by the video solutions segment. Development
costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological
feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s
products are released soon after technological feasibility has been established. Costs incurred subsequent to achievement of technological
feasibility were not significant, and software development costs were expensed as incurred during 2023 and 2022. Warrant
Derivative Liabilities In
accordance with FASB ASC 815-40, Derivatives and Hedging: Contracts in an Entities Own Equity, entities must consider whether to classify
contracts that may be settled in its own stock, such as warrants to purchase shares of Common Stock, as equity of 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, 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 statement of operations. Stock-Based
Compensation The
Company grants stock-based compensation to its employees, board of directors and certain third-party contractors. Share-based compensation
arrangements may include the issuance of options to purchase common stock in the future or the issuance of restricted stock, which generally
are subject to vesting requirements. The Company records stock-based compensation expense for all stock-based compensation granted based
on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period
of the award. The
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