UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________.
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| The |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☐
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 ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
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 May 20, 2025 | |
| Common Stock, $ par value per share |
FORM 10-Q
DIGITAL ALLY, INC.
MARCH 31, 2025
| 2 |
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements.
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2025 AND DECEMBER 31, 2024
March 31, 2025 | December 31, 2024 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable-trade, less allowance for doubtful accounts of $ | ||||||||
Subscriptions receivable, net of $ | ||||||||
| Other receivables | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill and other intangible assets, net | ||||||||
| Operating lease right of use assets, net | ||||||||
Subscriptions receivable – long-term | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of operating lease obligations | ||||||||
| Deferred revenue – current | ||||||||
| Notes payable – related party – current portion | ||||||||
| Debt obligations – current | ||||||||
| Warrant derivative liabilities | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Debt obligations – long term | ||||||||
| Operating lease obligation – long term | ||||||||
| Deferred revenue – long term | ||||||||
| Notes payable – related party – long-term portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Preferred stock, $ par value per share, shares authorized; issued or outstanding – March 31, 2025 and December 31, 2024 | ||||||||
| Common stock, $ par value; shares authorized; shares issued: – March 31, 2025 and – December 31, 2024 | ||||||||
| Additional paid in capital | ||||||||
| Noncontrolling interest in consolidated subsidiary | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total equity (deficit) | ( | ) | ||||||
| Total liabilities and equity (deficit) | $ | $ | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
| 3 |
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2025 AND 2024
(Unaudited)
| 2025 | 2024 | |||||||
| Revenue: | ||||||||
| Product | $ | $ | ||||||
| Service and other | ||||||||
| Total revenue | ||||||||
| Cost of revenue: | ||||||||
| Product | ||||||||
| Service and other | ||||||||
| Total cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses: | ||||||||
| Research and development expense | ||||||||
| Selling, advertising and promotional expense | ||||||||
| General and administrative expense | ||||||||
| Total selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Gain on extinguishment of debt – related party | ||||||||
| Gain on the extinguishment of liabilities | ||||||||
| Gain on disposal of intangibles | ||||||||
| Change in fair value of warrant derivative liabilities | ( | ) | ||||||
| Loss on sale of property, plant and equipment | ( | ) | ||||||
| Total other income (expense) | ( | ) | ||||||
| Income (loss) before income tax benefit (provision) | ( | ) | ||||||
| Income tax expense benefit (provision) | ||||||||
| Net income (loss) | ( | ) | ||||||
| Net income attributable to noncontrolling interests of consolidated subsidiary | ( | ) | ( | ) | ||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | ) | ||||
| Net income (loss) per share attributable to common information: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
| 4 |
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2025 AND 2024
(Unaudited)
| Noncontrolling | ||||||||||||||||||||||||
| Additional | Interest in | |||||||||||||||||||||||
| Common Stock | Paid In | consolidated | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | subsidiary | Deficit | Total | |||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Restricted common stock grant | ( | ) | ||||||||||||||||||||||
| Restricted common stock forfeitures | ( | ) | ||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, December 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Sale of common stock and pre-funded warrants, net of offering costs | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of pre-funded warrants | ( | ) | ||||||||||||||||||||||
| Fair value of pre-funded warrants issued along with sale of common stock | — | ( | ) | ( | ) | |||||||||||||||||||
| Transition of warrant derivative liability to equity upon exercise of pre-funded warrants | — | |||||||||||||||||||||||
| Issuance of common stock upon exercise of June 2024 Series B common stock purchase warrants | ||||||||||||||||||||||||
| Transition of warrant derivative liability to equity upon exercise of Series B warrants | — | |||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance, March 31, 2025 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
| 5 |
DIGITAL ALLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2025 AND 2024
(Unaudited)
| 2025 | 2024 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for doubtful accounts receivable | ( | ) | ||||||
| Provision for doubtful subscriptions receivable | ||||||||
| Provision for inventory obsolescence | ( | ) | ( | ) | ||||
| Stock based compensation | ||||||||
| Non-cash interest expense | ||||||||
| Gain on extinguishment of liabilities | ( | ) | ( | ) | ||||
| Gain on extinguishment of debt – related party | ( | ) | ||||||
| Change in fair value of warrant derivative liability | ( | ) | ||||||
| Loss on sale of property, plant and equipment | ||||||||
| Loss on disposal of intangible assets | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable – trade | ||||||||
| Subscriptions receivable | ( | ) | ||||||
| Other receivables | ) | |||||||
| Inventories | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Operating lease right of use assets | ||||||||
| Other assets | ( | ) | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accrued interest - related party | ||||||||
| Income taxes payable | ( | ) | ||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Additions to intangible assets | ( | ) | ( | ) | ||||
| Proceeds from sale of intangible assets | ||||||||
| Cash paid for acquisition of Country Stampede | ( | ) | ||||||
| Proceeds from sale of land and building | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Net proceeds of February 2025 public equity offering with detachable warrants | ||||||||
| Net proceeds of unsecured promissory note – entertainment segment | ||||||||
| Payments on Senior Secured Promissory Notes – Video Solutions Segment | ( | ) | ||||||
| Payments of related party note payable | ( | ) | ||||||
| Principal payments on EIDL loan | ( | ) | ( | ) | ||||
| Proceeds – Commercial Extension of Credit – Entertainment Segment | ||||||||
| Payments on Commercial Extension of Credit – Entertainment Segment | ( | ) | ( | ) | ||||
| Proceeds – Merchant Advances – Video Solutions Segment | ||||||||
| Payments on Merchant Advances – Video Solutions Segment | ( | ) | ||||||
| Proceeds from issuance of common shares upon exercise of Series B warrants | ||||||||
| Proceeds – Merchant Advances – Entertainment Segment | ||||||||
| Payments on Merchant Advances – Entertainment Segment | ( | ) | ||||||
| Principal payment on contingent consideration promissory notes | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash, cash equivalents and restricted cash | ||||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash payments for interest | $ | $ | ||||||
| Cash payments for income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Restricted common stock grant | $ | $ | ||||||
| Restricted common stock forfeitures | $ | $ | ||||||
| Commercial extension of credit repaid through accrued revenue – Entertainment segment | $ | $ | ||||||
| ROU and lease liability recorded on extension (termination) of lease | $ | $ | ( | ) | ||||
| Assets acquired in business acquisitions | $ | $ | ||||||
| Goodwill acquired in business acquisitions | $ | $ | ||||||
| Liabilities assumed in business acquisitions | $ | $ | ||||||
| Adjustments of accounts payable with the sale proceeds of property, plant and equipment | $ | $ | ||||||
| Fair value of warrants issued with sale of shares | $ | $ | ||||||
| Transition of warrant derivative liability to equity upon exercise of warrants | $ | $ | ||||||
| Reduction in proceeds from sale of building for loan, prepaid rent, and other accrued expenses | $ | $ | ||||||
| Issuance of common stock upon exercise of pre-funded warrants | $ | |||||||
See Notes to 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 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”), the Predecessor Registrant merged with and into its wholly owned subsidiary, DGLY Subsidiary Inc., a Nevada corporation (the “Registrant”), pursuant to an agreement and plan of merger, dated as of August 23, 2022 (the “Merger Agreement”), between the Predecessor Registrant and the Registrant, with the Registrant as the surviving corporation in the merger (such transaction, the “Merger”). At the Effective Time, Articles of Merger were filed with the Secretary of State of the State of Nevada, pursuant to which the Registrant was renamed “Digital Ally, Inc.” and, by operation of law, succeeded to the assets, continued the business and assumed the rights and obligations of the Predecessor Registrant immediately prior to the Merger. Under the Nevada Revised Statutes, shareholder approval was not required in connection with the Merger Agreement or the transactions contemplated thereby.
At the Effective Time, pursuant to the Merger Agreement, (i) each outstanding share of Predecessor Registrant’s common stock, par value $ per share (the “Predecessor Common Stock”) automatically converted into one share of common stock, par value $ per share, of the Registrant (“Registrant Common Stock”), (ii) each outstanding option, right or warrant to acquire shares of Predecessor Common Stock converted into an option, right or warrant, as applicable, to acquire an equal number of shares of Registrant Common Stock under the same terms and conditions as the original options, rights or warrants, and (iii) the directors and executive officers of the Predecessor Registrant were appointed as directors and executive officers, as applicable, of the Registrant, each to serve in the same capacity and for the same term as such person served with the Predecessor Registrant immediately before the Merger.
The business of the Registrant, Digital Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare, LLC (“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 17.
Reverse Stock Split
On May 6, 2025,
the Company, acting pursuant to authority received at an annual meeting of its stockholders on December 17, 2024, filed with the
Secretary of State of the State of Nevada a certificate of amendment (the “Charter Amendment”) to its articles of
incorporation, as amended (the “Articles of Incorporation”), which effected a
| 7 |
The following is a summary of the Company’s Significant Accounting Policies:
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-month period ended March 31, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025.
The balance sheet as of December 31, 2024 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, 2024.
Basis of Consolidation:
The accompanying condensed consolidated 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.
| 8 |
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, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company has two different revenue streams, product and service, represented through its three segments. The Company reports all revenues on a gross basis, other than service revenues from the Company’s entertainment and revenue cycle management segments, Revenues generated by all segments are reported net of sales taxes.
Video Solutions
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the customer. In situations where sales are to a distributor, the Company has 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 refunds or adjustment to determine the net consideration to which it expects to be entitled. As the Company’s standard payment terms are generally less than one year for product sales (although some subscriptions for services may reach out 3-5 years), 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.
| 9 |
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 monthly revenue 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 the 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
Deferred revenue 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. 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 March 31, 2025, the Company recognized revenue of $
| March 31, 2025 | ||||||||||||||||
December 31, 2024 | Additions/ Reclass | Recognized Revenue | March 31, 2025 | |||||||||||||
| Deferred revenue, current | $ | $ | $ | $ | ||||||||||||
| Deferred revenue, non-current | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 10 |
| December 31, 2024 | ||||||||||||||||
December 31, 2023 | Additions/ Reclass | Recognized Revenue | December 31, 2024 | |||||||||||||
| Deferred revenue, current | $ | $ | $ | $ | ||||||||||||
| Deferred revenue, non-current | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Sales returns
and allowances aggregated $
Use of Estimates:
The preparation of the condensed 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 condensed consolidated balance sheets 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 condensed consolidated 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 $
Restricted Cash:
Restricted cash of $-- and $
The following table provides a reconciliation of cash and cash equivalents in the condensed consolidated balance sheets to cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows:
March 31, 2025 | March 31, 2024 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Long-term restricted cash included in other assets | ||||||||
| Total cash, cash equivalents and restricted cash in the statements of cash flows | $ | $ | ||||||
| 11 |
Goodwill and Other Intangibles:
Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles - Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31st, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. The Company has adopted ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and 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 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 income and market approach include: future levels of revenue growth, gross profit margin, EBITDA as a percentage of revenue, cash-free debt-free net working capital as a percentage of revenue, capital expenditures as a percentage of revenue, discount rate, selection of guideline public companies and revenue market multiples.
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 assessed potential impairments of its long-lived assets as of an interim date of September 30, 2024 and concluded that there was an impairment which was recorded during the year ended December 31, 2024. 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 fiscal third quarter of 2024, when events occurred that we considered triggering events.
| 12 |
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 4. Goodwill and Other Intangible Assets for additional details on the interim impairment test, valuation methodologies, and inputs used in the fair value measurements. The Company also assessed potential impairments of its long-lived assets as of December 31, 2024 and concluded that there was no additional impairment as compared to its September 30, 2024 interim assessment. Subsequent to completing our annual impairment test as of December 31, 2024, no events or changes in circumstances were noted that triggered the requirement for an interim goodwill impairment test for the fiscal first quarter of 2025.
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 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.
Fair value of assets and liabilities acquired in business combinations:
The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management to valuation specialists, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows, discount rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through selling, general and administrative expense on the condensed consolidated statement of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through operating income within the condensed consolidated statements of operations.
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 that because the terms of the various warrants issued 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 condensed consolidated statement of operations.
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 the condensed consolidated financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s three operating segments are Video Solutions, Revenue Cycle Management, and Entertainment, each of which has specific personnel responsible for that business and reports to the CODM. Corporate expenses capture the Company’s corporate administrative activities, is also to be reported in the segment information. Therefore, its operations are eliminated in consolidation and is not considered a separate business segment for financial reporting purposes.
| 13 |
The Company adopted ASU 2023-07 in 2024 and applied the amendment retrospectively to all periods presented in the Company’s condensed consolidated financial statements. See Note 17, Operating Segments, for more information.
Non-Controlling Interests
Non-controlling interests in the Company’s Condensed Consolidated Financial Statements represent the interest in subsidiaries held by venture partners. The venture partners hold noncontrolling interests 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 attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations.
New Accounting Standards
Recently Adopted Accounting Standard Updates. - ASU 2023-07, Improvements to Reportable Segment Disclosures, which requires companies to disclose significant segment expenses provided to the chief operating decision maker (“CODM”) and a description of other segment items. Additionally, all existing annual disclosures must be provided on an interim basis. This ASU is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. This ASU is required to be applied retrospectively to all prior periods presented in the condensed consolidated financial statements. The Company adopted ASU 2023-07 in 2024 and applied the amendment retrospectively to all periods presented in the Company’s condensed consolidated financial statements. See Note 17, Operating Segments, for more information.
Recently Issued Accounting Pronouncements. - ASU 2023-09, Improvements to Income Tax Disclosures, requires improved disclosures related to the rate reconciliation and income taxes paid. This ASU requires companies to reconcile the income tax expense attributable to continuing operations to the U.S. statutory federal income tax rate applied to pre-tax income from continuing operations. Additionally, this ASU requires companies to disclose the total amount of income taxes paid during the period. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The guidance is required to be applied on a prospective basis with the option to apply retrospectively to all prior periods presented in the consolidated financial statements. The Company is currently evaluating the impact to the Company’s condensed consolidated financial statements.
ASU 2024-03, Disaggregation of Income Statement Expenses, requires disaggregated disclosures in the notes to the consolidated financial statements of certain categories of expenses that are included in expense line items on the Consolidated Statement of Income. This ASU is effective for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The guidance is required to be applied on a prospective basis with the option to apply retrospectively to all prior periods presented in the consolidated financial statements. The Company is currently evaluating the impact to the Company’s condensed consolidated financial statements.
ASU 2024-04, Induced Conversions of Convertible Debt Instruments, clarifies the requirement for determining whether certain settlements of convertible debt instruments should be accounted for as induced conversions or extinguishments. This ASU is effective for annual periods beginning after December 15, 2025. Early adoption is permitted and can be applied either on a prospective basis or retrospective basis. The Company is currently evaluating the impact of this ASU to the Company’s consolidated financial statements, however the Company does not anticipate this guidance having a material impact to the condensed consolidated financial statements.
| 14 |
The other recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) are not expected to have a significant impact on the Company’s consolidated financial statements and related disclosures.
Going Concern Matters and Management’s Plans
The accompanying condensed consolidated
financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred substantial operating losses in the years ended December 31, 2024 and
2023 primarily due to reduced gross margins caused by a combination of competitors’ introduction of newer products with more advanced
features together with significant price cutting of their products and the recent acquisitions with much smaller margins than the video
solutions segment, historically. The Company incurred operating losses of approximately $
In recent years the
Company has accessed the public and private capital markets to raise funding through the issuance of debt and equity. In that
regard, the Company raised approximately $
The Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing when needed, and obtain it on terms acceptable or favorable to the Company.
During the three months ended March 31, 2025 the Company completed a program to reduce costs and expenditures and raised its short and long-term liquidity position through the completion of the February 2025 public equity offering. In that regard, the Company has significantly cut costs in its entertainment segment through the removal of several large partnerships and sponsorships. These partnerships and sponsorships did not yield the results management expected; thus, it is not expected that these costs will significantly hinder total revenues in 2025 and beyond. In addition, the Company has significantly cut costs in its video segment through the reduction in headcount and relocating to smaller and less costly facilities after completing the sale of its warehouse/office building.
The Company has increased its
deferred revenue to nearly $
As a result of the Company’s implementation of cost cutting measures and liquidity generated by the recent
public equity offerings, the Company has significantly improved its financial position. During the three months ended March 31, 2025,
the Company generated $$
Based on the uncertainties described above and the corrective actions implemented by management, the Company believes its business plan including the implementation of corrective actions mitigates the existence of substantial doubt about its ability to continue as a going concern within one year from the date of the issuance of these condensed consolidated financial statements. The accompanying 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.
| 15 |
NOTE 2. INVENTORIES
Inventories consisted of the following at March 31, 2025 and December 31, 2024:
March 31, 2025 | December 31, 2024 | |||||||
| Raw material and component parts– video solutions segment | $ | $ | ||||||
| Work-in-process– video solutions segment | ||||||||
| Finished goods – video solutions segment | ||||||||
| Finished goods – entertainment segment | ||||||||
| Subtotal | ||||||||
| Reserve for excess and obsolete inventory– video solutions segment | ( | ) | ( | ) | ||||
| Reserve for excess and obsolete inventory – entertainment segment | ( | ) | ( | ) | ||||
| Total inventories | $ | $ | ||||||
NOTE 3. PREPAID EXPENSES
Prepaid expenses were the following at March 31, 2025 and December 31, 2024:
March 31, 2025 | December 31, 2024 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Prepaid advertising | ||||||||
| Prepaid commissions | ||||||||
| Prepaid common stock offering | ||||||||
| Other | ||||||||
| Total prepaid expenses | $ | $ | ||||||
| 16 |
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following as of March 31, 2025 and December 31, 2024:
| March 31, 2025 | ||||||||||||||||
Gross value | Accumulated amortization | Accumulated impairment | Net carrying value | |||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Patents and trademarks (video solutions segment) | $ | $ | $ | $ | ||||||||||||
| Sponsorship agreement network (entertainment segment) | ||||||||||||||||
| SEO content (entertainment segment) | ||||||||||||||||
| Personal seat licenses (entertainment segment) | ||||||||||||||||
| Software | ||||||||||||||||
| Website enhancements (entertainment segment) | ||||||||||||||||
| Client agreements (revenue cycle management segments) | ||||||||||||||||
| Indefinite life intangible assets: | ||||||||||||||||
| Goodwill (Entertainment segment) | ||||||||||||||||
| Goodwill (Revenue cycle management segment) | ||||||||||||||||
| Trade name and trademarks (entertainment segment) | ||||||||||||||||
| Patents and trademarks pending (video solutions segment) | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2024 | ||||||||||||||||
Gross value | Accumulated amortization | Accumulated impairment | Net carrying value | |||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Patents and trademarks (video solutions segment) | $ | $ | $ | $ | ||||||||||||
| Sponsorship agreement network (entertainment segment) | ||||||||||||||||
| SEO content (entertainment segment) | ||||||||||||||||
| Personal seat licenses (entertainment segment) | ||||||||||||||||
| Software | ||||||||||||||||
| Website enhancements (entertainment segment) | ||||||||||||||||
| Client agreements (revenue cycle management segments) | ||||||||||||||||
| Indefinite life intangible assets: | ||||||||||||||||
| Goodwill (Entertainment segment) | ||||||||||||||||
| Goodwill (Revenue cycle management segment) | ||||||||||||||||
| Trade name and trademarks (entertainment segment) | ||||||||||||||||
| Patents and trademarks pending (video solutions segment) | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 17 |
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 for the three months
ended March 31, 2025 and 2024 was $
| Year ending December 31: | ||||
| 2025 (April 1, 2025 to December 31, 2025) | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 and thereafter | ||||
| $ | ||||
Annual impairment test
We performed an annual impairment test as of December 31, 2024 for each of our reporting units with remaining goodwill. Subsequent to completing our annual impairment test as of December 31, 2024, no events or changes in circumstances were noted that triggered the requirement for an interim goodwill impairment test for the fiscal first quarter of 2025.
The fair value of each reporting
unit was estimated using a weighting of the income and market valuation approaches. The income approach applied 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. The weighted average cost of capital used
in our most recent impairment test ranged from
The combined fair values for all
reporting units were then reconciled to our aggregate market value of our shares of Common Stock on the date of valuation, while considering
a reasonable control premium. We consider a reporting unit’s fair value to be substantially in excess of the reporting unit’s
carrying value at a
Interim impairment test at September 30, 2024
We performed an interim impairment test as of the last day of the fiscal third quarter of 2024 as management determined that a triggering event had occurred resulting from the additional decline in demand for our services, prolonged economic uncertainty, the fact that 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 for our reporting units with remaining goodwill.
| 18 |
The fair value of each reporting
unit was estimated using a weighting of the income and market valuation approaches. The income approach applied 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. The weighted average cost of capital used
in our most recent impairment test ranged from
The combined fair values for all
reporting units were then reconciled to our aggregate market value of our shares of Common Stock on the date of valuation, while considering
a reasonable control premium. We consider a reporting unit’s fair value to be substantially in excess of the reporting unit’s
carrying value at a
We held goodwill of $
Indefinite-lived intangible assets
We held indefinite-lived trade
names/trademarks of $
As a result of our interim impairment
test as of the last day of the fiscal third quarter of 2024 management concluded that the carrying amount of a trade name/trademark related
to the entertainment segment exceeded its estimated fair value and we recorded a non-cash impairment charge of $
| 19 |
NOTE 5. DEBT OBLIGATIONS
Debt obligations is comprised of the following:
March 31, 2025 | December 31, 2024 | |||||||
| Economic injury disaster loan (EIDL) | $ | $ | ||||||
| Unsecured Promissory note – Entertainment Segment | ||||||||
| Commercial Extension of Credit- Entertainment Segment | ||||||||
| Merchant Advances – Video Solutions Segment | ||||||||
| Senior Secured Promissory Notes | ||||||||
| Unamortized debt issuance costs | ( | ) | ||||||
| Debt obligations | ||||||||
| Less: current maturities of debt obligations | ||||||||
| Debt obligations, long-term | $ | $ | ||||||
Debt obligations mature on an annual basis as follows as of March 31, 2025:
March 31, 2025 | ||||
| 2025 (April 1, 2025 to December 31, 2025) | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 and thereafter | ||||
| Total | $ | |||
2020 Small Business Administration Notes.
On May 12, 2020, the Company received
$
Under the terms of the note issued
under the EIDL program, interest accrues on the outstanding principal at the rate of
Unsecured Promissory Note
On February 1, 2025, the Company’s
Entertainment Segment entered into a $
| 20 |
2024 Commercial Extension of Credit
On January 22, 2024, the Company’s
Entertainment segment entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance
with the Ticket Solution Agreement. The Lender, Ticket Evolution, Inc., agreed to extend, subject to the conditions hereof, and Borrower
agreed to take, an advance for a sum of $
The advances made are recoupable
from client service fees with no more than $
Merchant Cash Advances – Video Solutions Segment
In November 2023, the Company
obtained a short-term merchant advance, which totaled $
During the year ended December
31, 2024, the Company made repayments totaling $
As of December 31, 2024 the outstanding
principal balance was $
Securities Purchase Agreement and Senior Secured Promissory Notes
On November 6, 2024, the Company
entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors (the “Purchasers”),
pursuant to which the Company agreed to issue and sell to such Purchasers, in a private placement transaction, (i) senior secured promissory
notes in aggregate principal amount of $
Pursuant to the SPA, the Company is required to file within 30 days of the Closing Date a registration statement with the SEC for a public offering and use its reasonable best efforts to pursue and consummate a follow-on financing transaction within 90 days of the Closing Date. The proceeds of the public offering shall be first used for the repayment of the principal amounts of the Notes. The Company is also required to file within 30 days of the Closing Date a registration statement on Form S-1 (or other appropriate form if the Company is not then S-1 eligible) providing for the resale by the Purchasers of the Commitment Shares issued under the SPA. The Company is required to use commercially reasonable efforts to cause such registration statement to become effective within 60 days following the filing thereof and to keep such registration statement effective at all times until no Purchaser owns any Commitment Shares.
Furthermore, pursuant to the SPA, the Company was required to complete the following: (i) the Company’s board of directors shall approve an amendment to the Company’s bylaws setting the quorum required for a special meeting of stockholders to one-third of all stockholders entitled to vote at such special meeting and (ii) the Company shall file with the SEC a preliminary proxy statement on Schedule 14A announcing a meeting of stockholders for the purpose of approving the Series A and Series B warrants issued by the Company on June 25, 2024.
| 21 |
If the Company engages in one
or more subsequent financings while the senior secured promissory notes are outstanding, the Company will be required to use at least
The net proceeds of the private
placement on November 7, 2024 was $
| Amount | ||||
| Allocated to the following: | ||||
| Senior secured promissory notes | $ | |||
| Commitment shares | ||||
| Total | $ | |||
The Company paid the senior secured promissory notes off in full on February 13, 2025 with funds generated by the February 2025 public equity offering (See Note 12). Following is an analysis of the senior secured promissory notes balance:
| Amount | ||||
| Balance, as of December 31, 2023 | $ | |||
| Issuance of senior secured promissory notes, at par | ||||
| Discount recognized at issuance date | ( | ) | ||
| Amortization of discount | ||||
| Balance, as of December 31, 2024 | ||||
| Amortization of discount | ||||
| Principal payment | ( | ) | ||
| Balance, as of March 31, 2025 | $ | |||
| 22 |
NOTE 6. FAIR VALUE MEASUREMENT
In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| ● | Level 1 — Quoted prices in active markets for identical assets and liabilities |
| ● | Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) |
| ● | Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value) |
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2025 and December 31, 2024:
| March 31, 2025 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following table represents the change in Level 3 tier value measurements for the three months ended March 31, 2025:
Warrant Derivative | ||||
| Balance, December 31, 2024 | $ | |||
| Issuance of pre-funded warrant derivative liabilities in February 2025 public equity offering | ||||
| Transition of warrant derivative liability to equity due to exercise of pre-funded warrant derivative liabilities in February 2025 public equity offering | ( | ) | ||
| Transition of warrant derivative liability to equity due to exercise of Series B common stock purchase warrants issued in June 2024 Private Placement | ( | ) | ||
| Change in fair value of warrant derivative liabilities | ( | ) | ||
| Balance, March 31, 2025 | $ | |||
| 23 |
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following at March 31, 2025 and December 31, 2024:
| March 31, 2025 | December 31, 2024 | |||||||
| Accrued warranty expense | $ | $ | ||||||
| Accrued payroll and related fringes | ||||||||
| Accrued sales returns and allowances | ||||||||
| Accrued sales taxes | ||||||||
| Accrued interest - related party | ||||||||
| Accrued board of directors’ fees | ||||||||
| Customer deposits | ||||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 8. INCOME TAXES
The effective tax rate for the
three months ended March 31, 2025, and 2024 varied from the expected statutory rate due to the Company continuing to provide a
The Company incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March 31, 2025. 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 fully reserve its deferred tax assets at March 31, 2025. 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. 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.
As of March 31, 2025, the Company had the following estimated Federal net operating loss carry-forwards available to offset future taxable income:
| Amount | ||||
| Tax years generated: | ||||
| 2017 and before | $ | |||
| 2018 and after | ||||
| Federal net operating loss carry-forwards available | $ | |||
Such tax net operating loss carry-forwards
expire between 2025 and 2043 relative to Federal net operating loss carry-forwards generated in tax years 2017 and prior. Federal net
operating loss carry-forwards generated in tax years 2018 and after cannot be carried back to prior years and have an indefinite life
since the enactment of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017 further provides for an annual limitation
on usage equivalent to 80% of taxable income. In addition, the Company had research and development tax credit carry-forwards totaling
$
The Company’s 2022 federal tax return was recently examined by the Internal Revenue Service resulting in no proposed adjustments.
| 24 |
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation.
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
On May 31, 2022, the Company filed a lawsuit against Culp McAuley, Inc. (“Culp McAuley”) and four individuals (Brandon Culp, Campbell McAuley, Mark Depew and Larry Roberts) (collectively the “defendants”) in the United States District Court for the District of Kansas, seeking monetary damages and injunctive relief based on certain conduct by the defendants. On July 18, 2022, Culp McAuley 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.
On December 20, 2022, the Company filed a motion for leave to file a second amended complaint to add additional claims against the defendants to avoid fraudulent transfers, to pierce the corporate veil of Culp McAuley, and for remedies related to the claims for fraudulent transfers and piercing the corporate veil. On December 22, 2022, the Court issued an Order granting the Company’s motion for leave to file a second amended complaint, which was filed with the Court on December 27, 2022. Because Culp McAuley’s original counsel withdrew, Culp McAuley was ordered to obtain new counsel on or before December 2, 2022. On December 5, 2022, the Court ordered that Culp McAuley show cause in writing by December 21, 2022, why the Court should not direct the Clerk to enter default against it. On December 22, 2022, the Court directed the Clerk to enter default against Culp McAuley. On February 21, 2023, the Clerk entered default against Culp McAuley.
In February and March, 2023, defendants Larry Roberts and Mark Depew filed separate motions to dismiss, respectively. The Company opposed both motions. On July 7, 2023, the Court issued an Order granting Roberts’ motion to dismiss and denying Depew’s motion to dismiss. On December 7, 2023, the Company filed an application for the Clerk’s entry of default against defendant Brandon Culp. On December 13, 2023, the Clerk entered default against Brandon Culp.
On January 5, 2024, the Company
filed a motion for summary judgment against defendants Campbell McAuley and Mark Depew. On the same date, the Company also filed separate
motions for default judgment against Culp McAuley and Brandon Culp, respectively. On January 5, 2024, defendant Mark Depew filed a motion
for summary judgment against the Company. On May 17, 2024, the Court issued Orders which, respectively, (i) granted defendant Mark Depew’s
motion for summary judgment against the Company; (ii) denied the Company’s motion for summary judgment against Depew; (iii) granted
the Company’s motion for summary judgment against defendant Campbell McAuley; and (iv) granted the Company’s motions for default
judgment against defendants Culp McAuley and Brandon Culp. Finding that defendants Brandon Culp and Campbell McAuley were each the alter
ego of Culp McAuley, on June 4, 2024, the Court entered judgment in favor of the Company in the amount of $
On June 14, 2024, the Company filed a Notice of Appeal to the United States Court of Appeals for the Tenth Circuit from the Court’s May 17, 2024 Order that granted summary judgment in favor of Mark Depew. On December 10, 2024, the Company and Depew filed a Stipulation of Dismissal in the Tenth Circuit that ended the appeal after the Company and Depew reached a settlement.
| 25 |
In March 2024, the Company filed a complaint against Larry Roberts (“defendant”) in the Superior Court of the State of California, County of Orange. The lawsuit arises from the defendant’s multiple breaches of his obligations to the Company. The Company seeks monetary damages based on certain conduct by the defendant. On May 28, 2024, the defendant filed a motion to strike portions of the complaint and a motion for demurrer. On October 4, 2024, the Court sustained in part and overruled in part defendant’s motion for demurrer. The Court further denied the defendant’s motion to strike in its entirety. A jury trial has been scheduled for October 19, 2026.
As of March 31, 2025 and December
31, 2024, we are able to estimate a range of reasonably possible loss related to the Culp McCauley case (when taking into account, among
other things, the uncertainty of recovering the judgment amount owed to the Company by Culp McAuley, Brandon Culp and Campbell McAuley,
jointly and severally), our estimate of the aggregate reasonably possible loss could be the entire balance of the judgment. The Company
has recorded an additional loss of $
While the ultimate resolution is unknown, based on the information currently available, we do not expect that the pending lawsuit or the enforcement of the judgment will have a material adverse effect on our operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of the pending lawsuit or enforcement of the judgment 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.
The Company recorded pre-tax compensation expense related to the grant of stock options and restricted stock issued of $ and $ for the three months ended March 31, 2025 and 2024, respectively.
As of March 31, 2025, the Company had adopted ten separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”), (viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”), (ix) the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”), and (x) the 2022 Stock Option and Restricted Stock Plan (the “2022 Plan”). The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan, 2020 Plan and 2022 Plan are referred to as the “Plans.”
Stock option grants. The Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have been granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of Common Stock that are issuable under its Plans with the SEC. A total of shares remained available for awards under the various Plans as of March 31, 2024.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.
| 26 |
| Options | Number of Shares | Weighted Average | ||||||
| Outstanding at January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2025 | $ | |||||||
| Exercisable at March 31, 2025 | $ | |||||||
| Options | Number of Shares | Weighted Average | ||||||
| Outstanding at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2024 | $ | |||||||
| Exercisable at March 31, 2024 | $ | |||||||
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model
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 three months ended March 31, 2025 and 2024.
At March 31, 2025 and December 31, 2024, the aggregate intrinsic value of options outstanding was approximately $-- and $--, respectively, and the aggregate intrinsic value of options exercisable was approximately $-- and $--, respectively.
| Outstanding options | Exercisable options | |||||||||||||
| Exercise price range | Number of options | Weighted average remaining contractual life | Number of options | Weighted average remaining contractual life | ||||||||||
| $ | to $ | years | years | |||||||||||
| $ | to $ | years | years | |||||||||||
| $ | to $ | years | years | |||||||||||
| Total | years | years | ||||||||||||
Restricted stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to four 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.
| 27 |
| Number of Restricted shares | Weighted average | |||||||
| Nonvested balance, January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ||||||||
| Nonvested balance, March 31, 2025 | $ | |||||||
| Number of Restricted shares | Weighted average | |||||||
| Nonvested balance, January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ( | ) | ( | ) | ||||
| Nonvested balance, March 31, 2024 | $ | |||||||
The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of the grant. As of March 31, 2025, there was $ of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next thirty-four months in accordance with their respective vesting scale.
The nonvested balance of restricted stock vests as follows:
| Years ended | Number of shares | |||
| 2025 (April 1, 2025 to December 31, 2025) | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
NOTE 11. COMMON STOCK PURCHASE WARRANTS
The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2025 and 2024:
| Warrants | Weighted average | |||||||
| Balance, January 1, 2025 | $ | |||||||
| Issuance February 2025 – Prefunded Warrants | ||||||||
| Exercise February 2025 – Prefunded Warrants | ( | ) | ||||||
| Exercised June 2024 - Series B warrants | ( | ) | ||||||
| Exercised | ||||||||
| Terminated/Cancelled | ||||||||
| Balance, March 31, 2025 | $ | |||||||
| 28 |
| Warrants | Weighted average | |||||||
| Balance, January 1, 2024 | $ | |||||||
| Issued | ||||||||
| Exercised | ||||||||
| Terminated/Cancelled | ||||||||
| Balance, March 31, 2024 | $ | |||||||
The total
intrinsic value of all outstanding warrants aggregated $-
The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase shares of Common Stock as of March 31, 2025:
| Outstanding and exercisable warrants | ||||||||
| Exercise price | Number of warrants | Weighted average | ||||||
| $ | years | |||||||
| $ | years | |||||||
| $ | years | |||||||
| $ | years | |||||||
| years | ||||||||
2025 Purchase Warrants
On February 13,
2025, the Company issued pre-funded units, each consisting of one-prefunded warrant (to purchase a total of
The pre-funded
warrants were all exercised within days of their issuance therefore their total fair value was estimated to be $
| Pre funded warrants issuance date – February 13, 2025 assumptions | ||||
| Volatility – range | % | |||
| Risk-free rate | % | |||
| Dividend | % | |||
| Remaining contractual term | ||||
| Exercise price | $ | |||
| Common stock issuable under the warrants | ||||
| 29 |
During the three months ended
March 31, 2025, the pre-funded warrants to purchase
2024 Purchase Warrants
On June 25, 2024, the Company
issued Series A and prefunded warrants to purchase a total of
The Series B warrants issued in
this transaction become issuable and exercisable on the date that relevant stockholder approval is obtained, if ever. Relevent stockholder approval was obtained
on December 17, 2024 which activated the Series A and B warrants. Both the Series A and Series B warrants also contain price and warrant
reset provisions that were activated upon the date of relevant stockholder approval. The reset provisions increased the number of common shares
issuable under the Series A warrant from to shares and the exercise price per Series A warrant was reduced from $
to $ per share effective December 17, 2024. In addition, the Series B warrants became effective and exercisable upon relevant stockholder approval
on December 17, 2024 which resulted in common shares issuable under the Series B warrants with an exercise price of $ per
share effective December 17, 2024. The Company recognized the full Series B warrant derivative liability value of $
| Series B issuance date - December 17, 2024 assumptions | Series B - December 31, 2024 assumptions | |||||||
| Volatility – range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend | % | % | ||||||
| Remaining contractual term | ||||||||
| Exercise price | $ | $ | ||||||
| Common stock issuable under the warrants | ||||||||
| 30 |
During the year ended December
31, 2024, prefunded warrants to purchase shares of Common Stock were fully exercised. No pre-funded warrants were exercised during
the three months ended March 31, 2025. In conjunction with the exercise of the Series B warrants, the Company transitioned the related
warrant derivative liability totaling $
During the three months ended
March 31, 2025, Series B warrants to purchase
The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the derivative liability relative to the prefunded warrants and Series A warrants as of their date of issuance and as of December 31, 2024 and March 31, 2025:
| Issuance date assumptions | December 31, 2024 assumptions | March 31, 2025 assumptions | ||||||||||
| Volatility – range | % | % | % | |||||||||
| Risk-free rate | % | % | % | |||||||||
| Dividend | % | % | % | |||||||||
| Remaining contractual term | ||||||||||||
| Exercise price | $ | $ | ||||||||||
| Common stock issuable under the warrants | ||||||||||||
The Company recognized the fair
value of the Series A warrants of $
2023 Purchase Warrants
On April 5, 2023, the Company
issued warrants to purchase a total of
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 March 31, 2025 and as of December 31, 2024:
December 31, 2024 assumptions | March 31, 2025 assumptions | |||||||
| Volatility – range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend | % | % | ||||||
| Remaining contractual term | ||||||||
| Exercise price | ||||||||
| Common stock issuable under the warrants | ||||||||
| 31 |
NOTE 12 - STOCKHOLDERS’ EQUITY
February 2025 Public Equity Offering
On February 13,
2025, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the
“Underwriter”) for the sale and issuance of (i) units at a public offering price per
unit of $ with each Unit consisting of one share of Common Stock, one Series A warrant to purchase
one share of Common Stock at an exercise price of $
The Series A and Series B warrants are exercisable only upon receipt of stockholder approval of (i) certain terms in the Series A and B warrants and the issuance of the shares of Common Stock issuable upon the exercise of such Series A and Series B warrants, as may be required by the applicable rules and regulations of The Nasdaq Stock Market LLC and (ii) if necessary, a proposal to amend the Company’s Articles of Incorporation, to increase the authorized share capital of the Company to an amount sufficient to cover the shares of Common Stock issuable upon the exercise of the Series A and Series B warrants. The Series A warrants will be exercisable commencing upon the date of public notice of Stockholder Approval until five years after such date, and the Series B Warrants will be exercisable commencing upon the date of public notice of Stockholder Approval until two and one-half years after such date.
The offering closed on February
14, 2025. The net proceeds to the Company from the offering were approximately $
The Company granted the Underwriter
an option to purchase additional shares of Common Stock and/or Series A and Series B warrants of (i) up to
Aegis Capital Corp. served as
the sole book-running manager in the offering, pursuant to the terms of the Underwriting Agreement, and received seven percent (
The units and pre-funded units were offered by the Company pursuant to an effective registration statement on Form S-1, as amended, which was declared effective by the SEC on February 12, 2025. The final prospectus relating to the offering was filed with the SEC on February 13, 2025.
| 32 |
The aggregate net proceeds to
the Company from the offering including the underwriters exercise of their overallotment option were approximately $
2024 Issuance of Restricted Common Stock
In January 2024, the board of directors approved the grant of shares of Common Stock to officers of the Company. Additionally, the board of directors approved the grant of restricted common shares to certain new employees of the Company. Such shares will generally vest over a period of one to on their respective anniversary dates in January through January 2026, provided that each grantee remains an employee of the company on such dates.
2024 Private Placement Transaction
On June 24, 2024, the Company
entered into a private placement transaction (the “Private Placement”), pursuant to a Securities Purchase Agreement (the “Securities
Purchase Agreement”) with certain institutional investors (the “Purchasers”) for aggregate gross proceeds of approximately
$
As part of the Private Placement,
the Company issued an aggregate of units and pre-funded units (collectively, the “June Units”) at a purchase price
of $ per unit (less $
Securities Purchase Agreement and Senior Secured Promissory Notes
On November 6, 2024, the Company
entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors, pursuant to which the Company
agreed to issue and sell to such investors, in a private placement transaction, (i) senior secured promissory notes in aggregate principal
amount of $
The net proceeds of the private
placement on November 7, 2024 was $
| Amount | ||||
| Allocated to the following: | ||||
| Senior secured promissory notes | $ | |||
| Commitment shares | ||||
| Total | $ | |||
| 33 |
Cancellation of Restricted Stock
During the three months ended March 31, 2025 and 2024, the Company cancelled -- and shares due to termination of employees, respectively.
Exercise of Prefunded Warrants
During the three months ended
March 31, 2025, prefunded warrants to purchase shares of Common Stock that were issued in conjunction with the February 2025
public equity offering of Common Stock, were fully exercised at an exercise price of $
During the three months ended
March 31, 2025, Series B warrants to purchase shares of Common Stock that were issued in conjunction with the June 2024 public
equity offering of Common Stock, were fully exercised for total proceeds of $
Reverse Stock Split
On May 6, 2025, the Company, acting pursuant to authority received at an annual meeting of its stockholders on December 17, 2024, filed
with the Secretary of State of the State of Nevada the Charter Amendment to its Articles of Incorporation, which effected a
Noncontrolling Interests
The Company owns a
NOTE 13. RELATED PARTY TRANSACTIONS
Transactions with Managing Member of Nobility Healthcare
The Company accrued reimbursable
expenses payable to Nobility, LLC totaling $
Transactions with Related Party of TicketSmarter
On September 22, 2023, a trust,
the beneficiaries of which are TicketSmarter’s Chief Executive Officer and his spouse, made a loan in the amount of $
| 34 |
On August 19, 2024, the parties
agreed to amend the note whereby the repayment dates were extended to begin on January 2, 2025 and continue at $
On March 20, 2025, the parties
agreed to a second modification of the TicketSmarter Related Party Note. The modification eliminated all accrued interest totaling $
Company Related Party Note
On August 22, 2024, Digital Ally’s
Chief Executive Officer, made a loan in the amount of $
NOTE 14. GAIN ON EXTINGUISHMENT OF LIABILITIES
The Company
recorded gains on the extinguishment of liabilities for the three months ended March 31, 2025 and 2024 of $
The gain on
extinguishment of liabilities was $
Three Months ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Numerator for basic and diluted income (loss) per share – Net loss attributable to common stockholders | $ | $ | ( | ) | ||||
| Denominator for basic income (loss) per share – weighted average shares outstanding | ||||||||
| Dilutive effect of shares issuable upon conversion of convertible debt and the exercise of stock options and warrants outstanding | ||||||||
| Denominator for diluted loss per share – adjusted weighted average shares outstanding | ||||||||
| Net income (loss) per share: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
Basic loss per share is based upon the weighted average number of shares of Common Stock outstanding during the period. For the three months ended March 31, 2025 and 2024, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted loss per share.
| 35 |
NOTE 16. COUNTRY STAMPEDE ACQUISITION
On March 1, 2024, Kustom 440, entered into an Asset Purchase Agreement (the “Acquisition Agreement”) with JC Entertainment, LLC, a Kansas limited liability company (“JC Entertainment”). Pursuant to the Acquisition Agreement, Kustom 440 acquired certain assets associated with a music entertainment event (“Country Stampede”), including all intellectual property arising out of and relating to Country Stampede (“Country Stampede Intellectual Property”) and certain contracts in which JC Entertainment is a party to host and operate the 2024 Country Stampede (the “Assumed Contracts”, and together with the Country Stampede Intellectual Property, the “Purchased Assets”).
As consideration for acquiring
the Purchased Assets, Kustom 440 paid JC Entertainment the aggregate purchase price amount $
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 Country Stampede 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 Country Stampede Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our condensed consolidated financial statements. The Country Stampede Acquisition was structured as an asset 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 condensed consolidated statement of operations from the acquisition date.
The purchase price of the Country Stampede Acquisition was allocated to tangible assets, goodwill, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company has finalized the estimated fair value of assets acquired, and liabilities assumed in the Country Stampede Acquisition which are as follows:
As allocated (Final) | ||||
| Description | March 1, 2024 | |||
| Assets acquired (provisional): | ||||
| Tangible assets acquired | $ | |||
| Identifiable intangible assets acquired (Trademarks and trade names) | ||||
| Goodwill | ||||
| Liabilities assumed | ( | ) | ||
| Net assets acquired and liabilities assumed | $ | |||
| Consideration: | ||||
| Cash paid at Country Stampede Acquisition date | $ | |||
| Cash paid subsequent to closing | ||||
| Total Country Stampede Acquisition purchase price | $ | |||
| 36 |
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.
NOTE 17. OPERATING SEGMENTS
The Company adopted ASU 2023-07 in 2024 and applied the amendment retrospectively to all periods presented in the Company’s condensed consolidated financial statements. Segment financial information is prepared in accordance with GAAP and our significant accounting policies described in Note 1. Resources are allocated and performance is assessed using segment operating income by our Chief Executive Officer, whom we have determined to be our Chief Operating Decision Maker (“CODM”). Our CODM utilizes segment operating income when making decisions about allocating capital and personnel to the segments, predominantly in the annual budget and quarterly forecasting processes. In addition, our CODM uses operating income, including comparison of actual results to budget and forecast, in assessing the performance of each segment and in evaluating product pricing, distribution strategies and marketing investments. Our CODM reviews balance sheet information at a consolidated level. We compute segment operating income based on net sales revenue, less cost of goods sold, SG&A, asset impairment charges and restructuring charges. The SG&A used to compute each segment’s operating income is directly associated with the segment. We do not allocate non-operating income and expense, including interest or income taxes, to operating segments.
We operate in three strategic business segments. The Video Solutions Segment encompasses our law, commercial, and shield divisions. This segment includes both service and product revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides working capital and back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Entertainment Segment acts as an intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms.
The Company’s corporate administration activities are reported in the corporate line item. These activities primarily include expense related to certain corporate officers and support staff, certain accounting staff, expense related to the Company’s Board of Directors, stock option expense for options granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes.
| 37 |
Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2025, and 2024:
| Three months ended March 31, 2025 | ||||||||||||||||||||
| Video Solutions | Entertainment | Revenue cycle Management | Corporate and other | Total | ||||||||||||||||
| Net revenues: | ||||||||||||||||||||
| Product | $ | $ | $ | $ | $ | |||||||||||||||
| Service | ||||||||||||||||||||
| Total segment net revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Less significant segment expenses: | ||||||||||||||||||||
| Cost of Revenue - Product | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Revenue – Service and other | ||||||||||||||||||||
| Research and development expense | ||||||||||||||||||||
| Selling, advertising and promotional expense | ||||||||||||||||||||
| General and administrative expense | ||||||||||||||||||||
| Total segment operating income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Non-operating (expenses) income: | ||||||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||||||
| Change in fair value of derivative liabilities | ||||||||||||||||||||
| Gain on the extinguishment of liabilities | ||||||||||||||||||||
| Gain on extinguishment of debt – related party | ||||||||||||||||||||
| Other non-operating income (loss) | ||||||||||||||||||||
| Total non-operating income (loss) | ||||||||||||||||||||
| Income before income tax benefit (provision) | $ | |||||||||||||||||||
| Depreciation and amortization expense | $ | $ | $ | $ | $ | |||||||||||||||
| Total identifiable assets, net of eliminations | $ | $ | $ | $ | $ | |||||||||||||||
| Three months ended March 31, 2024 | ||||||||||||||||||||
| Video Solutions | Entertainment | Revenue cycle Management | Corporate and other | Total | ||||||||||||||||
| Net revenues: | ||||||||||||||||||||
| Product | $ | $ | $ | $ | $ | |||||||||||||||
| Service | ||||||||||||||||||||
| Total segment net revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Less significant segment expenses: | ||||||||||||||||||||
| Cost of Revenue - Product | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Revenue – Service and other | ||||||||||||||||||||
| Research and development expense | ||||||||||||||||||||
| Selling, advertising and promotional expense | ||||||||||||||||||||
| General and administrative expense | ||||||||||||||||||||
| Total segment operating income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Non-operating (expenses) income: | ||||||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||||||
| Gain on the extinguishment of liabilities | ||||||||||||||||||||
| Other non-operating income (loss), net | ||||||||||||||||||||
| Total non-operating income (loss) | ( | ) | ||||||||||||||||||
| Loss before income tax benefit (provision) | $ | ( | ) | |||||||||||||||||
| Depreciation and amortization expense | $ | $ | $ | $ | $ | |||||||||||||||
| Total identifiable assets, net of eliminations | $ | $ | $ | $ | $ | |||||||||||||||
| 38 |
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 18. SUBSEQUENT EVENTS
Special Shareholder Meeting
On Tuesday, May 6, 2025, the Company held its special meeting of stockholders. Set forth below are each of the three proposals that were voted on at the Special Meeting and the stockholder votes on each such proposal, as certified by the inspector of elections for the Special Meeting. These proposals are described in further detail in the Definitive Proxy Statement on Schedule 14A that the Company filed with the SEC on March 4, 2025.
Proposal One: Approval of an amendment to our Articles of Incorporation to increase the number of authorized shares of our capital stock that we may issue from shares to shares, of which shares shall be classified as Common Stock. The proposal was not approved.
Proposal Two: Approval of a proposal to authorize the board of directors of the Company (the “Board”), in its sole and absolute discretion, and without further action of the stockholders, to file an amendment to our Articles of Incorporation to effect a reverse stock split of our issued and outstanding Common Stock at a ratio to be determined by the Board, ranging from one-for-five (1:5) to one-for-one hundred (1:100), with such reverse stock split to be effected at such time and date, if at all, as determined by the Board in its sole discretion, but no later than April 1, 2026, when the authority granted in this proposal to implement the reverse stock split would terminate. The proposal was approved.
Proposal Three: Authorization, for purposes of complying with Nasdaq listing rule 5635(d), of the issuance of Series A Warrants to purchase shares of Common Stock (the “Series A Warrants”) and Series B Warrants to purchase shares of Common Stock (the “Series B Warrants” and collectively with the Series A Warrants, the “Warrants”), shares of Common Stock underlying the Warrants and certain provisions of the Warrants, issued in connection with an offering and sale of securities of the Company that was consummated on February 14, 2025. The proposal was approved
Reverse Stock Split
On May 6, 2025, the
Company, acting pursuant to authority received at an annual meeting of its stockholders on December 17, 2024, filed with the Secretary
of State of the State of Nevada the Charter Amendment to its Articles of Incorporation, which effected a
Notices of Failure to Satisfy a Continued Listing Rule
Minimum Bid Price Requirement - December 20, 2024, the Company received a written notification from The Nasdaq Stock Market LLC indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”), as the Company’s closing bid price for its Common Stock was below $ per share for the prior thirty (30) consecutive business days. The Company has been granted a 180-calendar day compliance period, or until June 18, 2025, to regain compliance with the Minimum Bid Price Requirement. If the Company is not in compliance by June 18, 2025, the Company may be afforded a second 180-calendar day compliance period. If the Company does not regain compliance within such compliance period, including any granted extensions, its Common Stock may be subject to delisting, which delisting may be appealed to a Nasdaq hearings panel.
Minimum Stockholders’
Equity Standard - On January 2, 2025, the Company received a notice (the “Notice”) from the staff of the Listing Qualifications
department (the “Staff”) of Nasdaq, which indicated that the Company was not in compliance with Nasdaq Listing Rule 5550(b)(1)
(the “Stockholders’ Equity Requirement”), as the Company’s stockholders’ equity of ($
| 39 |
Under Nasdaq listing rules and as specified in the Notice, the Company has 45 calendar days from the date of the Notice to submit to the Staff a plan to regain compliance with the Stockholders’ Equity Requirement. If the Company’s plan to regain compliance is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the Notice for the Company to evidence compliance.
The Company submitted its plan to Nasdaq to regain compliance with the Stockholders’ Equity Requirement on February 17, 2025. There can be no assurance that the Company’s plan will be accepted or that if it is, that the Company will be able to regain compliance with the Stockholders’ Equity Requirement.
If the Company does not regain compliance within the allotted 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. At that time, the Company may appeal any such delisting determination to a Nasdaq hearings panel.
Minimum Bid Price Requirement - On March 6, 2025, the Company received notice (the “March 6 Letter”) from the Nasdaq Staff that the Staff had determined that as of March 5, 2025, the Company’s securities had a closing bid price of $ or less for ten consecutive trading days triggering application of Listing Rule 5810(c)(3)(A)(iii) which states in part: if during any compliance period specified in Rule 5810(c)(3)(A), a company’s security has a closing bid price of $ or less for ten consecutive trading days, the Listing Qualifications Department shall issue a Staff Delisting Determination under Rule 5810 with respect to that security (the “Low Priced Stocks Rule”). As a result, the Staff determined to delist the Company’s securities from Nasdaq, unless the Company timely requests an appeal of the Staff’s determination to a Hearings Panel (the “Panel”), pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series. The Company must request a hearing no later than 4:00 p.m. Eastern Time on March 13, 2025.
The Company timely requested a hearing before the Panel to appeal the March 6 Letter and to address all outstanding matters, including compliance with the Minimum Bid Price Requirement, the Low Priced Stocks Rule and the Stockholders’ Equity Requirement, which hearing date has not been set as of the date of this Form 10-K. While the appeal process is pending, the suspension of trading of the Company’s Common Stock, will be stayed and the Common Stock will continue to trade on the Nasdaq Capital Market until the hearing process concludes and the Panel issues a written decision. The Company held its hearing with the Panel as scheduled on April 17, 2025.
On May 1, 2025, the Panel rendered its decision which granted the Company’s request for continued listing on the Nasdaq Exchange. Such decision is subject to the following conditions:
| ● | On or before May 2, 2025, the Company shall file Form 10-K for 2024 in compliance with Listing Rule 5250(c)(1). | |
| ● | On or before May 20, 2025, the Company must file a public disclosure describing any transactions undertaken by the Company to increase its equity and providing an indication of its equity following those transactions. | |
| ● | In addition, on or before May 20, 2025, the Company must provide the Panel with an update on its fundraising plans, and updated income projections for the next 12 months, with all underlying assumptions clearly stated. | |
| ● | On or before June 6, 2025, the Company shall demonstrate compliance with the Minimum Bid Price Requirement. | |
| ● | If, prior to September 2, 2025, the Company becomes non-compliant with any Listing Rule, the Company will be delisted. |
The Company continues to work diligently to regain and maintain compliance with the Minimum Bid Price Requirement and Stockholders’ Equity Requirement as promptly as possible. In that regard, management believes that it has achieved compliance with the Stockholders’ Equity Requirement as reported in the accompanying Statement of Stockholders’ Equity (Deficit) as of March 31, 2025. There are no assurances however, that the Company will be able to meet and maintain all such conditions required by the Panel.
Series A and B warrants issued in connection with the February 2025 public equity offering
The Series A and B warrants issued
in the February 2025 public equity offering (See Note 12 – Stockholders Equity) become issuable and exercisable on the date of Stockholder
Approval. Stockholder approval was obtained on May 6, 2025 at the Special Meeting of Shareholders which activated both the Series A and
B warrants. Both the Series A and Series B warrants also contain price and warrant reset provisions that were activated upon the date
of Stockholder Approval. The reset provisions increased the number of common shares issuable under the Series A and B warrants as provided
for in their respective agreements and the exercise price was reduced from $
There have been no exercises
of the Series A warrants to date and the Series B warrants contained cashless exercise provisions. The Series B warrant holders have
exercised a total of of the total
***********************
| 40 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This quarterly report on Form 10-Q (the “Report”) of Digital Ally, Inc. (the “Company”, “we”, “us”, or “our”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal years 2024 and 2023; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (7) our ability to produce our products in a cost-effective manner; (8) competition from larger, more established companies with far greater economic and human resources; (9) our ability to attract and retain quality employees; (10) risks related to dealing with governmental entities as customers; (11) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (12) characterization of our market by new products and rapid technological change; (13) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVU products; (14) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (15) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (16) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (17) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (18) our ability to generate more recurring cloud and service revenues; (19) risks related to our license arrangements; (20) the fluctuation of our operation results from quarter to quarter; (21) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (22) the issuance or sale of substantial amounts of our Common Stock, or the perception that such sales may occur in the future, which may have a depressive effect on the market price of our securities; (23) potential dilution from the issuance of Common Stock underlying outstanding options and warrants; (24) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our Common Stock; (25) the volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; (26) our ability to integrate and realize the anticipated benefits from acquisitions; (27) our ability to maintain the listing of our Common Stock on the Nasdaq Capital Market.
| 41 |
Current Trends and Recent Developments for the Company
Reverse Stock Split
On May 6, 2025, the Company, acting pursuant to authority received at an annual meeting of its stockholders on December 17, 2024, filed with the Secretary of State of the State of Nevada a certificate of amendment (the “Charter Amendment”) to its articles of incorporation, as amended (the “Articles of Incorporation”), which effected a one-for-twenty reverse stock split (the “Reverse Stock Split”) of all of the Company’s outstanding shares of common stock, par value $0.001 per share (the “Common Stock”). Pursuant to the Charter Amendment, the Reverse Stock Split became effective as of 5:30 p.m. Eastern Time on May 6, 2025. As a result of the Reverse Stock Split, every twenty (20) shares of Common Stock were exchanged for one (1) share of Common Stock. The Common Stock began trading on the Nasdaq Capital Market on a split-adjusted basis at the start of trading on May 7, 2025. The Reverse Stock Split did not affect the total number of shares of capital stock, including the Common Stock, that the Company is authorized to issue, which remain as set forth pursuant to the Articles of Incorporation. No fractional shares of Common Stock were issued in connection with the Reverse Stock Split. Stockholders who otherwise were entitled to receive fractional shares of Common Stock were automatically entitled to receive an additional fraction of a share of Common Stock to round up to the next whole share, at a participant level. The Reverse Stock Split also had a proportionate effect on all other options and warrants of the Company outstanding as of the effective date of the Reverse Stock Split.
Nasdaq Notifications
As previously disclosed, on December 20, 2024, the Company received notice from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) that the bid price of its listed securities had closed at less than $1 per share over the previous 30 consecutive business days, and, as a result, did not comply with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). Therefore, in accordance with Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until June 18, 2025, to regain compliance with the Minimum Bid Price Requirement.
As previously disclosed, on January 2, 2025, the Staff notified the Company that it was not in compliance with Nasdaq Listing Rule 5550(b)(1), which requires companies listed on Nasdaq to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing (the “Stockholders’ Equity Requirement”). The Company reported stockholders’ equity (deficit) of ($2,448,310) in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, and, as a result, did not satisfy the Stockholders’ Equity Requirement pursuant to Listing Rule 5550(b)(1).
As previously disclosed, on March 6, 2025, the Company received notice (the “March 6 Letter”) from the Staff that the Staff had determined that as of March 5, 2025, the Company’s securities had a closing bid price of $0.10 or less for ten consecutive trading days triggering application of Listing Rule 5810(c)(3)(A)(iii) which states in part: if during any compliance period specified in Rule 5810(c)(3)(A), a company’s security has a closing bid price of $0.10 or less for ten consecutive trading days, the Listing Qualifications Department shall issue a Staff Delisting Determination under Rule 5810 with respect to that security (the “Low Priced Stocks Rule”).
The Company timely requested a hearing before the Panel to appeal the March 6 Letter and to address all outstanding matters, including compliance with the Minimum Bid Price Requirement, the Low Priced Stocks Rule and the Stockholders’ Equity Requirement, which hearing date has not been set as of the date of this Form 10-K. While the appeal process is pending, the suspension of trading of the Company’s Common Stock, will be stayed and the Common Stock will continue to trade on the Nasdaq Capital Market until the hearing process concludes and the Panel issues a written decision. The Company held its hearing with the Panel as scheduled on April 17, 2025.
On May 1, 2025, the Panel rendered its decision which granted the Company’s request for continued listing on the Nasdaq Exchange. Such decision is subject to the following conditions:
| ● | On or before May 2, 2025, the Company shall file Form 10-K for 2024 in compliance with Listing Rule 5250(c)(1). | |
| ● | On or before May 20, 2025, the Company must file a public disclosure describing any transactions undertaken by the Company to increase its equity and providing an indication of its equity following those transactions. | |
| ● | In addition, on or before May 20, 2025, the Company must provide the Panel with an update on its fundraising plans, and updated income projections for the next 12 months, with all underlying assumptions clearly stated. | |
| ● | On or before June 6, 2025, the Company shall demonstrate compliance with the Minimum Bid Price Requirement. | |
| ● | If, prior to September 2, 2025, the Company becomes non-compliant with any Listing Rule, the Company will be delisted. |
There are no assurances however, that the Company will be able to meet and maintain all such conditions required by the Panel.
| 42 |
Segment Overview
Video Solutions Operating Segment – Within our video solutions operating segment we supply technology-based products utilizing our portable digital video and audio recording capabilities for the law enforcement and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio, computer, mechanical, and multi-media technologies to create positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video systems for law enforcement and commercial markets; the FirstVU body-worn camera line, consisting of the FirstVu Pro, FirstVu, and the FirstVU HD; our patented and revolutionary VuLink product integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and commercial markets; EVO Web Portal, which is our cloud-based evidence management system for Law enforcement and commercial market; the EVO Fleet, FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video products that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu™ which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria.
Our video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and the sale of Shield disinfectant and personal protective products. This segment generates revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the term of the subscription, typically 3 or 5 years.
Revenue Cycle Management Operating Segment – We entered the revenue cycle management business late in the second quarter of 2021 with the formation of our wholly owned subsidiary, Digital Ally Healthcare, Inc., and its majority-owned subsidiary Nobility Healthcare. Nobility Healthcare completed its first acquisition in June 2021, when it acquired a private medical billing company, and has since completed three additional acquisitions of private medical billing companies, in which we will assist in providing working capital and back-office services to healthcare organizations throughout the country. Our assistance consists of insurance and benefit verification, medical treatment documentation and coding, and collections. Through our expertise and experience in this field, we maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins and cash flows.
Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform the obligations of our revenue cycle management services. Our revenue cycle management services are services, performed and charged monthly, generally based on a contractual percentage of total customer collections, for which we recognize our net service fees.
Entertainment Operating Segment - We also entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter provides ticket sales, partnerships, and mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events throughout the country through its platform, including concerts, sporting events, theatres, and performing arts. We also offer production and promotion of live music events in third-party venues throughout the country. These services begin with the logistical matters of an event, including artist booking and research, ticketing, staging, on-site operations, vendor sourcing, and day of production.
Our entertainment operating segment consists of entertainment services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold. Entertainment direct expenses include the cost of tickets purchased for resale by the Company and held as inventory, credit card fees, ticketing platform expenses, website maintenance fees, as well as other administrative costs.
| 43 |
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 and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.
Comparison of the Three Months Ended March 31, 2025 and 2024
Summary Financial Data
Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2025, and 2024:
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Net Revenues: | ||||||||
| Video Solutions | $ | 922,281 | $ | 1,718,293 | ||||
| Revenue Cycle Management | 1,350,551 | 1,434,598 | ||||||
| Entertainment | 2,202,432 | 2,376,460 | ||||||
| Total Net Revenues | $ | 4,475,264 | $ | 5,529,351 | ||||
| Gross Profit (loss): | ||||||||
| Video Solutions | $ | 555,761 | $ | 565,694 | ||||
| Revenue Cycle Management | 467,663 | 463,731 | ||||||
| Entertainment | 578,075 | 494,274 | ||||||
| Total Gross Profit | $ | 1,601,499 | $ | 1,523,699 | ||||
| Operating Income (loss): | ||||||||
| Video Solutions | $ | 167,280 | $ | (891,588 | ) | |||
| Revenue Cycle Management | 7,370 | 24,031 | ||||||
| Entertainment | (304,578 | ) | (642,219 | ) | ||||
| Corporate | (844,752 | ) | (2,081,196 | ) | ||||
| Total Operating Income (Loss) | $ | (974,680 | ) | $ | (3,639,034 | ) | ||
| Depreciation and Amortization: | ||||||||
| Video Solutions | $ | 53,669 | $ | 198,028 | ||||
| Revenue Cycle Management | 23,604 | 26,715 | ||||||
| Entertainment | 340,597 | 326,248 | ||||||
| Total Depreciation and Amortization | $ | 417,870 | $ | 550,991 | ||||
| Assets (net of eliminations): | ||||||||
| Video Solutions | $ | 12,786,363 | $ | 24,172,478 | ||||
| Revenue Cycle Management | 4,863,764 | 1,989,068 | ||||||
| Entertainment | 4,898,381 | 6,482,510 | ||||||
| Corporate | 7,707,828 | 12,520,139 | ||||||
| Total Identifiable Assets | $ | 30,256,336 | $ | 45,164,195 | ||||
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.
| 44 |
Results of Operations
Revenues
Revenues by Type and by Operating Segment
Our operating segments generate two types of revenues:
Product revenues primarily includes video solutions operating segment hardware sales of in-car and body-worn cameras, along with sales of our ThermoVuTM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale of tickets by our entertainment operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our entertainment segment until their sale.
Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video solutions segment. Our entertainment operating segment’s 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.
The following table presents revenues by type and segment:
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | % Change | |||||||||
| Product revenues: | |||||||||||
| Video solutions | $ | 54,231 | $ | 721,188 | (92.5 | )% | |||||
| Entertainment | 667,119 | 844,658 | (21.0 | )% | |||||||
| Total product revenues | 721,350 | 1,565,846 | (53.9 | )% | |||||||
| Service and other revenues: | |||||||||||
| Video solutions | 868,050 | 997,105 | (12.9 | )% | |||||||
| Entertainment | 1,535,313 | 1,531,801 | 0.2 | % | |||||||
| Revenue cycle management | 1,350,551 | 1,434,599 | (5.9 | )% | |||||||
| Total service and other revenues | 3,753,914 | 3,963,505 | (5.3 | )% | |||||||
| Total revenues | $ | 4,475,264 | $ | 5,529,351 | (19.1 | )% | |||||
Our video solutions operating segment sells our products and services to customers in the following manner:
| ● | Sales to domestic customers are made directly to the end customer (typically a law enforcement agency or a commercial customer) through our sales force, comprised of our employees. Revenue is recorded when the product is shipped to the end customer. | |
| ● | Sales to international customers are made through independent distributors who purchase products from us at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement. | |
| ● | Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer. |
| 45 |
Our revenue cycle management operating segment sells its services to customers in the following manner:
| ● | Our revenue cycle management operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying service revenue is recognized upon execution of services. Service revenues are generally determined as a percentage of the dollar amount of medical billings collected by the customer. |
Our entertainment operating segment sells our products and services to customers in the following manner:
| ● | Our entertainment operating segment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform. |
We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.
Product revenues by operating segment is as follows:
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Product Revenues: | ||||||||
| Video Solutions | $ | 54,231 | $ | 721,188 | ||||
| Revenue Cycle Management | — | — | ||||||
| Entertainment | 667,119 | 844,658 | ||||||
| Total Product Revenues | $ | 721,350 | $ | 1,565,846 | ||||
Product revenues for the three months ended March 31, 2025 and 2024 were $721,350 and $1,565,846, respectively, a decrease of $844,496 (53.9%), due to the following factors:
| ● | Revenues generated by the entertainment operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The entertainment operating segment generated $667,119 in product revenues for the three months ended March 31, 2025, compared to $844,658 for the three months ended March 31, 2024. This product revenue relates to the first Country Stampede music festival held by Kustom during 2024, as well as the resale of tickets purchased for live events, sporting events, concerts, and theatre, then sold through various platforms to customers. The decrease in revenues is attributable to a reduction in scope of primary ticket sales by Ticketsmarter as it focuses on higher margin events to improve its gross margins. In addition, the wildfires in California caused many event cancellations and postponements during the three months ended March 31, 2025, that also depressed product sales. |
| ● | The Company’s video segment operating segment generated revenues totaling $54,231 during the three months ended March 31, 2025 compared to $721,188 for the three months ended March 31, 2024. In general, our video solutions operating segment has experienced pressure on its product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined compared to the same period in 2024 due to the Company not having inventory in–stock to fulfill existing backlog orders, price-cutting and competitive actions by our competitors and adverse marketplace effects related to our recent financial condition. We have been able to start the product supply chain during the first quarter 2025 with funds generated by the February 2025 public equity offering which we believe will improve our video solutions product sales during the remainder of 2025. |
| ● | Our video solutions operating segment management has continued to focus on migrating commercial customers, from a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and a portion of our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has gained some traction, resulting in decreased product revenues and increasing our service revenues. We expect this program to continue to hold traction, resulting in recurring revenues over a span of three to five years. |
| 46 |
Service and other revenues by operating segment is as follows:
| Three months ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Service and Other Revenues: | ||||||||
| Video Solutions | $ | 868,050 | $ | 997,105 | ||||
| Revenue Cycle Management | 1,350,551 | 1,434,599 | ||||||
| Entertainment | 1,535,313 | 1,531,801 | ||||||
| Total Service and Other Revenues | $ | 3,753,914 | $ | 3,963,505 | ||||
Service and other revenues for the three months ended March 31, 2025 and 2024 were $3,753,914 and $3,963,505, respectively, a decrease of $209,591 (5%), due to the following factors:
| ● | Cloud revenues generated by the video solutions operating segment were $594,742 and $616,488 for the three months ended March 31, 2025 and 2024, respectively, a slight decrease of $21,746 (4%). We continue to experience increased interest in our cloud solutions for law enforcement primarily due to the deployment of our cloud-based EVO-HD in-car system and our next generation body-worn camera products, which contributed to our cloud revenues in the three months ended March 31, 2024. We expect this trend to continue for 2025 as the migration from local storage to cloud storage continues in our customer base. | |
| ● | Video solutions operating segment revenues from extended warranty services were $228,430 and $380,618 for the three months ended March 31, 2025 and 2024, respectively, a decrease of $152,188 (40%). This correlates with the decrease in sales of hardware during the three months ended March 31, 2025. | |
| ● | Our entertainment operating segment generated service revenues totaling $1,535,313 and $1,531,801 for the three months ended March 31, 2025 and 2024, respectively, a slight increase of $3,512 (0.2%). TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. We expect our entertainment operating segment to continue to fluctuate as we look to right-size this segment and work towards profitability. Our entertainment segment has focused on cost cutting and overall improvements in gross margin rather than top line revenues which has resulted in a reduction in revenues for ticketing events that did not meet its gross margin goals. | |
| ● | Our revenue cycle management operating segment generated service revenues totaling $1,350,551 and $1,434,599 for the three months ended March 31, 2025 and 2024, respectively, a decrease of $84,048 (6%). Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. The decrease in revenue is due to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue. |
Total revenues for the three months ended March 31, 2025, and 2024 were $4,475,264 and $5,529,351, respectively, a decrease of $1,054,087 (19%), due to the reasons noted above.
| 47 |
Cost of Product Revenue
Overall cost of product revenue sold for the three months ended March 31, 2025, and 2024 was $675,639 and $1,567,393, respectively, a decrease of $891,754 (57%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended March 31, 2025, and 2024 were 94% and 100%, respectively. Cost of products sold by operating segment is as follows:
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Cost of Product Revenues: | ||||||||
| Video Solutions | $ | 64,552 | $ | 797,494 | ||||
| Revenue Cycle Management | — | — | ||||||
| Entertainment | 611,087 | 769,899 | ||||||
| Total Cost of Product Revenues | $ | 675,639 | $ | 1,567,393 | ||||
The decrease in cost of goods sold for our video solutions segment products is due to large decrease in product sales experienced during the three months ended March 31, 2025. We were not able to fulfil open orders due to low inventory levels. We have utilized funds from the February 2025 public equity offering to ramp the supply chain which we believe will lead to improved product sales. Cost of product sold as a percentage of product revenues for the video solutions segment decreased to 119% for the three months ended March 31, 2025 as compared to 111% for the three months ended March 31, 2024.
The decrease in entertainment operating segment cost of product sold directly correlates to the lower product revenues for the three months ended March 31, 2025. Cost of Product Revenues were $611,087 and $769,899 for the three months ended March 31, 2025 and 2024, a decrease of $158,812 (21%). Cost of product sold as a percentage of product revenues for the entertainment segment increased to 92% for the three months ended March 31, 2025 as compared to 91% for the three months ended March 31, 2024.
Cost of Service Revenue
Overall cost of service revenue sold for the three months ended March 31, 2025, and 2024 was $2,198,126 and $2,438,259, respectively, a decrease of $240,133 (10%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended March 31, 2025, and 2024 were 59% and 62%, respectively. Cost of service revenues by operating segment is as follows:
| Three months ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Cost of Service Revenues: | ||||||||
| Video Solutions | $ | 301,968 | $ | 355,105 | ||||
| Revenue Cycle Management | 882,888 | 970,867 | ||||||
| Entertainment | 1,013,270 | 1,112,287 | ||||||
| Total Cost of Service Revenues | $ | 2,198,126 | $ | 2,438,259 | ||||
The decrease in cost of service revenues for our video solutions segment demonstrates the leverage we are enjoying as we increase our service revenues during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Cost of service revenues as a percentage of service revenues for the video solutions segment decreased to 35% for the three months ended March 31, 2025 as compared to 36% for the three months ended March 31, 2024.
| 48 |
The decrease in revenue cycle management operating segment cost of service revenue is commensurate with the decline in revenues due to certain loss generating services being eliminated during the year. Cost of service revenues as a percentage of product revenues for the revenue cycle management operating segment decreased to 65% for the three months ended March 31, 2025 as compared to 68% for the three months ended March 31, 2024.
The decrease in entertainment operating segment cost of service revenues is due to management right sizing the business working towards profitability. The Entertainment cost of service revenue was $1,013,170 for the three months ended March 31, 2025, compared to $1,112,287 for the three months ended March 31, 2024. Cost of service revenues as a percentage of service revenues for the entertainment segment decreased to 66% for the three months ended March 31, 2025 as compared to 73% for the three months ended March 31, 2024.
Gross Profit
Overall gross profit for the three months ended March 31, 2025 and 2024 was $1,796,034 and $1,523,699, respectively, an increase of $272,335 (18%). Gross profit by operating segment was as follows:
| Three months ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Gross Profit: | ||||||||
| Video Solutions | $ | 555,761 | $ | 565,694 | ||||
| Revenue Cycle Management | 467,663 | 463,731 | ||||||
| Entertainment | 578,075 | 494,274 | ||||||
| Total Gross Profit | $ | 1,601,499 | $ | 1,523,699 | ||||
The increase in gross profits is primarily due to improvements in our cost of sales as a percentage of sales particularly in our entertainment segment service revenues. There was an overall decrease in the cost of sales as a percentage of overall revenues to 64% for the three months ended March 31, 2025 from 72% for the three months ended March 31, 2024. This is primarily driven by large head-count reductions in our work-force during the three months ended March 31, 2025 as compared to 2024, a focus on right sizing recent acquisitions to increase profitability and a transition to a service subscription-based model in our video solutions segment. Our goal is to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, EVO Fleet, FLT-250, DVM-250, DVM-250 Plus and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,576,179 and $5,162,733 for the three months ended March 31, 2025 and 2024, respectively, a decrease of $2,586,554 (50%). The decrease was primarily attributable to the reduction in new advertising sponsorships being entered into by the Company. Our selling, general and administrative expenses as a percentage of sales increased to 58% for the three months ended March 31, 2025 compared to 93% in the same period in 2024. The significant components of selling, general and administrative expenses are as follows:
| Three Months ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Research and development expense | $ | 84,417 | $ | 487,466 | ||||
| Selling, advertising and promotional expense | 108,041 | 761,118 | ||||||
| General and administrative expense | 2,383,721 | 3,914,149 | ||||||
| Total | $ | 2,576,179 | $ | 5,162,733 | ||||
| 49 |
Research and development expense. Our research and development expenses totaled $84,417 and $487,466 for the three months ended March 31, 2025 and 2024, respectively which represents a decrease of $403,049 (83%). We have focused on controlling our expenditures on bringing new products to market, including updates and improvements to current products in response to our decline in revenues. The decrease in research and development expense reflects the large cut-back in our engineering staff and research activities in order to right-size our expenses in this area with our revenues.
Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $108,041 and $761,118 for the three months ended March 31, 2025 and 2024, respectively, a decrease of $653,077 (86%). The decrease in selling, advertising and promotional expenses reflects the large cut-back in selling staff and promotional and advertising activities in order to right-size our expenses in this area with our revenues. In addition, the decrease is attributable to the reduction in new sponsorships being entered into by the Company and its subsidiary TicketSmarter.
General and administrative expense. General and administrative expenses totaled $2,383,721 and $3,914,149 for the three months ended March 31, 2025 and 2024, respectively which represents a decrease of $1,530,428 (39%). The decrease in general and administrative expenses in the three months ended March 31, 2025 compared to the same period in 2024 is primarily attributable to a decrease in administrative salaries and reductions in headcount in order to right-size our expenses in this area with our revenues. The decrease in general and administrative expenses was offset by a substantial increase legal and professional expenses for the three months ended March 31, 2025 compared to the same period in 2024 due to the failed merger with CloverLeaf and various capital raises we have undertaken.
Operating Loss
For the reasons previously stated, our operating loss was $974,680 and $3,639,034 for the three months ended March 31, 2025 and 2024, respectively, an improvement of $2,664,354 (73%). Operating loss as a percentage of revenues improved to 22% in 2025 as compared to 66% in 2024.
Interest Income
Interest income increased to $31,975 for the three months ended March 31, 2025, from $19,356 in 2024, which reflects our overall increase in our cash and cash equivalent levels in 2025 compared to 2024 due to funds generated in the February 2025 public equity offering.
Interest Expense
We incurred interest expenses of $792,273 and $648,567 during the three months ended March 31, 2025 and 2024, respectively. The increase is attributable to the amortization of debt discounts associated with the senior secured promissory notes that were paid off with proceeds from the February 2025 public equity offering..
Other income (expense)
Other income (expense) decreased to $16,700 for the three months ended March 31, 2025, from $27,602 during the three months ended March 31, 2024, which reflects income related to a warehouse sublease within the corporate headquarters during early 2024 which ceased upon the sale of the building which occurred in 2024.
Gain on Extinguishment of Debt - related party
On September 22, 2023, a trust, the beneficiaries of which are TicketSmarter’s Chief Executive Officer and his spouse, made a loan in the amount of $2,325,000 to TicketSmarter to support TicketSmarter’s operations. The Related Party Note bears interest of 13.25% per annum with repayment beginning January 2, 2024. On October 2, 2023 an additional $375,000 was advanced to Ticketsmarter which increased the loan balance to $2,700,000. The use of proceeds of the TicketSmarter Related Party Note was to resolve numerous outstanding payables at a discounted rate, the discount received is recognized as a gain on extinguishment of liabilities on the condensed consolidated statement of operations. Additionally, these negotiations relieved TicketSmarter of numerous future obligations following fiscal year 2023.
| 50 |
On August 19, 2024, the parties agreed to amend the note whereby the repayment dates were extended to begin on January 2, 2025 and continue at $54,000 for 50 consecutive weeks plus interest. The parties did not change any other provisions or terms of the note. The amendment was determined to be a modification of the note rather than an extinguishment and reissuance of a new note. No payments have been made during the three months ended March 31, 2025.
On March 20, 2025, the parties agreed to a second modification of the TicketSmarter Related Party Note. The modification eliminated all accrued interest totaling $582,203 as of the date of the second modification, reduced the interest rate from 13.25% per annum to 8% per annum, and extended and reduced the repayment amount from $54,000 per week to $11,000 per week beginning April 1, 2025. The modification was deemed to be an extinguishment of debt resulting in a gain of $1,249,372 during the three months ended March 31, 2025.
Gain on Extinguishment of Liabilities
The Company recorded a gain on the extinguishment of liabilities for the three months ended March 31, 2025 and 2024 of $2,220,097, and $682,345, respectively. The gains reflect income related to the video solutions and entertainment segment’s ability to negotiate down payables and other contract obligations during the three months ended March 31, 2025 utilizing funds generated by the closing of the February 2025 public equity offering on February 13, 2025.
The gain on extinguishment of liabilities was $682,345 for the three months ended March 31, 2024, which reflects income related to the entertainment segment’s ability to negotiate down payables and other contract obligations during the period. The Company utilized funds from the related party note payable to resolve numerous outstanding payables at a discounted rate, the discount received was recognized as a gain on extinguishment of liabilities in the condensed consolidated statement of operations for the three months ended March 31, 2024.
Gain on disposal of intangibles
Gain on disposal of intangibles decreased to $-0- for the three months ended March 31, 2025, from $5,582 during the three months ended March 31, 2024.
Change in Fair Value of Derivative Liabilities
The change in fair value of the warrant derivative liabilities for the three months ended March 31, 2025 and 2024, respectively totaled a gain of $2,515,891 during the three months ended March 31, 2025 as compared to a loss of $348,891 during the three months ended March 31, 2024.
During 2024, the Company issued Series A and Series B detachable warrants in conjunction with its June 2024 capital raise. The underlying warrant terms under both of the Series A and Series B warrants provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances and requires reset provisions which were triggered upon the approval the warrant issuances by the Company’s shareholders. 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 warrants were approved by shareholders at the Company’s annual meeting on December 17, 2024, which triggered the reset provisions which resulted in an increase in the estimated fair value of the Series A and Series B warrants. The holders fully exercised their Series B warrants during the three months ended March 31, 2025 which caused a deterioration in the market value of the Company’s Common Stock which resulted in a large decrease in the estimated fair value of the remaining Class A warrants resulting in the gain from the change in fair value of warrant derivative liabilities in the condensed consolidated statement of operations for the three months ended March 31, 2025.
| 51 |
During 2023, the Company issued detachable warrants to purchase a total of 56,250 shares of Common Stock in association with the two secured convertible notes. The underlying warrant 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 increase in the estimated fair value of the 2023 warrants resulted in a loss from the change in fair value of warrant derivative liabilities in the condensed consolidated statement of operations for the three months ended March 31, 2025.
Loss on Sale of Property, Plant and Equipment
The Company reported a loss on sale of property, plant and equipment of $-0- and $41,661 during the three months ended March 31, 2025, and 2024, respectively.
Income (loss) before Income Tax Benefit
As a result of the above, we reported net income (loss) before income tax benefit of $4,267,082 and $(3,943,268) for the three months ended March 31, 2025 and 2024, respectively, an improvement of $8,210,350 (208%).
Income Tax Benefit
We recorded an income tax benefit of $-0- for the three months ended March 31, 2025 and 2024, respectively. The effective tax rate for both 2025 and 2024 varied from the expected statutory rate due to our continuing to provide a 100% valuation allowance on net deferred tax assets. We determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of March 31, 2025 and December 31, 2024 primarily because of the recurring operating losses.
We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of March 31, 2025.
We had approximately $159,280,000 of federal net operating loss carryforwards and $1,742,000 of research and development tax credit carryforwards as of March 31, 2025 and December 31, 2024 available to offset future net taxable income.
Net Income (Loss)
As a result of the above, we reported a net income (loss) of $4,267,082 and $(3,943,268) for the three months ended March 31, 2025 and 2024, respectively, an improvement of $8,210,350 (208%).
Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary
The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income/loss of Nobility Healthcare which is reflected in the condensed consolidated statement of 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 $3,611 and $12,248 for the three months ended March 31, 2025 and 2024, respectively.
Net Loss Attributable to Common Stockholders
As a result of the above, we reported a net income (loss) of $4,263,471 and $(3,931,020) for the three months ended March 31, 2025 and 2024, respectively, an improvement of $8,194,491 (208%).
| 52 |
Basic and Diluted Income/(Loss) per Share
The basic and diluted income/(loss) per share was $1.41 and ($27.48) for the three months ended March 31, 2025 and 2024, respectively, for the reasons previously noted. All outstanding stock options and Common Stock purchase warrants were considered antidilutive and therefore excluded from the calculation of diluted income (loss) per share for the three months ended March 31, 2025 and 2024 because all potentially dilutive securities were excluded from the computation because of their exercise price being higher than the market value of our Common Stock in 2025 and the net loss reported for 2024.
Liquidity and Capital Resources
Overall:
Management’s Liquidity Plan. We have experienced net losses and cash outflows from operating activities since inception. Based upon our current operating forecast, we anticipate that we will need to restore positive operating cash flows and/or raise additional capital in the short-term to fund operations, meet our customary payment obligations and otherwise execute our business plan over the next 12 months. We are continuously in discussions to raise additional capital, which may include a variety of equity and debt instruments; however, there can be no assurance that our capital raising initiatives will be successful. Our recurring losses and level of cash used in operations, along with uncertainties concerning our ability to raise additional capital, raise substantial doubt about our ability to continue as a going concern.
Cash, cash equivalents: As of March 31, 2025, we had cash and cash equivalents with an aggregate balance of $3,762,608, an increase from a balance of $454,314 at December 31, 2024. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $3,308,294 net increase in cash during the three months ended March 31, 2025:
| ● | Operating activities: | Net cash used in operating activities was $5,754,761 and $918,545 for the three months ended March 31, 2025 and 2024, respectively, a deterioration of $4,836,216. The decrease is attributable to the repayment of accounts payable from proceeds of our February 2025 public equity offering, an increase in noncash gains from the change in fair value of warrant derivative liabilities, the extinguishment of liabilities and debt and cash used by the change in operating assets and liabilities during the three months ended March 31, 2025 compared to the same period in 2024. | |
| ● | Investing activities: | Net cash provided by (used in) investing activities was $(85,447) and $160,830 for the three months ended March 31, 2025 and 2024, respectively. During the three months ended March 31, 2025, we made expenditures for the purchase of property plant and equipment and also for patents. |
| ● | Financing activities: | Net cash provided by financing activities was $9,148,502 and $1,005,027 for the three months ended March 31, 2025 and 2024, respectively. During 2025, we most notably issued Common Stock in a February 2025 public equity with detachable warrants resulting in $14,308,300 in net cash proceeds and issued an unsecured promissory note raising $600,000 in net cash proceeds. The cash proceeds were partially offset by payments on outstanding loans including the payments on senior secured promissory notes and merchant advances. |
The net result of these activities was an increase in cash of $3,308,294 to $3,762,608 for the three months ended March 31, 2025.
| 53 |
Commitments:
We had $3,762,608 of cash and cash equivalents and net positive working capital of $3,385,051 as of March 31, 2025. Accounts receivable and other receivables balances represented $4,923,191 of our net working capital at March 31, 2025. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2025, which would help to provide positive cash flow to support our operations during 2025 and beyond. Inventory represents $2,489,111 of our net working capital at March 31, 2025. We are actively managing the level of inventory and our goal is to reduce such level during 2025 by our sales activities, the decrease of which should provide additional cash flow to help support our operations during 2025 and beyond.
Capital Expenditures:
We had the following material commitments for capital expenditures at March 31, 2025:
Lease commitments. Total lease expense under the Company’s operating leases was approximately $223,580 during the three months ended March 31, 2025.
The following sets forth the operating lease right of use assets and liabilities as of March 31, 2025:
| Assets: | ||||
| Operating lease right of use assets | $ | 680,628 | ||
| Liabilities: | ||||
| Operating lease obligations-current portion | 162,234 | |||
| Operating lease obligations-less current portion | 518,394 | |||
| Total operating lease obligations | $ | 680,628 |
Following are the minimum lease payments for each year and in total.
| Year ending December 31: | ||||
| 2025 (April 1, 2025 through December 31, 2025) | $ | 158,086 | ||
| 2026 | 210,925 | |||
| 2027 | 189,275 | |||
| 2028 | 100,863 | |||
| 2029 and thereafter | 130,086 | |||
| Total undiscounted minimum future lease payments | 789,235 | |||
| Imputed interest | (108,607 | ) | ||
| Total operating lease liability | $ | 680,628 |
Debt obligations - We have the following outstanding debt as of March 31, 2025 which require future principal payments:
| March 31, 2025 | ||||
| Economic injury disaster loan (EIDL) | $ | 143,654 | ||
| Unsecured Promissory note – Entertainment Segment | 600,000 | |||
| Debt obligations | 743,654 | |||
| Less: current maturities of debt obligations | (603,444 | ) | ||
| Debt obligations, long-term | $ | 140,210 |
Debt obligations mature on an annual basis as follows as of March 31, 2025:
| March 31, 2025 | ||||
| 2025 (April 1, 2025 to December 31, 2025) | $ | 603,444 | ||
| 2026 | 3,542 | |||
| 2027 | 3,677 | |||
| 2028 | 3,817 | |||
| 2029 and thereafter | 129,175 | |||
| Total | $ | 743,654 |
| 54 |
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 re-evaluate and update accruals as matters progress over time.
While the ultimate resolution is unknown, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect to our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows. See Note 9, “Commitments and Contingencies,” to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q for information on our litigation.
Critical Accounting Estimates
Our significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to our condensed consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies and estimates are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions:
| ● | Revenue Recognition / Allowance for Doubtful Accounts; | |
| ● | Allowance for Excess and Obsolete Inventory; | |
| ● | Goodwill and other intangible assets; | |
| ● | Warranty Reserves; | |
| ● | Fair value of assets and liabilities acquired in business combinations; | |
| ● | Fair value of warrant derivative liabilities; | |
| ● | Stock-based Compensation Expense; and | |
| ● | Accounting for Income Taxes. |
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. |
| 55 |
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 entertainment segment is recorded on a gross or net basis based on management’s assessment of whether we are acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.
We sell our tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. We act as the principal in these transactions as we own the ticket at the time of sale, therefore we control the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.
We also act as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from entertainment operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As we do not control the ticket prior to the transfer, we act as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment is due at the time of sale.
| 56 |
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 deferred revenue and recognized over the term of the extended warranty.
For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible since we commenced deliveries during 2006.
For our entertainment segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition, we will track historical bad debts and continue to assess appropriate reserves.
For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves.
Allowance for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost.
Inventories consisted of the following at March 31, 2025 and December 31, 2024:
March 31, 2025 | December 31, 2024 | |||||||
| Raw material and component parts– video solutions segment | $ | 2,590,526 | $ | 2,589,804 | ||||
| Work-in-process– video solutions segment | 71,592 | 4,906 | ||||||
| Finished goods – video solutions segment | 1,301,474 | 1,655,317 | ||||||
| Finished goods – entertainment segment | 174,061 | 505,694 | ||||||
| Subtotal | 4,137,653 | 4,755,721 | ||||||
| Reserve for excess and obsolete inventory– video solutions segment | (1,600,459 | ) | (2,037,252 | ) | ||||
| Reserve for excess and obsolete inventory – entertainment segment | (48,083 | ) | (132,403 | ) | ||||
| Total inventories | $ | 2,489,111 | $ | 2,586,066 | ||||
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 40% of the gross inventory balance at March 31, 2025, compared to 46% of the gross inventory balance at December 31, 2024. We had $1,648,542 and $2,169,655 in reserves for obsolete and excess inventories at March 31, 2025 and December 31, 2024, respectively. The decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of March 31, 2025.
If actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established.
| 57 |
Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets.
Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets.
Determining an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset’s useful life.
The Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring changes or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value.
When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test.
Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data.
| 58 |
We performed an impairment test as of the last day of the fiscal third quarter of 2024 as management determined that a triggering event had occurred resulting from the additional decline in demand for our services, prolonged economic uncertainty, the fact that the split-off transaction did not occur when and as expected and a further decrease in our stock price. Therefore, we performed an impairment test for our reporting units with remaining goodwill.
The fair value of each reporting unit was estimated using a weighting of the income and market valuation approaches. The income approach applied 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. The weighted average cost of capital used in our most recent impairment test ranged from 20.9% to 32.5%. We also applied a market approach, which develops a value correlation based on the market capitalization of similar publicly traded companies, referred to as a multiple, to apply to the operating results of the reporting units. The primary market multiples used are revenue and earnings before interest, taxes, depreciation, and amortization. The income and market approaches were equally weighted in our most recent annual impairment test, for all of the reporting units.
The combined fair values for all reporting units were then reconciled to our aggregate market value of our shares of Common Stock on the date of valuation, while considering a reasonable control premium. We consider a reporting unit’s fair value to be substantially in excess of the reporting unit’s carrying value at a 25% premium or greater. Based on our most recent impairment test, the video solutions reporting unit’s fair value was substantially in excess of its carrying value, while the revenue cycle management and entertainment segments were determined to be impaired.
We held goodwill of $5,480,966 as of September 30, 2024, related to businesses within our revenue cycle management segment. We held goodwill of $6,112,507 as of September 30, 2024, respectively, related to businesses within our entertainment segment. As a result of our September 30, 2024 interim impairment test, we concluded that the carrying amount of the revenue cycle management and the entertainment reporting units exceeded its estimated fair values. Thus, we recorded a non-cash goodwill impairment charge of $4,322,000, related to the goodwill carrying balance for the revenue cycle management segment, and a non-cash goodwill impairment charge of $307,000, related to the goodwill carrying balance for the entertainment segment, both of which was included in goodwill and intangible asset impairment charge on our Condensed Consolidated Statements of Operations for the three months ended September 30, 2024. The goodwill impairment was primarily driven by recent performance of the revenue cycle management and entertainment reporting units since our annual impairment testing date, as well as a delay in the projected timing of recovery. The remaining balance for the goodwill carrying balance related to businesses within our revenue cycle management segment and entertainment segment was $1,158,966 and $5,805,507, respectively as of March 31, 2025 and December 31, 2024.
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. 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 compared to 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.
| 59 |
Warrant derivative liabilities.
The Company accounts for their derivative financial instruments in accordance with ASC 815 “Derivatives and Hedging” therefore any embedded conversion options and warrants accounted for as derivatives are to be recorded at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The Black-Scholes option valuation model was used to estimate the fair value of the embedded conversion options and warrants. The model includes subjective input assumptions that can materially affect the fair value estimates.
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 March 31, 2025 and December 31, 2024, we have fully reserved all of our deferred tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased by $4,680,000 to a balance of $46,290,000 to fully reserve our deferred tax assets at March 31, 2025 and December 31, 2024. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of March 31, 2025 and December 31, 2024, 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.
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 March 31, 2025 and December 31, 2024 representing uncertain tax positions.
We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year. We do not believe that our Video Solutions and Revenue Cycle Management segments business is seasonal in nature, however; the Entertainment Segment is expected to generate higher revenues during the second half of the calendar year than in the first half.
| 60 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) under the Exchange Act. The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of such disclosure controls and procedures for this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2025 to provide reasonable assurance that material information required to be disclosed by the Company in this Report was recorded, processed, summarized and communicated to the Company’s management as appropriate and within the time periods specified in SEC rules and forms.
As part of our plan to remediate our controls which were not effective, we are performing a full review of our internal control procedures. We have implemented, and plan to continue to implement, new controls and new processes. We have hired and plan to continue to hire additional qualified personnel and establish more robust processes to support our internal control over financial reporting, including clearly defined roles and responsibilities. The Company anticipates time being required to complete the implementation and to assess and ensure the sustainability of these controls. The effectiveness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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 – 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 Factors.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the three months ended March 31, 2025 that were not disclosed by the Company on a Current Report on Form 8-K.
| 61 |
Item 3. Defaults upon Senior Securities.
There were no defaults upon senior securities during the three months ended March 31, 2025 that were not disclosed by the Company on a Current Report on Form 8-K.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
| (a) | Exhibits: |
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
| 62 |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 20, 2025
| DIGITAL ALLY, INC. | ||
| By: | /s/ Stanton E. Ross | |
| Name: | Stanton E. Ross | |
| Title: | Chief Executive Officer | |
| By: | /s/ Thomas J. Heckman | |
| Name: | Thomas J. Heckman | |
| Title: | Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) | |
| 63 |