form10-k.htm
10-K
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03/31/2023 02:31 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
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: 001-33899
DIGITAL ALLY, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
14001 Marshall Drive, Lenexa, KS
(Address of principal executive offices)
Registrant’s telephone number, including area code: (913) 814-7774
Securities registered pursuant to Section 12(b) of the Act:
20-0064269
(I.R.S. Employer
Identification No.)
66215
(Zip Code)
Common Stock, $0.001 par value
(Title of class)
DGLY
(Trading Symbol)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant’s most recently completed second fiscal quarter,
computed by reference to the closing price ($15.80), was: $34,496,434, which have been adjusted for the Reverse Split (as defined below).
The number of shares of our common stock outstanding as of March 31, 2023 was: 2,755,224 as adjusted for the Company’s 1-for-20 reverse stock split, which was
effective on February 6, 2023 (the “Reverse Split”). All share and price per share information in this Annual Report on Form 10-K has been adjusted to reflect the Reverse Split.
Documents Incorporated by Reference: None.
FORM 10-K
DIGITAL ALLY, INC.
DECEMBER 31, 2022
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7a.
Item 8.
Item 9.
Item 9A
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
Signatures
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Item 1.
Business.
Overview
PART I
We were incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. From that date until November 30, 2004, when we entered into a Plan of Merger with
Digital Ally, Inc., a Nevada corporation which was formerly known as Trophy Tech Corporation (the “Predecessor Registrant”), we had not conducted any operations and were
a closely-held company. In conjunction with the merger, we were renamed Digital Ally, Inc.
On January 2, 2008, we commenced trading on the Nasdaq Capital Market under the symbol “DGLY.” We conduct our business from 14001 Marshall Drive, Lenexa,
Kansas 66215. Our telephone number is (913) 814-7774. Our website address is www.digitalallyinc.com. The contents of, or information accessible through, our website are
not part of this Annual Report on Form 10-K. We make our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all amendments to those reports, as well as beneficial ownership filings available free of charge on our website as soon as reasonably practicable after
we file such reports with, or furnish such reports to, the SEC. Our filings with the SEC are available to the public through the SEC’s website at www.sec.gov.
On August 23, 2022 (the “Effective Time”), the Predecessor Registrant merged with and into its wholly owned subsidiary, DGLY Subsidiary Inc., a Nevada
corporation (the “Registrant”), pursuant to an agreement and plan of merger, dated as of August 23, 2022 (the “Merger Agreement”), between the Predecessor Registrant and
the Registrant, with the Registrant as the surviving corporation in the merger (such transaction, the “Merger”). At the Effective Time, Articles of Merger were filed with the
Secretary of State of the State of Nevada, pursuant to which the Registrant was renamed “Digital Ally, Inc.” and, by operation of law, succeeded to the assets, continued the
business and assumed the rights and obligations of the Predecessor Registrant immediately prior to the Merger. Under the Nevada Revised Statutes, shareholder approval was
not required in connection with the 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 $0.001 per share (the
“Predecessor Common Stock”) automatically converted into one share of common stock, par value $0.001 per share, of the Registrant (“Registrant Common Stock”), (ii) each
outstanding option, right or warrant to acquire shares of Predecessor Common Stock converted into an option, right or warrant, as applicable, to acquire an equal number of
shares of Registrant Common Stock under the same terms and conditions as the original options, rights or warrants, and (iii) the directors and executive officers of the
Predecessor Registrant were appointed as directors and executive officers, as applicable, of the Registrant, each to serve in the same capacity and for the same term as such
person served with the Predecessor Registrant immediately before the Merger.
For the purposes of this Annual Report on Form 10-K, unless the context otherwise requires, (i) the term “our,” or “us” refers to the Predecessor Registrant and its
subsidiaries with respect to the period prior to the Effective Time and to the Registrant and its subsidiaries with respect to the period on and after the Effective Time; (ii) as of
any period prior to the Effective Time, references to the “directors” mean the directors of the Predecessor Registrant, and, as of any period at and after the Effective Time, the
directors of the Registrant, (iii) as of any period prior to the Effective Time, references to “stockholders” mean the holders of Predecessor Common Stock, and, as of any period
at and after the Effective Time, the holders of Registrant Common Stock, and (iv) as of any period prior to the Effective Time, references to “Common Stock” means the
Predecessor Common Stock, and, as of any period at and after the Effective Time, Registrant Common Stock.
The business of the Registrant, Digital Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare,
LLC, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc., and its majority-owned subsidiary Nobility Healthcare,
LLC, collectively, “Digital Ally,” “Digital,” and the “Company”), is divided into three reportable operating segments: 1) the Video Solutions Segment, 2) the Revenue Cycle
Management Segment and 3) the Entertainment Segment. The Video Solutions Segment is our legacy business that produces digital video imaging, storage products,
disinfectant and related safety products for use in law enforcement, security and commercial applications. This segment includes both service and product revenues through our
subscription models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides
working capital and back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Entertainment Segment acts as an
intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also 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. The following table sets forth the Company’s total revenue and the revenue derived
from each reportable operating segment:
Net Revenues:
Video Solutions
Revenue Cycle Management
Entertainment
Total Net Revenues
Years Ended December 31,
2022
2021
$
$
8,252,288
7,886,107
20,871,500
37,009,895
$
$
9,073,626
1,630,048
10,709,760
21,413,434
3
Additional information regarding each reportable operating segment is also included in Note 23 entitled Segment Data of “Notes to Consolidated Financial
Statements”.
Video Solutions Operating Segment
Within our video solutions operating segment we 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 II, and the FirstVu HD; our patented and
revolutionary VuLink product which integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and
commercial markets; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as “event recorders” for the commercial
fleet and mass transit markets; and 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 ShieldTM
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, LLC (“Nobility Healthcare”). Nobility Healthcare completed its first acquisition on June 30, 2021, when it acquired a
private medical billing company, and has since completed three more acquisitions of private medical billing companies, in which we assist in providing working capital and
back-office services to healthcare organizations throughout the country. Our assistance consists of insurance and benefit verification, medical treatment documentation and
coding, and collections. Through our expertise and experience in this field, we aim to maximize our customers’ service revenues collected, leading to substantial improvements
in their operating margins and cash flows.
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Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform the obligations of our
revenue cycle management services. Our revenue cycle management services are services, performed and charged monthly, generally based on a contractual percentage of total
customer collections, for which we recognize our net service fees.
Entertainment Operating Segment
We have also entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter, Inc.
(“TicketSmarter”) and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter provides ticket sales, partnerships, and
mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events through its
platform, for a wide range of events, including concerts, sporting events, theatres, and performing arts, throughout the country.
Our entertainment operating segment consists of ticketing services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this
segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are
recognized when the underlying tickets are sold. Ticketing direct expenses include the cost of tickets purchased for resale by the Company and held as inventory, credit card
fees, ticketing platform expenses, website maintenance fees, along with other administrative costs.
Our Video Operating Segment Products and Services
Through our video operating segment we supply technology-based products utilizing our portable digital video and audio recording capabilities for the law
enforcement and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio, computer, mechanical, and multi-
media technologies to create positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video
systems for law enforcement and commercial markets; the FirstVu body-worn camera line, consisting of the FirstVu Pro, FirstVu, and the FirstVu HD; our patented and
revolutionary VuLink product integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and
commercial markets; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as “event recorders” for the commercial
fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings
in 2020, by introducing two new lines of branded products: (1) the ThermoVu® which is a line of self-contained temperature monitoring stations that provides alerts and
controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and
bacteria.
In-Car Digital Video Mirror System for Law Enforcement – EVO-HD, DVM-800 and DVM-800 Lite
In-car video systems for patrol cars are a necessity and have generally become standard. Current systems are primarily digital based systems with cameras mounted on
the windshield and the recording device generally in the trunk, headliner, dashboard, console or under the seat of the vehicle.
The Company launched its in-car digital video platform under the name EVO-HD during the second quarter of 2019. The EVO-HD is a revolutionary in-car system
that delivers versatility and reliability for law enforcement.
5
With built-in, patented auto-activation technology, EVO-HD captures multiple recording angles in sync from a FirstVu PRO or FirstVu HD body-worn camera and up
to four HD in-car cameras – all from a single trigger. The EVO-HD maximizes space and offers top-end reliability when paired with remote service capabilities. An internal cell
modem will allow for connectivity to the VuVault.net cloud, powered by Amazon Web Services (“AWS”) and real time metadata when in the field.
The Company offers the DVM-800, a continuation in the family of highly successful digital video mirrored (DVM) systems developed by the Company. The DVM-
800 is a time-tested, compact, powerful and easy-to-use solution designed for law enforcement. The DVM-800 system has built-in road and driver facing cameras and can
record up to two external HD cameras. The DVM-800 is compatible with the patented VuLink® auto-activation technology and can be paired with a FirstVu HD body-worn
camera.
The Company also offers the DVM-800 Lite, an entry level system is a self-contained video recorder, microphone and digital storage system that is integrated into a
rear-view mirror and is designed for law enforcement. The system can record up to two internal HD cameras.
In-Car Digital Video “Event Recorder” System – DVM-250 Plus and FLT-250 for Commercial Fleets
Digital Ally provides commercial fleets and commercial fleet managers with the digital video tools that they need to increase driver safety, track assets in real-time and
minimize the company’s liability risk while enabling fleet managers to operate the fleet at an optimal level. We market a product designed to address these commercial fleet
markets with our DVM-250 Plus and FLT-250 event recorders that provide various types of commercial fleets with features and capabilities that are fully-customizable and
consistent with their specific application and inherent risks.
The DVM-250 Plus is a part of the DVM family and is designed for commercial fleets featuring built-in digital audio and video recording technology and other
features to provide commercial fleet managers unmatched driver and asset management – all while aiming to deliver the return on investment that matters most: the safety and
security of drivers and passengers. The DVM-250 Plus is designed to capture events, such as wrecks and erratic driving or other abnormal occurrences, for evidentiary or
training purposes. The commercial fleet markets may find our units attractive from both a feature and a cost perspective compared to other providers. Due to our marketing
efforts, commercial fleets are beginning to adopt this technology, and in particular, the ambulance and taxi-cab markets.
In the first quarter of 2021, Digital Ally released the FLT-250, offering the same great features of the DVM-250 Plus in a new compact, non-mirrored form factor that
allows for multiple mounting options in any vehicle type for commercial fleets. We believe that, due to non-mirror-based aspect of this product, the FLT-250 will become more
attractive for our potential customers, as it is a much simpler plug and play option compared to mirror-based products.
Digital Ally offers a suite of data management web-based tools to assist fleet managers in the organization, archival, and management of videos and telematics
information. Within the suite, there are powerful mapping and reporting tools that are intended to optimize efficiency, serve as training tools for teams on safety, and,
ultimately, generate a significant return on investment for the organization.
We expect the EVO-HD to become the platform for a new family of in-car video solution products for the commercial markets. The innovative EVO-HD technology is
expected to replace the current in-car mirror-based systems with a miniaturized system that can be custom-mounted in the vehicle, while offering numerous hardware
configurations to meet the varied needs and requirements of our commercial customers. In its commercial market application, the EVO-HD can support up to four HD cameras,
with two cameras having pre-event and ECA capabilities to allow customers to review entire shifts. An internal cell modem will allow for connectivity to the FleetVu Manager
cloud-based system for commercial fleet tracking and monitoring, which is powered by AWS and real time metadata when in the field.
Body-Worn Digital Video System – FirstVu Pro, FirstVu II, and FirstVu HD for Law Enforcement and Private Security
During 2021, Digital Ally launched two next generation body-worn cameras and docking stations, refreshing the Company’s complete ecosystem of evidence
recording devices. The latest body worn camera launched by the Company is the FirstVu Pro, the Company’s flagship product in its family of next generation of technology.
The light weight, one-piece unit captures full HD video and audio, while offering industry leading features such as live streaming, a full-color touchscreen display, an advanced
image sensor with IR LEDs, proprietary image distortion reduction, IP67 rated resisting dust and wind and is water submersible for 30 minutes at a depth of 3 feet. It is also
MIL-STD-810G compliant capable of handling drops, shock, and vibration, and will function flawlessly in a wide temperature range.
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In addition to the FirstVu Pro, Digital Ally also added the FirstVu II to its family of next generation technology. The FirstVu II is a one-piece device offering industry
leading technology such as an articulating camera head, a full-color display, an advanced image sensor, and GPS. It can be used in law enforcement, private and event security
and commercial segments.
Digital Ally still carries the FirstVu HD, the two-piece body-worn camera which allows for multiple mounting options while minimizing space and weight. It can be
used in law enforcement, private and event security and commercial segments. This system is also a derivative of our in-car video systems, but is much smaller and lighter and
more rugged and water-resistant to handle a hostile outdoor environment. The FirstVu HD can be used in many applications in addition to law enforcement and private security
and is designed specifically to be clipped to an individual’s pocket or other outer clothing. The unit is self-contained and requires no external battery or storage devices. Our
FirstVU HD integrates with our in-car video systems through our patented VuLink system allowing for automatic activation of both systems.
With the newly introduced body-worn cameras, Digital Ally also introduced two new QuickVu docking stations compatible with the FirstVu PRO and FirstVu II body-
worn cameras. The QuickVu docking stations provide a comprehensive and elegant solution for storing and charging body cameras while uploading video evidence to the
cloud. QuickVu also allows for rapid reviewing of footage right from the interactive touchscreen display, and is available in eight or twenty-four individual docking bays. For
docking with the FirstVu HD body-worn cameras, Digital Ally offers a 12-bay docking station and Mini-Docks. The 12-bay docking station includes a 1TB local memory hard
drive which simultaneously upload 4 hours of video from 12 FirstVu HD cameras within a 15-minute shift change and push configuration updates. The Mini-Dock is a single
unit, portable smart dock that uploads video evidence to VuVault from a FirstVu HD body camera.
Auto-activation and Interconnectivity Between In-car Video Systems and Body-worn Camera Products – VuLink for Law Enforcement
Recognizing a critical limitation in law enforcement camera technology, we pioneered the development of our VuLink ecosystem that provides intuitive auto-activation
functionality as well as coordination between multiple recording devices. The United States Patent and Trademark Office (the “USPTO”) has recognized these pioneering
efforts by granting us multiple patents with claims covering a variety of triggers, including emergency lights and sirens, extreme acceleration or braking, g-force or any 12-volt
relay. Additionally, the awarded patent claims cover automatic coordination between multiple recording devices. Prior to our VuLink ecosystem, officers had to manually
activate each device while responding to emergency scenarios, a requirement that both decreased the usefulness of the existing camera systems and diverted officers’ attention
during critical moments.
EVO Web and FleetVu Manager
EVO Web is a web-based software, powered by and hosted on the AWS GovCloud platform, that enables police departments and security agencies to manage digital
video evidence quickly and easily. EVO Web is capable of playing back, reviewing, downloading, archiving, unit configuration and management, running customizable reports
and maintaining a chain of custody logs. AWS is the most secure cloud platform on the market with features that go beyond simply storing and reviewing video evidence. AWS
GovCloud platform is trusted by the Department of Justice, Defense Digital Services for the US Air Force, U.S. Department of Treasury, and U.S. Department of Homeland
Security. Our products that are compatible with EVO Web include: FirstVu Pro, FirstVu II, FirstVu HD, QuickVu, EVO-HD, DVM-800 and DVM-800 Lite.
FleetVu Manager is a web-based software that provides commercial fleet managers with the tools to increase driver safety, track assets in real-time and minimize their
companies’ liability risks. FleetVu Manager is able to generate driver reports, identify at risk behaviors before an incident takes place, and enable commercial fleet managers to
manage the entire fleet through a single, easy to use platform. Our products compatible with FleetVu Manager include: DVM-250 and FLT-250.
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ShieldTM Heath Protection Products
The Company’s ShieldTM brand offers a variety of products to help keep you safe, including; Shield Cleansers, ThermoVu, Shield Electrostatic Sprayer, Shied
Disinfectant, and a variety of personal protection equipment including masks, gloves and sanitizer wipes.
Shield Cleansers is a full line of safe and effective hypochlorous acid (HOCl) based products - and is free of toxic bleach, ammonia, methanol, ethanol, and alcohol
ingredients. Shield Disinfectant is EPA approved and has shown effectiveness against SARS-COV-2, the virus that causes the novel COVID-19 disease. Other products in the
Shield brand include animal wellness products, wound care, and household cleaning solutions.
ThermoVu is a non-contact temperature-screening instrument that measures temperature through the wrist and controls entry to facilities when temperature
measurements exceed pre-determined parameters. ThermoVu has optional features such as facial recognition to improve facility security by restricting access based on
temperature and/or facial recognition reasons. ThermoVu provides an instant pass/fail audible tone with its temperature display and controls access to facilities based on such
results.
Shield Electrostatic Sprayer is a compact and lightweight disinfecting sprayer utilizing electrostatic induction. The charged particles repel each other and affix to
surfaces more evenly, eliminating large droplets for better disinfecting coverage. It is ideal for use in office buildings, schools, and other populated areas.
The Company has been distributing other personal protective equipment and supplies, since the second quarter of 2021, such as masks and gloves to supplement its
Shield brand of products to health care workers as well as other consumers, consisting of vinyl and nitrile gloves, level 3 and N95 NIOSH certified face masks, and disposable
wipes.
Our Revenue Management Operating Segment Products and Services
Through our revenue cycle management segment, we provide assistance in providing working capital and back-office services to healthcare organizations throughout
the country. Our RCM operating segment services consist of insurance and benefit verification, medical treatment documentation and coding, and collections. Through our
expertise and experience in this field, we maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins and cash flows.
We generally receive a service fee based on a percentage of the service revenues collected by our customers.
Our Entertainment Operating Segment Products and Services
Through our entertainment segment, we provide customers with access to the online live event ticketing marketplace through our online platform -
TicketSmarter.com. Offering over 48 million tickets for sale for over 125,000 live events, TicketSmarter is a national ticket marketplace offering tickets for live events
featuring sports, concerts and theatre. TicketSmarter is the official ticket resale partner of more than 35 collegiate conferences, over 300 universities, and hundreds of events and
venues.
Our entertainment operating segment primarily receives compensation for its services generally determined as a percentage of the face-value of the tickets being
purchased. Our entertainment operating segment also provides customers with access to tickets which it has purchased or received in return for its sponsorship or partnership
from the venue, event or owner.
Market and Industry Overview – Video Solutions Operating Segment
Our video solutions segment has historically had a primary market of domestic and international law enforcement agencies. We have since expanded our scope by
pursuing the commercial fleet vehicle and mass transit markets. Additionally, we have expanded into event security services where we provide the hardware and software to
supplement private security for NASCAR races, football and other sporting events, concerts and other events where people gather. We continue to further expand our focus on
private security, homeland security, mass transit, healthcare, general retail, educational, general consumer and other commercial markets. In that regard, we have several
installations involving private security on cruise ships and similar markets. We believe there are many potential private uses of our product offerings. We continue to have sales
in the commercial fleet and ambulance service provider market, confirming that our DVM-250 Plus and FLT-250 products and FleetVu Manager can become a significant
revenue producer for us. Additionally, our body-worn cameras have applications in law enforcement, along with private and event security, as well as commercial segments.
With the recent acquisitions we completed in 2021, we hope to utilize the connections we now have to live events, stadiums, and arenas, as well as new medical connections.
8
Market and Industry Overview – Revenue Cycle Management Operating Segment
Our revenue cycle management segment consists of end-to-end revenue cycle management services that focuses on claim reimbursement billing, verification, and
related services to medical providers throughout the country. We offer agreements with customers in which we provide our services and bill the customers monthly for our
services. The healthcare industry in the United States represents a strong portion of the United States’ economy, offering a robust market for these services. Our current market
includes many diverse specialties, including radiology, oncology, orthopedics, pediatrics, internal medicine, and cardiology. We continue to investigate ways to expand our
market reach, although can make no assurances in that regard.
Market and Industry Overview – Entertainment Operating Segment
Our entertainment segment refers to the sale of event tickets primarily through our online and mobile platforms. We will buy inventory of event ticket to then sell
tickets through various platforms, including our own. Our resale services refer to the sale of tickets by a holder, who originally obtained the tickets directly from a venue or
entity, through our platform in which we then collect services fees on the transaction. This is commonly referred to as secondary ticketing. We work directly with consumers
looking to buy or sell event tickets for particular shows, concerts, games, and other events, allowing a simple and effective platform to move tickets. We also currently partner
with more than 35 collegiate conferences, over 300 universities, and hundreds of events and venues.
Competition - Video Solutions Operating Segment
Our video solutions segment, consisting of law enforcement and security surveillance markets, is extremely competitive. Competitive factors in these industries include
ease of use, quality, portability, versatility, reliability, accuracy and cost. There are direct competitors with technology and products in the law enforcement and surveillance
markets for all of our products, including those that are in development. Many of these competitors have significant advantages over us, including greater financial, technical,
marketing and manufacturing resources, more extensive distribution channels, larger customer bases and faster response times to adapt new or emerging technologies and
changes in customer requirements. Our primary competitors in the in-car video systems market include L-3 Mobile-Vision, Inc., Coban Technologies, Inc., Enforcement Video,
LLC d/b/a WatchGuard Video (“WatchGuard”), Kustom Signals, Panasonic System Communications Company, International Police Technologies, Inc. and a number of other
competitors who sell, or may in the future sell, in-car video systems to law enforcement agencies. Our primary competitors in the body-worn camera market include Axon
Enterprises, Inc. (“Axon”), Reveal Media, WatchGuard, and VieVU, Inc., which was acquired by Axon in 2018. We face similar and intense competitive factors for our event
recorders in the commercial fleet and private security markets as we do in the law enforcement and security surveillance markets. There can be no assurance that we will be able
to compete successfully in these markets. Further, there can be no assurance that new and existing companies will not enter the law enforcement and security surveillance
markets in the future. The commercial fleet security and surveillance markets likewise are also very competitive. There are direct competitors for our FLT-250 and DVM-250
Plus “event recorders,” which may have greater financial, technical marketing, and manufacturing resources than we do. Our primary competitors in the commercial fleet sector
include Lytx, Inc. (previously DriveCam, Inc.) and SmartDrive Systems, among others.
9
Competition – Revenue Cycle Management Operating Segment
Our revenue cycle management segment is a highly competitive market that is only intensifying as the market continues to grow. We face competition from a variety
of sources, including internal revenue cycle management departments within healthcare organizations, as these organizations are beginning to make internal investments in
these departments to keep these services in house. Additionally, other revenue cycle management providers exist and offer similar services through software vendors, traditional
consultants, and information technology sources.
Competition – Entertainment Operating Segment
Our entertainment segment faces robust competition from several sources throughout the industry. As the online and mobile ticketing market continues to increase, it
has allowed for more technology-based companies to offer ticketing services and systems. The online environment consists of numerous other websites and platforms for all
markets. With the market continuing to grow, resale marketplaces and websites can reach a vastly larger audience with more convenient access to tickets for a wide variety of
events. We continue to build our brand and recognition, through the numerous partnerships and sponsorships throughout the country, in attempt to become a preferred platform
for consumers.
Worldwide Reinsurance Ltd.
In December 2021, the Company formed a wholly-owned subsidiary, Worldwide Reinsurance Ltd. (“Worldwide Re”), a Bermuda incorporated captive insurance
company that will provide primarily liability insurance coverage to the Company for which insurance may not be currently available or economically feasible in today’s
insurance marketplace.
Worldwide Re is subject to capital and other regulatory requirements imposed by the Bermuda Monetary Authority (“BMA”). Although these capital requirements are
generally less constraining than U.S. capital requirements, failure to satisfy these requirements could result in regulatory actions from the BMA or loss of or modification of
Worldwide Re’s Class 1 insurer license, which could adversely impact our ability to support our insurance needs and to grow this business into another line of business for our
holding company. To date, our captive’s relatively immature claims history limits the predictive value of estimating the costs of incurred and future claims. Accordingly, the
captive could continue to incur significant fluctuations in financial results as the captive provides insurance coverage to Digital Ally and its affiliated businesses and seeks to
expand beyond our affiliated companies to offer coverage for third parties.
Intellectual Property – Video Solutions Operating Segment
Our video solutions operating segment’s ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States
and abroad. We have filed for patent protection in the United States and certain other countries to cover certain design aspects of our products.
Some of our patent applications are still under review by the USPTO and, therefore, we have not yet been issued all the patents that we applied for in the United States.
We were issued several patents in recent years, including a patent on our VuLink product that provides automatic triggering of our body-worn camera and our in-car video
systems. No assurance can be given which, or any, of the patents relating to our existing technology will be issued from the United States or any foreign patent offices.
Additionally, no assurance can be given that we will receive any patents in the future based on our continued development of our technology, or that our patent protection
within and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.
We have entered into supply and distribution agreements with several companies that produce certain of our products, including our DVM-250 and DVM-800
products. These supply and distribution agreements contain certain confidentiality provisions that protect our proprietary technology, as well as that of the third-party
manufacturers.
In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a
competitive advantage. Although we have entered into or intend to enter into confidentiality and invention agreements with our employees, consultants and advisors, no
assurance can be given that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover,
no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade
secrets and know-how.
10
Intellectual Property – Revenue Cycle Management Operating Segment
Our revenue cycle management’s operating segment’s ability to compete effectively primarily depends on our trade secrets and know-how and does not depend heavily
on any proprietary technology or patents.
Intellectual Property – Entertainment Operating Segment
Our entertainment operating segment’s ability to compete effectively primarily depends on our trade secrets and know-how and does not depend heavily on any
proprietary technology or patents.
Human Capital
As of December 31, 2022, Digital Ally, and its subsidiaries, had approximately 201 full-time employees spread throughout the country, representing the core values
and objectives of the Company. These employees are spread amongst our operating segments as follows:
Employee headcount:
Video Solutions
Revenue Cycle Management [1]
Entertainment
Total Employee Headcount
As of
December 31,
2022
109
78
14
201
[1] Our revenue cycle management operating segment has no direct employees. Nobility Healthcare, our minority interest partner provides all human capital resources
to manage and operate the Company’s revenue cycle management operating segment.
Our employees are our most important assets and they set the foundation for our ability to achieve our strategic objectives. All of our employees contribute to Digital
Ally’s success and, in particular, the employees in our manufacturing, sales, research and development, and quality assurance departments are instrumental in driving
operational execution and strong financial performance, advancing innovation and maintaining a strong quality and compliance program.
Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We strive to create a culture and work
environment that enables us to attract, train, promote, and retain a diverse group of talented employees who together can help us gain a competitive advantage. Our key
programs and initiatives that are focused to attract, develop and retain our diverse workforce include:
● Compensation Programs and Employee Benefits: the main objective of Digital Ally’s compensation program is to provide a compensation package that will attract,
retain, motivate and reward superior employees who must operate in a highly competitive and technologically challenging environment. We seek to do this by linking
annual changes in compensation to overall Company performance, as well as each individual’s contribution to the results achieved. The emphasis on overall Company
performance is intended to align the employee’s financial interests with the interests of shareholders. Digital Ally also seeks fairness in total compensation with
reference to external comparisons, internal comparisons and the relationship between management and non-management remuneration. The structure of our
compensation programs balances incentive earnings for both short-term and long-term performance. Specifically:
11
● We provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location.
● We align our executives’ long-term equity compensation with our shareholders’ interests by linking realizable pay with stock performance.
● Annual increases and incentive compensation are based on merit, which is communicated to employees at the time of hiring and documented through our talent
management process as part of our annual review procedures and upon internal transfer and/or promotion.
● All employees are eligible for health insurance, paid and unpaid leaves, short-term disability, worker’s compensation, long-term disability, a retirement plan and
life and disability/accident coverage. We also offer a variety of voluntary benefits that allow employees to select the options that meet their needs.
Item 1A.
Risk Factors.
Not applicable.
Item 1B.
Unresolved Staff Comments.
None.
12
Item 2.
Properties.
On May 13, 2020, the Company entered into an operating lease for new warehouse and office space which had served as its principal executive office and primary
business location, prior to the completed building purchase. The Company plans to relocate the entertainment operating segment operations to this existing leased facility in
2023. This facility contains approximately 16,531 square feet and is located at 15612 College Blvd, Lenexa, Kansas 66219. The lease terms, as amended, include no base rent
for the first nine months and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 31, 2026.
On April 30, 2021, the Company closed on the purchase and sale agreement to acquire a 71,361 square feet commercial office building located in Lenexa, Kansas
which is intended to serve as the Company’s future office and warehouse needs for executive offices and for management and warehouse operations for the video solutions
operating segment. The building contains approximately 30,000 square feet of office space and the remainder warehouse space. The total purchase price was approximately $5.3
million. The Company funded the purchase price with cash on hand, without the addition of external debt or other financing.
On June 30, 2021, the Company completed the acquisition of a private medical billing company, through Nobility Healthcare, a majority owned subsidiary. Upon
completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging
from $2,648 to $2,774 and terminate in July 2024. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing owned or
leased facilities upon termination of this operating lease.
On August 31, 2021, the Company completed the acquisition of another private medical billing company, through Nobility Healthcare. Upon completion of this
acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $11,579 to
$11,811 and terminate in March 2023. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing owned or leased
facilities upon termination of this operating lease.
On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC, through TicketSmarter. Upon completion of this
acquisition, the Company became responsible for the operating lease for the TicketSmarter office space. The lease terms included monthly payments ranging from $7,211 to
$7,364 and expired in December 2022. The Company signed a six month extension through June 2023, and plans to relocate the entertainment operating segment operations at
that time.
On January 1, 2022, the Company completed the acquisition of another private medical billing company, through Nobility Healthcare. Upon completion of this
acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $4,233 to
$4,626 and terminate in June 2025. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing owned or leased facilities
upon termination of this operating lease.
Item 3.
Legal Proceedings.
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.
13
While the ultimate resolution is unknown, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect to our results of
operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages
that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance
coverage and will not have a material adverse effect on our operating results, financial condition or cash flows.
Culp McCauley
On May 31, 2022, the Company filed a lawsuit against Culp McAuley, Inc. (“defendant”) in the United States District Court for the District of Kansas. The lawsuit
arises from the defendant’s multiple breaches of its obligations to the Company. The Company seeks monetary damages and injunctive relief based on certain conduct by the
defendant. On July 18, 2022, the defendant filed its Answer to the Company’s Verified Complaint and included Counterclaims alleging breach of contract and seeking monetary
damages. On August 8, 2022, the Company filed its Reply and Affirmative Defenses to the Counterclaims by, among other things, denying the allegations and any and all
liability. We have not concluded that a material loss related to the allegations is probable, nor have we accrued a liability related to these claims. Although we believe a loss
could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the
potential damages given that the dispute is yet to enter the discovery process. We will continue to vigorously pursue these claims, and we continue to believe that we have valid
grounds for recovery of the disputed deliverables. However, there can be no assurances as to the outcome of the dispute.
Item 4.
Mine Safety Disclosures.
Not applicable.
14
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Holders of Common Stock
As of March 31, 2023, we had approximately 170 shareholders of record for our Common Stock.
Dividend Policy
To date, we have not declared or paid cash dividends on our shares of Common Stock. The holders of our Common Stock will be entitled to non-cumulative dividends
on the shares of Common Stock, when and as declared by our board of directors (“Board of Directors” or “Board”) in its discretion. We intend to retain all future earnings, if
any, for our business and do not anticipate paying cash dividends in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, capital
requirements, general business conditions and such other factors as our Board may deem relevant.
Recent Sales of Unregistered Securities
Except as previously reported by the Company on its Quarterly Reports on Form 10-Q or its Current Reports on Form 8-K, as applicable, we did not sell any securities
during the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act.
Item 6.
[Reserved].
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate
future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations
or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are
beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place
undue reliance on such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide
variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that
the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but
are not limited to: (1) our losses in recent years, including fiscal years 2022 and 2021; (2) economic and other risks for our business from the effects of the COVID-19
pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to
increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and
uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law
enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to deliver our new product offerings as scheduled in 2023, and whether new
products perform as planned or advertised and whether they will help increase our revenues; (7) whether we will be able to increase the sales, domestically and internationally,
for our products in the future; (8) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete,
including increasing our international revenues; (9) our ability to produce our products in a cost-effective manner; (10) competition from larger, more established companies
with far greater economic and human resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities as customers;
(13) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (14) characterization of our
market by new products and rapid technological change; (15) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to
profitability; (16) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (17) our dependence on key
personnel; (18) our reliance on third-party distributors and sales representatives for part of our marketing capability; (19) our dependence on a few manufacturers and suppliers
for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (20) our ability to protect technology through patents
and to protect our proprietary technology and information, such as trade secrets, through other similar means; (21) our ability to generate more recurring cloud and service
revenues; (22) risks related to our license arrangements; (23) our revenues and operating results may fluctuate unexpectedly from quarter to quarter; (24) sufficient voting power
by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other
stockholders; (25) the sale of substantial amounts of our Common Stock that may have a depressive effect on the market price of the outstanding shares of our Common Stock;
(26) the possible issuance of Common Stock subject to options and warrants that may dilute the interest of stockholders; (27) our nonpayment of dividends and lack of plans to
pay dividends in the future; (28) future sale of a substantial number of shares of our Common Stock that could depress the trading price of our common stock, lower our value
and make it more difficult for us to raise capital; (29) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our
Common Stock; (30) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (31) whether such technology will have
a significant impact on our revenues in the long-term; (32) whether we will be able to meet the standards for continued listing on the Nasdaq Capital Market; and (33)
indemnification of our officers and directors.
15
Current Trends and Recent Developments for the Company
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; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as “event
recorders” for the commercial fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and
broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu® which is a line of self-contained temperature monitoring
stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are
for use against viruses and bacteria.
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 have since completed three additional acquisitions of private medical billing companies, in which we will assist in
providing working capital and back-office services to healthcare organizations throughout the country. Our assistance consists of insurance and benefit verification, medical
treatment documentation and coding, and collections. Through our expertise and experience in this field, we maximize our customers’ service revenues collected, leading to
substantial improvements in their operating margins and cash flows.
Entertainment Operating Segment - We also entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary,
TicketSmarter and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter provides ticket sales, partnerships, and
mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events through its
platform, for a wide range of events, including concerts, sporting events, theatres, and performing arts, throughout the country.
Segment Overview
Our reportable segments are: 1) video solutions, 2) revenue cycle management, and 3) entertainment.
Video Solutions Operating Segment
Our video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and the sale of Shield
disinfectant and personal protective products. This segment generates revenues our subscription models offering cloud and warranty solutions, and hardware sales for video and
personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty
subscription plans are deferred over the term of the subscription, typically 3 or 5 years.
16
To judge the health of our video solutions segment, we review the current active subscriptions and deferred service revenues, along with the quantity and gross margins
generated by our video solutions hardware sales.
Revenue Cycle Management Operating Segment
Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform our obligations of our
revenue cycle management services. Our revenue cycle management segment is services performed and such services are charged monthly, generally based on a contractual
percentage of total customer collections, for which we recognize our net service fees.
To judge the health of our revenue cycle management segment, we review the collection success rate and collection timing. In addition, we review the associated costs
incurred to assist our customers, and any changes in operating margins and cash flows.
Entertainment Operating Segment
Our entertainment operating segment consists of ticketing services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this
segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are
recognized when the underlying tickets are sold. Ticketing direct expenses include the cost of tickets purchased for resale by the Company and holds as inventory, credit card
fees, ticketing platform expenses, website maintenance fees, along with other administrative costs.
To judge the health of our entertainment operating segment, we review the gross transaction value, which represents the total value related to a ticket sale and includes
the face value of the ticket as well as the service charge. In addition, we review the number of visits to our websites, cost of customer acquisition, the purchase conversion rate,
the overall number of customers in our database, and the number and percentage of tickets sold via the website and mobile app.
Summary Financial Data
Summarized financial information for the Company’s reportable business segments is provided for the years ended December 31, 2022, and 2021:
Net Revenues:
Video Solutions
Revenue Cycle Management
Entertainment
Total Net Revenues
Gross Profit (loss):
Video Solutions
Revenue Cycle Management
Entertainment
Total Gross Profit
Operating Income (loss):
Video Solutions
Revenue Cycle Management
Entertainment
Corporate
Total Operating Income (Loss)
Depreciation and Amortization:
Video Solutions
Revenue Cycle Management
Entertainment
Total Depreciation and Amortization
Assets (net of eliminations):
Video Solutions
Revenue Cycle Management
Entertainment
Corporate
Total Identifiable Assets
Years Ended December 31,
2022
2021
8,252,288
7,886,107
20,871,500
37,009,895
(1,250,277)
3,303,477
268,741
2,321,941
(9,278,721)
357,705
(7,369,241)
(13,443,001)
(29,733,258)
769,228
128,082
1,279,369
2,176,679
28,509,706
2,201,570
11,190,491
14,766,295
56,668,062
$
$
$
$
$
$
$
$
$
$
9,073,626
1,630,048
10,709,760
21,413,434
2,002,345
521,047
3,140,383
5,663,775
(4,497,196)
93,763
235,432
(10,592,909)
(14,760,910)
395,361
—
427,128
822,489
25,983,348
934,095
12,260,780
43,810,974
82,989,197
$
$
$
$
$
$
$
$
$
$
17
Segment net revenues reported above represent only sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating
income (loss), which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets
are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other
assets.
Consolidated Results of Operations
We experienced operating losses for all quarters during 2022 and 2021. The following is a summary of our recent operating results on a quarterly basis:
Total revenue
Gross profit
Gross profit margin percentage
Total selling, general and administrative expenses
Operating loss
Operating loss percentage
Net income/(loss)
December
31, 2022
$ 8,879,504
(1,932,256)
(21.8)%
7,769,389
(9,701,645)
(109.3)%
September
30, 2022
$ 8,484,153
595,500
7.0%
7,162,523
(6,567,023)
(77.4)%
June 30,
2022
$ 9,351,457
1,719,078
18.4%
8,380,330
(6,661,252)
(71.2)%
For the Three Months Ended:
December
March 31,
31, 2021
2022
$ 11,744,112
$ 10,294,781
2,190,523
1,939,619
18.8%
8,742,957
(6,803,338)
(66.1)%
18.7%
7,869,883
(5,679,360)
(48.4)%
September
30, 2021
$ 4,639,822
1,400,570
30.2%
4,999,543
(3,598,973)
June 30,
2021
$ 2,493,671
1,260,800
50.6%
3,877,684
(2,616,884)
March 31,
2021
$ 2,535,829
811,882
32.0%
3,677,575
(2,865,693)
(77.6)%
(104.9)%
(113.0)%
$ (9,574,258)
$ (1,919,071)
$
(682,187)
$ (6,698,242)
$ 1,122,791
$ 8,068,799
$ (5,382,487)
$ 21,721,858
Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table.
These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently
released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods
sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation
settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; and (7) the completion of corporate acquisitions including the recent
purchases in the revenue cycle management and entertainment operating segments. We reported net loss of $9,574,258 on revenues of $8,879,504 for the fourth quarter of 2022.
18
The factors and trends affecting our recent performance include:
● The Company formed two new operating segments in 2021 and revenues increased in the first through third quarters of 2022 compared to the same quarters in
2021. The primary reason for the revenue increase in 2022 is the completion of three acquisitions in 2021, being TicketSmarter which is included in our
entertainment operating segment and two acquisitions of medical billing companies through our revenue cycle management operating segment, paired with two
further acquisitions within the revenue cycle management operating segment in the first quarter of 2022. The new entertainment operating segment generated
$20,871,500 in revenue in 2022, and our revenue cycle management operating segment generated $7,886,107 in revenues for 2022. We expect to continue to
experience improved results from our two new operating segments and their recent acquisitions, along with improved results from the video solutions segment as
the recurring revenue model expands.
● Our objective is to expand our video solutions segment’s recurring service revenue to help stabilize our revenues on a quarterly basis. Revenues from cloud
storages have been increasing in recent quarters and reached approximately $431,167 in the fourth quarter of 2022, an increase of $128,533 (42%) over the fourth
quarter of 2021. Overall, cloud revenues increased to approximately $1,471,860 for the year ended December 31, 2022 compared to approximately $1,055,965 for
the year ended December 31, 2021, an increase of $415,895, or 39%. We are pursuing several new market channels outside of our traditional law enforcement and
private security customers, similar to our NASCAR and event security customers, which we believe will help expand the appeal of our products and service
capabilities to new commercial markets. If successful, we believe that these new market channels could yield recurring service revenues for us in the future.
● We have a multi-year official partnership with NASCAR, naming us “A Preferred Technology Provider of NASCAR.” As part of the relationship, we provide
cameras that are mounted in the Monster Energy NASCAR Cup Series garage throughout the season, bolstering both NASCAR’s commitment to safety at every
racetrack, as well as enhancing its officiating process through technology. Our relationship with NASCAR has yielded many new opportunities with NASCAR
related sponsors. We believe this partnership with NASCAR demonstrates the flexibility of our product offerings and will help expand the appeal of our products
and service capabilities to new commercial markets. We also have an affiliation with the Indy series races and, in particular, the Rahal Letterman Lanigan Racing
team which has several cars in most Indy style races. These relationships provide us with access to many potential customers through the various programs
supported by both the NASCAR and Indy-Style car race series.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with
any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations,
liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 15, “Commitments and Contingencies,”
to our consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and
services.
19
For the Years Ended December 31, 2022 and 2021
Results of Operations
Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31,
2022 and 2021, represented as a percentage of total revenues for each respective year:
Years Ended December 31,
2022
2021
Revenue
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
Change in fair value of derivative liabilities
Change in fair value of contingent consideration promissory notes and earn-out
agreements
Warrant modification expense
Change in fair value of short-term investments
Gain on extinguishment of warrant derivative liability
Gain on extinguishment of debt
Gain on sale of property, plant and equipment
Interest income (expense) and other income, net
Income (loss) before income tax benefit
Income tax expense (benefit)
Net income (loss)
Net loss attributable to noncontrolling interests of consolidated subsidiary
Loss on redemption – Series A & B convertible redeemable preferred stock
Net income (loss) attributable to common stockholders
Net income (loss) per share information:
Basic
Diluted
100%
94%
6%
6%
25%
55%
87%
(80)%
18%
1%
—%
—%
10%
—%
1%
(1)%
(51)%
—%
(51)%
(1)%
(6)%
(59)%
100%
74%
26%
9%
27%
60%
96%
(69)%
171%
17%
(1)%
—%
—%
—%
—%
1%
119%
—%
119%
—%
—%
119%
$
$
(8.50)
(8.50)
$
$
10.14
10.14
Revenues
Revenues by Type and by Operating Segment
Our operating segments generate two types of revenues:
Product revenues primarily includes video operating segment hardware sales of in-car and body-worn cameras, along with sales of our 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.
20
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 segments’ secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated
through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management
segment revenues are included in the service revenues for services provided to medical providers throughout the country.
The following table presents revenues by type and segment:
Product revenues:
Video solutions
Entertainment
Total product revenues
Service and other revenues:
Video solutions
Entertainment
Revenue cycle management
Total service and other revenues
Total revenues
2022
Year Ended December 31,
% Change
2021
5,401,089
5,598,803
10,999,892
2,851,199
15,272,697
7,886,107
26,010,003
37,009,895
$
$
21
(15.5)% $
100.9%
19.8%
6.4%
92.8%
384.0%
112.6%
72.8%
$
6,393,050
2,787,237
9,180,287
2,680,576
7,922,523
1,630,048
12,233,147
21,413,434
Our video 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.
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 for the years ended December 31, 2022 and 2021 were $10,999,892 and $9,180,287, respectively, an increase of $1,819,605 (20%), due to the
following factors:
●
●
Revenues generated by the new entertainment operating segment began with the Company’s acquisition of TicketSmarter on September 1, 2021. The new
entertainment operating segment generated $5,598,803 in product revenues for the year ended December 31, 2022, compared to $2,787,237 for the fiscal year
ended December 31, 2021. This largely relates to the Company having a full year of activity in 2022, in comparison to just four months of activity post-
acquisition in 2021.
The Company’s video solutions operating segment generated product revenues totaling $5,401,089 during the year ended December 31, 2022 compared to
$6,393,050 for the year ended December 31, 2021. 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 over the year ended December 31, 2022 due to price-cutting and competitive actions by our competitors, adverse
marketplace effects related to our patent litigation proceedings and our recent financial condition.
22
●
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.
Service and other revenues for the years ended December 31, 2022 and 2021 were $26,010,003 and $12,233,147, respectively, an increase of $13,776,856 (113%), due
to the following factors:
●
●
●
●
Cloud revenues generated by the video solutions operating segment were $1,471,860 and $1,055,965 for the years ended December 31, 2022 and 2021,
respectively, an increase of $415,895 (39%). 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 increased cloud
revenues in the year ended December 31, 2022. We expect this trend to continue for 2023 as the migration from local storage to cloud storage continues in our
customer base.
Video solutions operating segment revenues from extended warranty services were $692,017 and $978,018 for the years ended December 31, 2022 and 2021,
respectively, an decrease of $286,001 (29%). This correlates with the decrease in sales of DVM-800 hardware systems resulting in a decrease in their
associated extended warranty.
Our new entertainment operating segment generated service revenues totaling $15,272,697 and $7,922,523 for the years ended December 31, 2022 and 2021,
respectively, an increase of $7,350,174 (93%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC in the third quarter
of 2021, thus resulting in the new revenue stream for the Company during the last fourth months of 2021 and twelve months ended December 31, 2022.
TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events
throughout the country. This increase reflects a full twelve months of service revenues by our entertainment operating segment, which we hope will continue
to present a strong revenue outlook moving forward.
Our new revenue cycle management operating segment generated service revenues totaling $7,886,107 and $1,630,048 for the years ended December 31,
2022 and 2021, respectively, an increase of $6,256,059 (384%). Our revenue cycle management operating segment has completed four acquisitions since
formation in June 2021, thus resulting in the new service revenue stream added in the twelve months ended December 31, 2022. Our revenue cycle
management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country.
We expect our revenue cycle management segment to continue to present a strong revenue outlook moving forward.
Total revenues for the years ended December 31, 2022, and 2021 were $37,009,895 and $21,413,434, respectively, an increase of $15,596,461 (73%), due to the
reasons noted above.
23
Cost of Product Revenue
Overall cost of product revenue sold for the years ended December 31, 2022, and 2021 was $14,372,115 and $8,635,047, respectively, an increase of $5,737,068
(66%). Overall cost of goods sold for products as a percentage of product revenues for the years ended December 31, 2022, and 2021 were 131% and 94%, respectively. Cost of
products sold by operating segment is as follows:
Cost of Product Revenues:
Video Solutions
Revenue Cycle Management
Entertainment
Total Cost of Product Revenues
Years Ended December 31,
2022
2021
$
$
8,332,484
—
6,039,631
14,372,115
$
$
6,197,061
—
2,437,986
8,635,047
The increase in cost of goods sold for our video solutions segment products is due to numerous factors including a sizeable increase in the allowance for excess and
obsolete inventory, mostly surrounding the personal protective equipment product line. Cost of product sold as a percentage of product revenues for the video solutions segment
increased to 154% for the year ended December 31, 2022 as compared to 97% for the year ended December 31, 2021.
The increase in entertainment operating segment cost of product sold is due to the September 1, 2021 acquisition of TicketSmarter, resulting in a full twelve months of
cost of product revenues for the year ended December 31, 2022, and an increase to cost of product revenue of $3,601,645 for the year ended December 31, 2022 compared to
$2,437,986 for the year ended December 31, 2021. Cost of product sold as a percentage of product revenues for the entertainment segment increased to 108% for the year ended
December 31, 2022 as compared to 87% for the year ended December 31, 2021.
We recorded $5,489,541 and $3,353,458 in reserves for obsolete and excess inventories for the years ended December 31, 2022 and 2021, respectively. Total raw
materials and component parts were $4,509,165 and $3,062,046 for the years ended December 31, 2022 and 2021, respectively, an increase of $1,447,119 (47%). Finished
goods balances were $7,816,618 and $10,512,579 for the years ended December 31, 2022 and December 31, 2021, respectively, a decrease of $2,695,961 (26%) which was
attributable to a reduction in inventory for the video solutions product lines and a large decrease in ticket inventory for the newly acquired entertainment segment. The increase
in the inventory reserve is primarily due to inventory obsolescence for the level of component parts of the older versions of our printed circuit boards and the phase out of our
DVM-750, DVM-500 Plus, LaserAlly legacy products, ThermoVu products, and personal protective equipment. Additionally, the Company determined a reasonable reserve for
inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We
believe the reserves are appropriate given our inventory levels as of December 31, 2022.
Cost of Service Revenue
Overall cost of service revenue sold for the years ended December 31, 2022, and 2021 was $20,315,839 and $7,114,612, respectively, an increase of $13,201,227
(186%). Overall cost of goods sold for services as a percentage of service revenues for the years ended December 31, 2022, and 2021 were 78% and 58%, respectively. Cost of
service revenues by operating segment is as follows:
Cost of Service Revenues:
Video Solutions
Revenue Cycle Management
Entertainment
Total Cost of Service Revenues
Years Ended December 31,
2022
2021
$
$
1,170,081
4,582,630
14,563,128
20,315,839
$
$
874,219
1,109,001
5,131,392
7,114,612
24
The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the year ended December 31, 2022
compared to the year ended December 31, 2021. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 41% for the year
ended December 31, 2022 as compared to 33% for the year ended December 31, 2021.
The increase in revenue cycle management operating segment cost of service revenue is due to the four completed acquisitions of medical billing companies in late
2021 and early 2022. Cost of service revenues as a percentage of product revenues for the revenue cycle management operating segment decreased to 58% for the year ended
December 31, 2022 as compared to 68% for the year ended December 31, 2021.
The increase in entertainment operating segment cost of service revenues is due to the September 1, 2021 acquisition of TicketSmarter, resulting in an increase to cost
of service revenue to $14,563,128 for the year ended December 31, 2022, compared to $5,131,392 for the year ended December 31, 2021. Cost of service revenues as a
percentage of service revenues for the entertainment increased to 95% for the year ended December 31, 2022 as compared to 65% for the year ended December 31, 2021.
Gross Profit
Overall gross profit for the years ended December 31, 2022 and 2021 was $2,321,941 and $5,663,775, respectively, a decrease of $3,341,833 (59%). Gross profit by
operating segment was as follows:
Gross Profit:
Video Solutions
Revenue Cycle Management
Entertainment
Total Gross Profit
Years Ended December 31,
2022
2021
$
$
(1,250,278)
3,303,477
268,742
2,321,941
$
$
2,002,345
521,047
3,140,383
5,663,775
The overall decrease is attributable to the increase in cost of goods sold across our video and entertainment segments for the year ended December 31, 2022, as there
was an overall increase in the cost of sales as a percentage of overall revenues to 94% for the year ended December 31, 2022 from 74% for the year ended December 31, 2021.
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, ShieldTM disinfectants
and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase,
we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to
continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.
Selling, General and Administrative Expenses
Overall selling, general and administrative expenses were $32,055,199 and $20,424,685 for the years ended December 31, 2022 and 2021, respectively, an increase of
$11,630,514 (57%). The increase was primarily attributable to the recent acquisitions completed in the first quarter of 2022 and third quarter of 2021. Our selling, general and
administrative expenses as a percentage of sales decreased to 87% for 2022 compared to 95% in the same period in 2021.
The significant components of selling, general and administrative expenses are as follows:
Research and development expense
Selling, advertising and promotional expense
Professional fees and expense
Executive, sales, and administrative staff payroll
Other
Total
Year ended December 31,
2022
2021
$
$
2,290,293
9,312,204
3,297,895
6,544,711
10,610,096
32,055,199
$
$
1,930,784
5,717,824
1,513,862
3,288,360
7,973,855
20,424,685
25
Selling, general and administrative expenses by operating segment are as follows:
Selling, general and administrative expenses:
Video Solutions
Revenue Cycle Management
Entertainment
Corporate
Total selling, general and administrative expenses
Years Ended December 31,
2022
2021
$
$
9,950,263
2,575,592
1,681,997
17,847,347
32,055,199
$
$
6,231,254
427,284
2,904,951
10,861,196
20,424,685
Research and development expense. Our video solutions operating segment continues to focus on bringing new products to market, including updates and
improvements to current products. Our research and development expenses totaled $2,290,293 and $1,930,784 for the years ended December 31, 2022 and 2021, respectively,
an increase of $359,509 (19%). We employed 21 engineers at December 31, 2022 compared to 17 engineers at December 31, 2021, most of whom are dedicated to research and
development activities for new products and primarily the FirstVu Pro, FirstVu II, QuickVu docking stations, EVO-HD and non-mirror based DVM-250 that can be located in
multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings
based on our new EVO-HD product platform and we continue to outsource more development projects. We consider our research and development capabilities and new product
focus to be a competitive advantage and will continue to invest in this area on a prudent basis and consistent with our financial resources.
Selling, advertising and promotional expenses. Selling, advertising and promotional expenses totaled $9,312,204 and $5,717,824 for the years ended December 31,
2022 and 2021, respectively, an increase of $3,594,380 (63%). Salesman salaries and commissions for our video solutions segment represent the primary components of these
costs and were $1,643,563 and $1,605,034 for the years ended December 31, 2022 and 2021, respectively, a slight increase of $38,529 (2%). The effective commission rate was
4% for the year ended December 31, 2022 compared to 8% for the year ended December 31, 2021. We increased the number of salesmen in our law enforcement and
commercial channels in 2022 compared to 2021, thus leading to an increase in sales commissions paid during the year ended December 31, 2022. Further, our recent
acquisitions require minimal salespeople, due to their specific service offerings and platforms.
Promotional and advertising expenses totaled $7,668,641 during the year ended December 31, 2022 compared to $4,112,790 during the year ended December 31,
2021, an increase of $3,555,851 (86%). The overall increase is primarily attributable to our 2022 sponsorships within NASCAR and IndyCar, along with TicketSmarter’s very
active approach to sponsorship and advertising, as they are continuing to build a brand and gaining recognition. TicketSmarter accounted for $4,024,748 of the total promotional
and advertising expense for the year ended December 31, 2022.
Professional fees and expense. Professional fees and expenses totaled $3,297,895 and $1,513,862 for the years ended December 31, 2022 and 2021, respectively, an
increase of $1,784,033 (118%). The increase in professional fees is primarily attributable to increased legal and other fees in connection with strategic transactions and
acquisitions during the year ended December 31, 2022 paired with other current due diligence items and opportunities the Company is exploring. Additionally, board fees, audit
fees, and service fees that also attribute to this increase.
Executive, sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled $6,544,711 and $3,288,360 for the years ended
December 31, 2022 and 2021, respectively, an increase of $3,256,351 (99%). The primary reason for the increase in executive, sales and administrative staff payroll was the
recent formation of the revenue cycle management and entertainment operating segments and their acquisitions of the medical billing companies and TicketSmarter which
occurred in late 2021 and early 2022. These recent acquisitions resulted in additional payroll expenses with expanded executive positions, sales, and administrative staff
numbers compared to 2021.
26
Other. Other selling, general and administrative expenses totaled $10,610,096 and $7,973,855 for the years ended December 31, 2022 and 2021, respectively, an
increase of $2,636,241 (33%). The increase in other expenses in the year ended December 31, 2022 compared to the same period in 2021 is primarily attributable to the
increased expenses related to the two new operating segments and their acquisitions, and associated operating expenses, completed during the year ended December 31, 2022,
that were not relevant to the year ended December 31, 2021. Additionally, this increase is also attributable to an increase in travel costs and increased insurance costs, primarily
in general liability and related coverages which premiums have been increased throughout the marketplace.
Operating Loss
For the reasons previously stated, our operating loss was $29,733,258 and $14,760,910 for the years ended December 31, 2022 and 2021, respectively, an increase of
$14,972,348 (101%). Operating loss as a percentage of revenues worsened to 80% in 2022 from 69% in 2021.
Interest and Other Income
Interest income decreased to $131,025 for the year ended December 31, 2022, from $310,200 in 2021, which reflects our overall decline in our cash and cash
equivalent levels in 2022 compared to 2021. The company has completed five acquisitions and numerous other capital expenditures since the beginning of 2021, leading to the
decrease in cash balances: thus, leading to a decrease in interest income for the period.
Interest Expense
We incurred interest expenses of $37,196 and $28,600 during the years ended December 31, 2022 and 2021, respectively. The increase is attributable to the contingent
earn-out notes associated with the four Nobility Healthcare acquisitions, currently at a total balance of $777,840 for the four notes, with interest rates of 3.00% per annum.
Change in Fair Value of Short-Term Investments
We recognized a loss on change in fair value of short-term investments totaling $84,818 and $101,645 during the years ended December 31, 2022 and 2021,
respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. The decrease reflects our
overall lower cash and cash equivalent levels in 2022 compared to 2021.
Change in Fair Value of Warrant Derivative Liabilities
During 2021, the Company issued detachable warrants to purchase a total of 2,127,500 shares of Common Stock in association with the two registered direct offerings
previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain
circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each
reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. The
change in fair value of the warrant derivative liabilities during year ended December 31, 2022 totaled $6,726,638, compared to $36,664,907 for the year ended December 31,
2021, which was recognized as a gain on the Consolidated Statements of Operations.
27
Change in Fair Value of Contingent Consideration Promissory Notes and Earn-Out Agreements
During the year ended December 31, 2021, the Company issued a contingent consideration earn-out agreement in connection with the Stock Purchase Agreement
between TicketSmarter, Inc., Goody Tickets, LLC and TicketSmarter of $3,700,000. Management determined that the actual Measurement Period EBITDA generated by
TicketSmarter was less than 70% of the Projected EBITDA threshold provided in such an agreement. Therefore, no TicketSmarter earn-out payments were due under such
agreement. Therefore, the fair value of the contingent consideration earn-out agreement was reduced to zero, and the resulting gain of $3,700,000 was reported in our
Consolidated Statements of Operations for the year ended December 31, 2021. There was no gain recorded for the year ended December 31, 2022.
On June 30, 2021, Nobility Healthcare, a subsidiary of the Company, issued a contingent consideration promissory note (the “June Contingent Note”) in connection
with a stock purchase agreement between Nobility Healthcare and a private company (the “June Seller”) of $350,000. Principal payments, since its inception, on this contingent
consideration promissory note totaled $113,617. The estimated fair value of the note at December 31, 2022 is $176,456, representing a decrease in its estimated fair value of
$27,139 as compared to its estimated fair value as of December 31, 2021. Therefore, the Company recorded a gain of $27,139 and $32,789 in the Consolidated Statements of
Operations for the years ended December 31, 2022 and December 31, 2021, respectively.
On August 31, 2021, Nobility Healthcare, issued another contingent consideration promissory note (the “August Contingent Payment Note”) in connection with a stock
purchase agreement between Nobility Healthcare and a private company (the “August Sellers”) of $650,000. Principal payments, since its inception, on this contingent
consideration promissory note totaled $292,953. The estimated fair value of the August Contingent Note at December 31, 2022 is $388,954, representing an increase in its
estimated fair value of $31,907 as compared to is estimated fair value as of December 31, 2021. Therefore, the Company recorded a loss of $31,907 and $-0- in the
Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.
On January 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “January Contingent Payment Note”) in connection with a stock
purchase agreement between Nobility Healthcare and a private company (the “January Sellers”) of $750,000. Principal payments, since its inception, on this contingent
consideration promissory note totaled $120,833. The estimated fair value of the January Contingent Note at December 31, 2022 is $208,083, representing a decrease in its
estimated fair value of $421,085 as compared to its estimated fair value as of the inception date. Therefore, the Company recorded a gain of $421,085 and $-0- in the
Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.
On February 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “February Contingent Payment Note”) in connection with an
asset purchase agreement between Nobility Healthcare and a private company (the “February Sellers”) of $105,000. The estimated fair value of the February Contingent Note at
December 31, 2022 is $4,346, representing a decrease in its estimated fair value of $100,654 as compared to its estimated fair value as of the inception date. Therefore, the
Company recorded a gain of $100,654 and $-0- in the Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.
Gain on Extinguishment of Debt
We recognized a gain on extinguishment of debt totaling $-0- and $10,000 during the years ended December 31, 2022 and 2021, respectively. During the year ended
December 31, 2021 the Company was notified that its $10,000 EIDL advance received with the Payroll Protection Program (the “PPP”) Loan was fully forgiven, thus included
in “Gain on Extinguishment of Debt” in our Consolidated Statements of Operations for the year ended December 31, 2021, and further resulting in $-0- for the year ended
December 31, 2022.
Gain on Extinguishment of Warrant Derivative Liabilities
We recognized a gain on the extinguishment of warrant derivative liabilities of $3,624,794 and $-0- during the year ended December 31, 2022 and December 31, 2021,
respectively. This is in connection with the Warrant Exchange Agreements executed by the Company on August 23, 2022.
Income/(Loss) before Income Tax Benefit
As a result of the above, we reported a net income/(loss) before income tax benefit of ($18,873,758) and $25,530,961 for the years ended December 31, 2022 and
2021, respectively, a decline of $44,404,719 (174%).
Income Tax Benefit
We recorded an income tax benefit of $-0- for the years ended December 31, 2022 and 2021, respectively. The effective tax rate for both 2022 and 2021 varied from
the expected statutory rate due to our continuing to provide a 100% valuation allowance on net deferred tax assets. We determined that it was appropriate to continue the full
valuation allowance on net deferred tax assets as of December 31, 2022 and 2021 primarily because of the recurring operating losses.
We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of December 31, 2022. During 2022, we decreased our
valuation reserve on deferred tax assets by $17,220,000 whereby our deferred tax assets continue to be fully reserved due to our recent operating losses.
We had approximately $113,315,000 of federal net operating loss carryforwards and $1,795,000 of research and development tax credit carryforwards as of December
31, 2022 available to offset future net taxable income.
Net Income/(Loss)
As a result of the above, we reported a net income/(loss) of ($18,873,758) and $25,530,961 for the years ended December 31, 2022 and 2021, respectively, a decline of
$44,404,719 (174%).
Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary
The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is
allocated 49% of the income/loss of Nobility Healthcare which is reflected in the statement of income (loss) as “net income (loss) attributable to noncontrolling interests of
consolidated subsidiary”. We reported net income (loss) attributable to noncontrolling interests of consolidated subsidiary of $407,933 and $56,453 for the years ended
December 31, 2022 and 2021, respectively.
28
Loss on Redemption – Series A & B Convertible Redeemable Preferred Stock
During the year ended December 31, 2022, the Company redeemed 1,400,000 shares of Series A & 100,000 shares of Series B Preferred Stock, for a redemption price
of $15,750,000, with a $13,365,000 carrying amount, resulting in a $2,385,000 loss on redemption.
Net Income/(Loss) Attributable to Common Stockholders
As a result of the above, we reported a net income/(loss) of ($21,666,691) and $25,474,508 for the years ended December 31, 2022 and 2021, respectively, a decline of
$47,141,199 (185%).
Basic and Diluted Income/(Loss) per Share
The basic and diluted income/(loss) per share was ($8.50) and $10.14 for the years ended December 31, 2022 and 2021, respectively, for the reasons previously noted.
All outstanding stock options and common stock purchase warrants were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the
years ended December 31, 2022 and 2021 because all potentially dilutive securities during 2022 had exercise prices in excess of the market value of the company’s common
stock and because of the net loss reported for 2022.
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.
Our Common Stock is currently listed on The Nasdaq Capital Market. In order to maintain our listing, we must satisfy minimum financial and other continued listing
requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price,
and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards. See “Nasdaq Listing” below.
We had $3,532,199 of available cash and equivalents and net working capital of $11,447,313 as of December 31, 2022. Net working capital as of December 31, 2022,
included approximately $6.1 million of accounts receivable and other receivables and $6.8 million of current inventory.
Cash, cash equivalents: As of December 31, 2022, we had cash and cash equivalents with an aggregate balance of $3,532,199, a decrease from a balance of
$32,007,792 for the year December 31, 2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the
$28,475,593 net decrease in cash during the year ended December 31, 2022:
●
Operating activities:
●
Investing activities:
$18,580,385 of net cash used in operating activities. Net cash used in operating activities was $18,580,385 and
$17,825,108 for the years ended December 31, 2022 and 2021, respectively, a deterioration of $755,277. The
deterioration is attributable to the net loss incurred for 2022, the non-cash gain attributable to the change in value of
the warrant derivative liability, increased accounts receivable and other assets during the year ended December 31,
2022 compared to the same period in 2021.
$2,940,591 of net cash used in investing activities. Cash used in investing activities was $2,940,591 and $19,124,379
for the years ended December 31, 2022 and 2021 respectively. In 2022, we incurred costs for the purchase of an
aircraft for our BirdVu Jets subsidiary, further building improvements, the closing of one business acquisition and one
asset acquisition. In 2021 we incurred costs for: (i) the purchase of an office and warehouse building; (ii) the build out
of the new leased office and warehouse space; (iii) the tooling of new products; (iv) patent applications on our
proprietary technology utilized in our new products and included in intangible assets; and (v) the closing of three
acquisitions during the year ended December 31, 2021, compared to only two, smaller acquisitions during the year
ended December 31, 2022.
29
●
Financing activities:
$6,954,617 of net cash used in financing activities. Cash used in financing activities was $6,954,617 for the year
ended December 31, 2022, compared to cash provided by financing activities of $64,595,521 for the year ended
December 31, 2021. In 2022, we utilized over $4.0 million on the stock repurchase program, $2.4 million for
completion of the preferred stock transaction, as well as over $0.5 million on payments of contingent consideration
promissory notes related to the revenue cycle management segment. In 2021, we closed two underwritten public
offerings of our Common Stock, which generated $66.6 million of cash and repurchased and cancelled shares of
common stock of approximately $1.98 million.
The net result of these activities was a decrease in cash of $28,475,593 to $3,532,199 for the year ended December 31, 2022.
Commitments:
We had $3,532,199 of cash and cash equivalents and net positive working capital $11,447,313 as of December 31, 2022. Accounts receivable and other receivable
balances represented $6,120,578 of our net working capital as of December 31, 2022. We intend to collect our outstanding receivables on a timely basis and reduce the overall
level during 2023, which would help to provide positive cash flow to support our operations during 2023. Inventory represented $6,839,406 of our net working capital as of
December 31, 2022. We are actively managing the level of inventory and our goal is to reduce such level during 2023 by our sales activities, the increase of which should
provide additional cash flow to help support our operations during 2023.
Capital Expenditures. On December 6, 2021, the Board authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock under the
specified terms of a share repurchase program (the “Program”). During the year ended December 31, 2022, the Company repurchased 186,299 shares of its common stock for
$4,026,523, in accordance with the Program.
On June 30, 2022, the Board elected to terminate the Program, effective immediately. The Program began in December 2021, with the Company purchasing a total of
273,041 shares at a cost of $6,001,602 through its termination on June 30, 2022.
The Company’s revenue cycle management segment completed its third medical billing company acquisition using approximately $1.2 in cash for the portion of the
purchase price during 2022. The acquisition of the medical billing company included a contingent consideration promissory note payable to the sellers of $750,000 at closing,
which management estimated its fair value of $208,083 as of December 31, 2022.
In addition, the Company’s revenue cycle management segment completed its fourth medical billing asset acquisition using approximately $230,000 in cash for a
portion of the total purchase price. The acquisition of the fourth medical billing asset purchase price included a contingent consideration promissory note payable to the sellers
with an estimated fair value of $105,000 at closing which management estimated its fair value of $4,346 as of December 31, 2022.
30
Lease commitments. On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which served as its new principal executive
office and primary business location prior to the April 30 purchase and sale agreement. The original lease agreement was amended on August 28, 2020 to correct the footage
under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments
ranging from $12,398 to $14,741 thereafter, with a termination date of December 31, 2026. The Company is responsible for property taxes, utilities, insurance and its
proportionate share of common area costs related to its new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the
Company’s office and warehouse operating lease as of December 31, 2022 was forty-eight months.
The Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes. The terms of the lease include 48
monthly payments of $1,598 with a maturity date of October 2023. The Company has the option to purchase such equipment at maturity for its estimated fair market value at
that point in time. The remaining lease term for the Company’s copier operating lease as of December 31, 2022 was ten months.
On June 30, 2021, the Company completed the acquisition of its first medical billing company, through Nobility Healthcare. Upon completion of this acquisition,
Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $2,648 to $2,774 thereafter,
with a termination date in July 2024. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this
location. The remaining lease term for the Company’s office and warehouse operating lease as of December 31, 2022 was nineteen months.
On August 31, 2021, the Company completed the acquisition of its second acquired medical billing company, through Nobility Healthcare. Upon completion of this
acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $11,579 to
$11,811 thereafter, with a termination date in March 2023. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs
related to this location. The Company took possession of the leased facilities on September 1, 2021. The remaining lease term for the Company’s office and warehouse
operating lease as of December 31, 2022 was three months. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing
owned or leased facilities upon termination of this operating lease.
On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this
acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211 to
$7,364 thereafter, with a termination date of December 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area
costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company signed a six month extension for the lease, extending
the remaining lease term for the Company’s office and the remaining lease term for the Company’s warehouse operating lease as of December 31, 2022 was six months.
On January 1, 2022, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion
of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $4,233 to
$4,626, with a termination date of June 2025. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this
location. The Company took possession of the leased facilities on January 1, 2022. The remaining lease term for the Company’s office and warehouse operating lease as of
December 31, 2022, was thirty months.
Lease expense related to the office spaces and copier operating leases was recorded on a straight-line basis over the lease term. Total lease expense under the five
operating leases was approximately $547,609 for the year ended December 31, 2022.
The weighted-average remaining lease term related to the Company’s lease liabilities as of December 31, 2022 and December 31, 2021 was 3.3 years and 3.8 years,
respectively.
31
The discount rate implicit within the Company’s operating leases was not generally determinable, and therefore, the Company determined the discount rate based on its
incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount
rate of 8%.
The following sets forth the operating lease right of use assets and liabilities as of December 31, 2022:
Assets:
Operating lease right of use assets
Liabilities:
Operating lease obligations-current portion
Operating lease obligations-less current portion
Total operating lease obligations
Following are the minimum lease payments for each year and in total.
Year ending December 31:
2023
2024
2025
2026
Total undiscounted minimum future lease payments
Imputed interest
Total operating lease liability
Litigation.
$
$
$
$
$
$
782,129
294,617
555,707
850,324
349,811
245,761
196,462
175,113
967,147
(116,823)
850,324
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 Item 3, “Legal Proceedings,” of this Annual Report on Form
10-K for information on our litigation.
401 (k) Plan. The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended, requires the Company to provide 100%
matching contributions for employees, who elect to contribute up to 3% of their compensation to the plan and 50% matching contributions for employee’s elective deferrals on
the next 2% of their contributions. The Company made matching contributions totaling $223,084 and $127,293 for the years ended December 31, 2022 and 2021, respectively.
Each participant is 100% vested at all times in employee and employer matching contributions.
32
Critical Accounting Estimates
Our significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to our consolidated financial
statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting
policies 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;
Stock-based Compensation Expense;
Fair value of warrants;
Fair value of assets and liabilities acquired in business combinations;
Accounting for Income Taxes; and
Redeemable Preferred Stock.
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)
(ii)
(iii)
(iv)
(v)
Identify the contract with the customer;
Identify the performance obligations in the contract;
Determine the transaction price;
Allocate the transaction price to the performance obligations in the contract; and
Recognize revenue when a performance obligation is satisfied.
We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a
contract when the customer order is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we
have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more
than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s
historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.
Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of
being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and
are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance
obligations consist of (i) products, (ii) professional services, and (iii) extended warranties.
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable
consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
None of our contracts contain a significant financing component.
33
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.
We review all significant, unusual, or nonstandard shipments of products or delivery of services as a routine part of our accounting and financial reporting process to
determine compliance with these requirements. Extended warranties are offered on selected products, and when a customer purchases an extended warranty, the associated
proceeds are treated as contract liability and recognized over the term of the extended warranty.
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. As of December 31, 2022, our historical bad debts have been negligible, with less than
$286,000 charged off as uncollectible on cumulative revenues of $256.3 million since we commenced deliveries in 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.
34
As of December 31, 2022, and 2021, we had provided a reserve for doubtful accounts of $152,736 and $113,234, respectively.
We periodically perform a specific review of significant individual receivables outstanding for risk of loss due to uncollectability. Based on such review, we consider
our reserve for doubtful accounts to be adequate as of December 31, 2022. However, should the balance due from any significant customer ultimately become uncollectible then
our allowance for bad debts will not be sufficient to cover the charge-off and we will be required to record additional bad debt expense in our statement of operations.
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 as of December 31, 2022 and 2021:
Raw material and component parts
Work-in-process
Finished goods – video solutions
Finished goods – entertainment
Subtotal
Reserve for excess and obsolete inventory – video solutions
Reserve for excess and obsolete inventory – entertainment
Total inventories
December 31, 2022
December 31, 2021
$
$
4,509,165
3,164
6,846,091
970,527
12,328,947
(5,230,261)
(259,280)
6,839,406
$
$
3,062,046
—
8,410,307
2,102,272
13,574,625
(3,353,458)
(561,631)
9,659,536
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 44.5% of the gross inventory balance as of December 31, 2022,
compared to 28.8% of the gross inventory balance as of December 31, 2021. We had $5,489,541 and $3,915,089 in reserves for obsolete and excess inventories as of December
31, 2022 and 2021, respectively. Total raw materials and component parts were $4,506,709 and $3,062,046 as of December 31, 2022 and 2021, respectively, an increase of
$1,444,663 (47%). Finished goods balances were $7,816,618 and $10,512,579 as of December 31, 2022 and 2021, respectively, a decrease of $2,695,961 (26%). The decrease
in finished goods was primarily attributable to declining inventory for the new Shield product line, our new body-worn cameras and docking stations, along with a decline in
inventory from our entertainment segment, acquired in September 2021. The increase in the inventory reserve is primarily due to inventory obsolescence for the level of
component parts of the older versions of our printed circuit boards and the phase out of our DVM-750, DVM-500 Plus, LaserAlly legacy products, ThermoVu products, and
personal protective equipment. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items
sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of December 31,
2022.
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.
35
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 charges 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.
Our most recent annual impairment test of goodwill conducted as of December 31, 2022, indicated no impairment. Subsequent to completing our 2022 annual
impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 — Nature of Business and Summary of Significant
Accounting Policies and Note 8 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements provide additional information regarding the
Company’s goodwill and other intangible assets.
36
Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses
related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of
claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were increased to $15,694 as of December
31, 2022 compared to $13,742 as of December 31, 2021 as we begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty
coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers, which reduced our overall warranty exposure as
these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on
our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to
these liabilities in future periods.
Stock-based Compensation Expense. We grant stock options to our employees and directors and such benefits provided are share-based payment awards which
require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical
volatilities of the underlying stock that are obtained from public data sources and there were 1,250 stock options granted during the year ended December 31, 2022.
If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we
have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the
subjective input assumptions can materially affect our estimates of the fair value of our share-based compensation. Certain share-based payment awards, such as employee stock
options, may expire worthlessly or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial
statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in
our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of
the fair value observed in a willing buyer/willing seller market transaction. In addition, we account for forfeitures as they occur.
Accounting for Income Taxes. Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments
include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future
periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on
audit.
As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities
using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. As of December 31, 2022, cumulative valuation allowances
in the amount of $34,200,000 were recorded in connection with the net deferred income 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 $17,220,000 to a balance of $34,200,000 to fully reserve our deferred tax assets at December
31, 2022. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of December 31, 2022, because of the overall net
operating loss carryforwards available. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that
demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future
taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to
deductions for stock option exercises, an increase in shareholders’ equity.
As required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards
established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return, that
has not been reflected in measuring income tax expense for financial reporting purposes. We have no recorded liability as of December 31, 2022, representing uncertain tax
positions.
37
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.
Redeemable Preferred Stock. Preferred stock may be classified as a liability, temporary equity (i.e., mezzanine equity) or permanent equity. In order to determine the
appropriate classification, an evaluation of the cash redemption features is required. Where there exists an absolute right of redemption presently or in the future, the preferred
stock would be classified as a liability. If redemption is contingently redeemable upon the occurrence of an event that is outside of the issuer’s control, it should be classified as
mezzanine equity. The probability that the redemption event will occur is irrelevant. If no redemption features exist, or if a contingent redemption feature is within the
Company’s control, the preferred stock would be considered equity.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year; however, we believe that it is likely to have significant impact to all of our operating segments in
2023 and beyond. We do not believe that our business is seasonal in nature; however, we generally generate higher revenues during the second half of the calendar year
compared to the first half.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Financial Statements and Supplementary Data.
Our financial statements are included in this Annual Report on Form 10-K commencing on page F-1.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the control objectives, as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on their evaluation as of December 31, 2022, the end of the period covered by this Annual Report on
Form 10-K, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2022 due
to the reasons described below.
In connection with the audit of our consolidated financial statements as of December 31, 2022 and 2021, we identified a material weakness in our internal control over
financial reporting related to the timely detection of potential accounting misstatements. The company believes that the increase in acquisition activities resulted in a temporary
gap of accounting resources during the year ended December 31, 2022. To address these deficiencies, the Company will implement additional procedures designed to accelerate
the tempo of upwardly reporting subsidiaries and the visibility of receipt of reports by the parent company to allow for ample opportunities for review procedures in the
financial reporting process.
38
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
●
●
●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The SEC guidance allows companies to exclude acquisitions from management’s report on internal control over financial reporting for the first year after the
acquisition. During 2022, the Company completed one business acquisition and one asset acquisition within the revenue cycle management segment. Due to the timing of the
transaction, management has excluded the transaction from our annual evaluation of internal control over financial reporting. The preliminary total revenue of this acquisition
represents less than 10% of our consolidated revenues for the year ended December 31, 2022.
In connection with the filing of this Annual Report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2022. In making this assessment, our management used the criteria set forth by 2013 Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our assessment using the framework in 2013 Internal Control – Integrated Framework, management
believes that, as of December 31, 2022, our internal control over financial reporting is not effective.
Material Weakness
In connection with the audit of our consolidated financial statements as of December 31, 2022 and 2021, we identified a material weakness in our internal control over
financial reporting related to timely review and detection of potential accounting misstatements, which in the aggregate, constitute a material weakness.
Remediation Activities
As part of our plan to remediate this material weakness, 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 material weakness 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
We have completed the process of integrating our recent business acquisition, which was acquired at the beginning of 2022, into our overall internal control over
financial reporting process. Other than this integration, there have been no changes in our internal control over financial reporting during the year ended December 31, 2022,
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring and assessing our internal
controls to ensure the appropriate design and operating effectiveness.
Item 9B.
Other Information.
None.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
39
Item 10.
Directors, Executive Officers and Corporate Governance.
Directors
PART III
The names of the members of our Board of Directors and certain information about them as of the date of this Annual Report on Form 10-K are set forth below:
Name of Board of Director Member (4)
Stanton E. Ross
Leroy C. Richie (1)(2)(3)
Daniel F. Hutchins (1)
Michael J. Caulfield (1)(2)(3)
Positions
Chairman, President and Chief Executive Officer
Lead Independent Director, Chairman of the Nominating Committee and Compensation
Committee and attorney
Independent Director; Chairman of Audit Committee
Independent Director
Age
61
81
67
67
Director
Since
2005
2005
2007
2016
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
(4) The address of each executive officer and director listed is 14001 Marshall Drive, Lenexa, Kansas 66215.
The Board has determined that Messrs. Richie, Hutchins, and Caulfield are “independent directors,” as defined by the rules and listing standards of The Nasdaq Stock
Market LLC (“Nasdaq”). In making this determination, the Board considered the transactions and relationships disclosed under “Certain Relationships and Related
Transactions” below.
Stanton E. Ross has served as Chairman, President and Chief Executive Officer (“CEO”) since September 2005. From March 1992 to June 2005, Mr. Ross was the
Chairman and President of American Noble Gas Inc. (formerly known as Infinity Energy Resources, Inc.), a publicly held oil and gas exploration and development company
(“AMGAS”) and served as an officer and director of each of AMGAS’s subsidiaries. He resigned from all his positions with AMGAS in June 2005, except Chairman, but was
reappointed President in October 2006. From 1991 until March 1992, he founded and served as President of Midwest Financial, a financial services corporation involved in
mergers, acquisitions, and financing for corporations in the Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc., an investment banking firm in
Lenexa, Kansas, where he primarily worked in corporate finance. From 1989 to 1990, he was employed by Stifel, Nicolaus & Co., a member of the New York Stock Exchange,
where he was an investment executive. From 1987 to 1989, Mr. Ross was self-employed as a business consultant. From 1985 to 1987, Mr. Ross was President and founder of
Kansas Microwave, Inc., which developed a radar detector product. From 1981 to 1985, he was employed by Birdview Satellite Communications, Inc., which manufactured and
marketed home satellite television systems, initially as a salesman and later as National Sales Manager. Mr. Ross estimates he devoted most of his time to Digital Ally and the
balance to AMGAS in 2020. In late 2007, AMGAS sold a substantial portion of its operating assets and has not required a substantial amount of his time since such point. Mr.
Ross holds no public company directorships other than with the Company and AMGAS and has not held any others during the previous five years. The Company believes that
Mr. Ross’s broad entrepreneurial, financial, and business expertise and his experience with micro-cap public companies and his role as President and Chief Executive Officer
give him the qualifications and skills to serve as a Director.
40
Leroy C. Richie has been the Lead Independent Director of Digital Ally since September 2005. He is also the Chairman of the Compensation Committee and
Nominating Committee and a member of the Audit Committee. Since June 1, 1999, Mr. Richie has been a director of AMGAS. Additionally, until 2017, Mr. Richie served as a
member of the board of directors of Columbia Mutual Funds, (or mutual fund companies acquired by or merged with Columbia Mutual Funds), a family of investment
companies managed by Ameriprise Financial, Inc. From 2004 to 2015, he was of counsel to the Detroit law firm of Lewis & Munday, P.C. From 2007 to 2014, Mr. Richie
served as a member of the board of directors of OGE Energy Corp. He holds no other public directorships and has not held any others during the previous five years. Until
2019, Mr. Richie served as the Vice-Chairman of the Board of Trustees and Chairman of the Compensation Committee for the Henry Ford Health System, in Detroit. Mr.
Richie was formerly Vice President of Chrysler Corporation and General Counsel for automotive legal affairs, where he directed all legal affairs for its automotive operations
from 1986 until his retirement in 1997. Before joining Chrysler, he was an associate with the New York law firm of White & Case (1973-1978) and served as director of the
New York office of the Federal Trade Commission (1978-1983). Mr. Richie received a B.A. from City College of New York, where he was valedictorian, and a J.D. from the
New York University School of Law, where he was awarded an Arthur Garfield Hays Civil Liberties Fellowship. The Company believes that Mr. Richie’s extensive experience
as a lawyer and as an officer or director of public companies gives him the qualifications and skills to serve as a Director.
Daniel F. Hutchins was elected a Director in December 2007. He serves as Chairman of the Audit Committee and is the Board’s financial expert. Mr. Hutchins, a
Certified Public Accountant, was a Principal with the accounting firm of Hutchins & Haake, LLC until his retirement on July 1, 2021. Mr. Hutchins currently serves as a
director and the Chief Financial Officer of AMGAS, of which Mr. Ross is the Chairman and President. Mr. Hutchins has served as an instructor for the Becker CPA exam with
the Keller Graduate School of Management and has over 18 years of teaching experience preparing CPA candidates for the CPA exam. He has over 40 years of public
accounting experience, including five years with Deloitte & Touche, LLP. He has served on the boards of various non-profit groups and is a member of the American Institute
of Certified Public Accountants. Mr. Hutchins earned his Bachelor of Business Administration degree in Accounting at Washburn University in Topeka, Kansas. Mr. Hutchins
holds no other public company directorships and has not held any others during the previous five years. The Company believes that Mr. Hutchins’ significant experience in
finance and accounting gives him the qualifications and skills to serve as a Director.
Michael J. Caulfield was elected a Director in May 2016. He is a member of the Audit Committee, Compensation Committee and Nominating Committee. He served
as Vice President – Strategic Development of the Company from June 1, 2009 to January 11, 2012. Mr. Caulfield was most recently (2012-2016) a Vice-Chairman at Teneo
Holdings, LLC, a global advisory firm where he was responsible for the firm’s investment banking relationships with a broad range of industrial companies. From 2006 to 2009,
Mr. Caulfield served as a Managing Director at Banc of America Securities (“BAS”), where he was responsible for the merger, acquisition, divestiture and restructuring
advisory services for a number of large public and private companies. He was also in charge of BAS’s global investment banking activities involving the Safety, Security,
Engineering and Construction Industries. Prior to joining BAS, Mr. Caulfield spent six years (2000-2006) as a Managing Director with Morgan Stanley in New York City,
leading that global investment banking firm’s efforts in the Aerospace and Defense Industries. He was also responsible for the investment banking relationships with a number
of Morgan Stanley’s largest clients. From 1989 to 2000, he worked at General Electric Capital Corp., where he served as a Managing Director and head of the Corporate
Finance Group. In this capacity, he advised GE Capital and the industrial divisions of General Electric on such issues as capital structuring, mergers and acquisitions, and
private equity transactions. Mr. Caulfield received an MBA from the Wharton School of the University of Pennsylvania and a B.S. Degree from the University of Minnesota.
The Company believes that Mr. Caulfield’s significant experience in investment banking and the public market gives him the qualifications and skills to serve as a Director.
Our Directors are elected annually and hold office until the next annual meeting of our stockholders or until their successors are elected and qualified. Officers are
elected annually and serve at the discretion of the Board of Directors. There is no family relationship between any of our directors, director nominees and executive officers.
Board vacancies are filled by a majority vote of the Board.
41
Board of Directors and Committee Meetings
Our Board of Directors held four meetings and acted a number of times by unanimous consent resolutions during the fiscal year ended December 31, 2022. Each of our
directors attended at least 75% of the meetings of the Board of Directors and the committees on which he served in the fiscal year ended December 31, 2022. Our directors are
expected, absent exceptional circumstances, to attend all Board meetings and meetings of committees on which they serve and are also expected to attend our annual meeting of
stockholders. All directors then in office attended the 2022 annual meeting of stockholders.
Committees of the Board of Directors
Our Board of Directors currently has four committees: an Audit Committee, a Compensation Committee and a Nominating Committee. Each committee has a written
charter approved by the Board of Directors outlining the principal responsibilities of the committee. These charters are also available on the Investor Relations page of our
website. All of our directors, other than our Chairman and Chief Executive Officer, have met in executive sessions without management present on a regular basis in 2022 and
year-to-date 2023.
Audit Committee
Our Audit Committee appoints the Company’s independent auditors, reviews audit reports and plans, accounting policies, financial statements, internal controls, audit
fees, and certain other expenses and oversees our accounting and financial reporting process. Specific responsibilities include selecting, hiring and terminating our independent
auditors; evaluating the qualifications, independence and performance of our independent auditors; approving the audit and non-audit services to be performed by our auditors;
reviewing the design, implementation, adequacy and effectiveness of our internal controls and critical accounting policies; overseeing and monitoring the integrity of our
financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; reviewing any earnings
announcements and other public announcements regarding our results of operations in conjunction with management and our public auditors; conferring with management and
the independent auditors regarding the effectiveness of internal controls, financial reporting processes and disclosure controls; consulting with management and the independent
auditors regarding Company policies governing financial risk management; reviewing and discussing reports from the independent auditors on critical accounting policies used
by the Company; establishing procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or
auditing matters; reviewing and approving related-person transactions in accordance with the Company’s policies and procedures with respect to related-person transactions and
applicable rules; reviewing the financial statements to be included in our Annual Report on Form 10-K; discussing with management and the independent auditors the results of
the annual audit and the results of quarterly reviews and any significant changes in our accounting principles; and preparing the report that the SEC requires in our annual proxy
statement.
The Audit Committee is comprised of three Directors, each of whom is independent, as defined by the rules and regulations of the SEC and Nasdaq Rule 5605(a)(2).
The Audit Committee held four meetings during the year ended December 31, 2022. The members of our Audit Committee are Daniel F. Hutchins (Chairman), Leroy C. Richie
and Michael J. Caulfield. The Board of Directors determined that Mr. Hutchins qualifies as an “audit committee financial expert,” as defined under the applicable rules and
listing standards of Nasdaq and SEC rules and regulations and is independent as noted above.
42
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by the Company’s independent registered public accounting firm must be approved
in advance by the Audit Committee to assure that such services do not impair the auditor’s independence from the Company. Accordingly, the Audit Committee has adopted an
Audit and Non-Audit Services Pre-Approval Policy (the “Policy”) that sets forth the procedures and the conditions pursuant to which services to be performed by the
independent auditors are to be pre-approved. Pursuant to the Policy, certain services described in detail in the Policy may be pre-approved on an annual basis together with pre-
approved maximum fee levels for such services. The services eligible for annual pre-approval consist of services that would be included under the categories of Audit Fees,
Audit-Related Fees and Tax Fees in the table, as well as services for limited review of actuarial reports and calculations. If not pre-approved on an annual basis, proposed
services must otherwise be separately approved prior to being performed by the independent registered public accounting firm. In addition, any services that receive annual pre-
approval but exceed the pre-approved maximum fee level also will require separate approval by the Audit Committee prior to being performed. The Audit Committee may
delegate authority to pre-approve audit and non-audit services to any member of the Audit Committee but may not delegate such authority to management.
Compensation Committee
Our Compensation Committee assists our Board of Directors in determining the development plans and compensation of our officers, directors and employees.
Specific responsibilities include approving the compensation and benefits of our executive officers; reviewing the performance objectives and actual performance of our
officers; administering our stock option and other equity compensation plans; and reviewing and discussing with management the compensation discussion and analysis that the
SEC requires in our future Form 10-Ks and proxy statements.
Our Compensation Committee is comprised of three Directors, whom the Board considers to be independent under the applicable rules and listing standards of Nasdaq
and SEC rules and regulations. The members of our Compensation Committee are Leroy C. Richie (Chairman) and Michael J. Caulfield. The Compensation Committee held
two meetings and acted several times by unanimous written consent resolutions during the year ended December 31, 2022. Mr. Ross, our Chief Executive Officer, does not
participate in the determination of his own compensation or the compensation of directors. However, he makes recommendations to the Compensation Committee regarding the
amount and form of the compensation of the other executive officers and key employees, and he often participates in the Compensation Committee’s deliberations about such
persons’ compensation. Thomas J. Heckman, our Chief Financial Officer (“CFO”), also assists the Compensation Committee in its deliberations regarding executive officer,
director and employee compensation. No other executive officers participate in the determination of the amount or the form of the compensation of executive officers or
directors. The Compensation Committee does not utilize the services of an independent compensation consultant to assist in its oversight of executive and director
compensation.
Nominating Committee
Our Nominating Committee assists our Board of Directors by identifying and recommending individuals qualified to become members of our Board of Directors,
reviewing correspondence from our stockholders, and establishing, evaluating, and overseeing our corporate governance guidelines. Specific responsibilities include the
following: evaluating the composition, size and governance of our Board of Directors and its committees and making recommendations regarding future planning and
appointing directors to our committees; establishing a policy for considering stockholder nominees for election to our Board of Directors; and evaluating and recommending
candidates for election to our Board of Directors.
43
Our Nominating Committee strives for a Board composed of individuals who bring a variety of complementary skills, expertise, or background and who, as a group,
will possess the appropriate skills and experience to oversee our business. The diversity of the members of the Board relates to the selection of its nominees. While the
Committee considers diversity and variety of experiences and viewpoints to be important factors, it does not believe that a director nominee should be chosen or excluded solely
or largely because of race, color, gender, national origin or sexual orientation or identity. In selecting a director nominee for recommendation to our Board, our Nominating
Committee focuses on skills, expertise or background that would complement the existing members on the Board. Accordingly, although diversity may be a consideration in the
Committee’s process, the Committee and the Board of Directors do not have a formal policy regarding the consideration of diversity in identifying director nominees.
When the Nominating Committee has either identified a prospective nominee or determined that an additional or replacement director is required, the Nominating
Committee may take such measures as it considers appropriate in connection with its evaluation of a director candidate, including candidate interviews, inquiry of the person or
persons making the recommendation or nomination, engagement of an outside search firm to gather additional information, or reliance on the knowledge of the members of the
Board of Directors or management. In its evaluation of director candidates, including the members of the Board eligible for re-election, the Nominating Committee considers a
number of factors, including: the current size and composition of the Board of Directors, the needs of the Board of Directors and the respective committees of the Board, and
such factors as judgment, independence, character and integrity, age, area of expertise, diversity of experience, length of service and potential conflicts of interest.
The Nominating Committee of the Board selects director nominees and recommends them to the full Board of Directors. In relation to such nomination process, the
Nominating Committee:
●
●
●
●
●
●
●
●
determines the criteria for the selection of prospective directors and committee members;
reviews the composition and size of the Board and its committees to ensure proper expertise and diversity among its members;
evaluates the performance and contributions of directors eligible for re-election;
determines the desired qualifications for individual directors and desired skills and characteristics for the Board;
identifies persons who can provide needed skills and characteristics;
screens possible candidates for Board membership;
reviews any potential conflicts of interests between such candidates and the Company’s interests; and
shares information concerning the candidates with the Board and solicits input from other directors.
The Nominating Committee has specified the following minimum qualifications that it believes must be met by a nominee for a position on the Board: the highest
personal and professional ethics and integrity; proven achievement and competence in the nominee’s field and the ability to exercise sound business judgment; skills that are
complementary to those of the existing Board; the ability to assist and support management and make significant contributions to our success; the ability to work well with the
other directors; the extent of the person’s familiarity with the issues affecting our business; an understanding of the fiduciary responsibilities that are required of a member of
the Board of Directors; and the commitment of time and energy necessary to diligently carry out those responsibilities. A candidate for director must agree to abide by our Code
of Ethics and Conduct.
44
After completing its evaluation, the Nominating Committee makes a recommendation to the full Board of Directors as to the persons who should be nominated to the
Board, and the Board of Directors determines the nominees after considering the recommendation and report of the Committee.
Our Nominating Committee is comprised of two Directors, whom the Board considers to be independent under the applicable rules and listing standards of Nasdaq and
SEC rules and regulations. The Nominating Committee held one meeting during the year ended December 31, 2022. The members of our Nominating Committee are Leroy C.
Richie (Chairman) and Michael J. Caulfield.
Board of Directors’ Role in the Oversight of Risk Management
We face a variety of risks, including credit, liquidity, and operational risks. In fulfilling its risk oversight role, our Board of Directors focuses on the adequacy of our
risk management process and overall risk management system. Our Board of Directors believes that an effective risk management system will (i) adequately identify the
material risks that we face in a timely manner; (ii) implement appropriate risk management strategies that are responsive to our risk profile and specific material risk exposures;
(iii) integrate consideration of risk and risk management into our business decision-making; and (iv) include policies and procedures that adequately transmit necessary
information regarding material risks to senior executives and, as appropriate, to the Board or relevant committee.
The Board of Directors has designated the Audit Committee to take the lead in overseeing risk management at the Board of Directors level. Accordingly, the Audit
Committee schedules time for periodic review of risk management, in addition to its other duties. In this role, the Audit Committee receives reports from management,
independent registered public accounting firm, outside legal counsel, and other advisors, and strives to generate serious and thoughtful attention to our risk management process
and system, the nature of the material risks we face, and the adequacy of our policies and procedures designed to respond to and mitigate these risks.
Although the Board of Directors has assigned the primary risk oversight to the Audit Committee, it also periodically receives information about our risk management
system and the most significant risks that we face. This is principally accomplished through Audit Committee reports to the Board of Directors and summary versions of the
briefings provided by management and advisors to the Audit Committee.
In addition to the formal compliance program, our Board of Directors and the Audit Committee encourage management to promote a corporate culture that understands
risk management and incorporates it into our overall corporate strategy and day-to-day business operations. Our risk management structure also includes an ongoing effort to
assess and analyze the most likely areas of future risk for us. As a result, the Board of Directors and the Audit Committee periodically ask our executives to discuss the most
likely sources of material future risks and how we are addressing any significant potential vulnerability.
Board Leadership Structure
Our Board of Directors does not have a policy on whether the roles of Chief Executive Officer and Chairman of the Board of Directors should be separate and, if they
are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee. Our Board of Directors believes that it should be
free to make a choice from time to time in any manner that is in the best interest of us and our stockholders. The Board of Directors believes that Mr. Ross’s service as both
Chief Executive Officer and Chairman of the Board is in the best interest of us and our stockholders. Mr. Ross possesses detailed and in-depth knowledge of the issues,
opportunities and challenges we face and is thus best positioned to develop agendas, with the input of Mr. Richie, the lead independent director, to ensure that the Board’s time
and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances our ability to communicate our
message and strategy clearly and consistently to our stockholders, employees, customers, and suppliers, particularly during times of turbulent economic and industry conditions.
45
Our Board of Directors also believes that a lead independent director is part of an effective Board leadership structure. To this end, the Board has appointed Mr. Richie
as the lead independent director. The independent directors meet regularly in executive sessions at which only they are present, and the lead independent director chairs those
sessions. As the lead independent director, Mr. Richie calls meetings of the independent directors as needed; sets the agenda for meetings of the independent directors; presides
at meetings of the independent directors; is the principal liaison on Board issues between the independent directors and the Chairman and between the independent directors and
management; provides feedback to the Chairman and management on the quality, quantity and timeliness of information sent to the Board; is a member of the Compensation
Committee that evaluates the CEO’s performance; and oversees the directors’ evaluation of the Board’s overall performance. The Nominating Committee and the Board believe
that its leadership structure, which includes the appointment of a lead independent director, is appropriate because it, among other things, provides for an independent director
who gives board member leadership and each of the directors, other than Mr. Ross, is independent. Our Board of Directors believes that the independent directors provide
effective oversight of management.
Stockholder Communications with the Board of Directors
Stockholders may communicate with the Board of Directors by writing to us as follows: Digital Ally, Inc., attention: Corporate Secretary, 14001 Marshall Drive,
Lenexa, Kansas 66215. Stockholders who would like their submission directed to a member of the Board of Directors may so specify and the communication will be forwarded
as appropriate.
Policy for Director Recommendations and Nominations
Our Nominating Committee will consider candidates for Board membership suggested by Board members, management and our stockholders. The policy of our
Nominating Committee is to consider recommendations for candidates to the Board of Directors from any stockholder of record in accordance with our Bylaws. A director
candidate recommended by our stockholders will be considered in the same manner as a nominee recommended by a Board member, management or other sources. In addition,
a stockholder may nominate a person directly for election to the Board of Directors at an annual meeting of stockholders, provided the stockholder meets the requirements set
forth in our Bylaws. We do not pay a fee to any third party to identify or evaluate or assist in identifying or evaluating potential nominees.
Stockholder Recommendations for Director Nominations. Stockholder recommendations for director nominations may be submitted to the Company at the following
address: Digital Ally, Inc., Attention: Corporate Secretary, 14001 Marshall Drive, Lenexa, Kansas 66215. Such recommendations will be forwarded to the Nominating
Committee for consideration, provided that they are accompanied by sufficient information to permit the Board to evaluate the qualifications and experience of the nominees,
and they are in time for the Nominating Committee to do an adequate evaluation of the candidate before the Annual Meeting. The submission must be accompanied by a written
consent of the individual to stand for election if nominated by the Board of Directors and to serve if elected and to cooperate with a background check.
Stockholder Nominations of Directors. Our Bylaws provide that, in order for a stockholder to nominate a director at an annual meeting of stockholders, the
stockholder must give timely written notice to our Secretary and such notice must be received at our principal executive offices not less than one-hundred-and-twenty (120)
days before the date of our release of the proxy statement to stockholders in connection with our previous year’s annual meeting of stockholders. Such stockholder’s notice shall
include, with respect to each person whom the stockholder proposes to nominate for election as a director, all information relating to such nominee that is required under the
Exchange Act, including such person’s written consent to being named in the proxy statement as a nominee and serving as a director, and cooperating with a background
investigation. In addition, the stockholder must include in such notice the name and address, as they appear on our records, of the stockholder proposing the nomination of such
person, and the name and address of the beneficial owner, if any, on whose behalf the nomination is made, the class and number of shares of our capital stock that are owned
beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the nomination is made, and any material interest or relationship
that such stockholder of record and/or the beneficial owner, if any, on whose behalf the nomination is made may respectively have in such business or with such nominee. At
the request of the Board of Directors, any person nominated for election as a director shall furnish to our Secretary the information required to be set forth in a stockholder’s
notice of nomination that pertains to the nominee.
To be timely in the case of a special meeting or if the date of the annual meeting is changed by more than thirty (30) days from such anniversary date, a stockholder’s
notice must be received at our principal executive offices no later than the close of business on the tenth (10th) day following the earlier of the day on which notice of the
meeting date was mailed or public disclosure of the meeting date was made.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves, or in the past has served, as a member of the Compensation Committee. None of the members of our Compensation Committee
is, or has ever been, an officer or employee of the Company.
Code of Ethics and Conduct
Our Board of Directors has adopted a Code of Ethics and Conduct that is applicable to all of our employees, officers and directors. Our Code of Ethics and Conduct is
intended to ensure that our employees, officers and directors act in accordance with the highest ethical standards. The Code of Ethics and Conduct is available on the Investor
Relations page of our website at http://www.digitalally.com and the Code of Ethics and Conduct was filed as an exhibit to our Annual Report on Form 10-KSB filed March 4,
2008.
46
Item 11.
Executive Compensation.
The following table presents information concerning the total compensation of the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief
Operating Officer (“COO”) and collectively with the CEO and the CFO, the “Named Executive Officers”) for services rendered to the Company in all capacities for the years
ended December 31, 2022 and 2021, as required by Item 402(m)(2) of Regulation S-K.
Summary Compensation Table
Name and Principal Position
Stanton E. Ross
Chairman, CEO and President
Thomas J. Heckman
CFO, Treasurer and Secretary
Peng Han (9)
COO
Year
2021
2022
2021
2022
2021
2022
Salary
($)
$ 250,000
$ 300,000
$ 230,000
$ 120,000
Bonus ($)
$ 250,000
$ 100,000
$ 115,000
$
Stock
awards
($)
$ 828,000(1)(3)
$ 374,500(6)
$ 414,000(1)(4)
— $ 80,250(7)
$ 165,000
$ 250,000
$
$
— $ 63,000(1)(5)
— $ 107,000(8)
Option
awards
($) (1)
All other
compensation
($) (2)
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
30,805
32,034
23,329
16,292
5,428
10,576
Total ($)
$ 1,358,805
$ 806,534
$ 782,329
$ 216,542
$ 233,428
$ 367,576
(1) Represents aggregate grant date fair value pursuant to ASC Topic 718 for the respective year for stock options granted. Please refer to Note 14 to the consolidated financial
statements for a further description of the awards and the underlying assumptions utilized to determine the amount of grant date fair value related to such grants.
(2) Amounts included in all other compensation include the following items: the employer contribution to the Company’s 401(k) Retirement Savings Plan (the “401(k) Plan”)
on behalf of the named executive. We are required to provide a 100% matching contribution for all who elect to contribute up to 3% of their compensation to the plan and a
50% matching contribution for all employees’ elective deferral between 4% and 5%. The employee (i) is 100% vested at all times in the employee contributions and employer
matching contributions; (ii) receives Company paid healthcare insurance; (iii) receives Company paid contributions to health savings accounts; and (iv) receives Company paid
life, accident and disability insurance. See “All Other Compensation Table” below.
(3) Stock awards include the following restricted stock granted during 2021 to Mr. Ross: 15,000 shares at $55.20 per share that vest 50% on January 6, 2022 and 50% on
January 6, 2023, subject to Mr. Ross remaining an employee of the Company at that point in time.
(4) Stock awards include the following restricted stock granted during 2021 to Mr. Heckman: 7,500 shares at $55.20 per share that vest 50% on January 6, 2022 and 50% on
January 6, 2023, subject to Mr. Heckman remaining an employee of the Company at that point in time.
(5) Stock awards include the following restricted stock granted during 2021 to Mr. Han: 2,500 shares at $25.20 per share that vest ratably over the two-year period ending
September 20, 2023.
(6) Stock awards include the following restricted stock granted during 2022 to Mr. Ross: 17,500 shares at $21.40 per share that vest 50% on January 7, 2023 and 50% on
January 7, 2024, subject to Mr. Ross remaining an employee of the Company at that point in time.
(7) Stock awards include the following restricted stock granted during 2022 to Mr. Heckman: 3,750 shares at $21.40 per share that on January 7, 2023, subject to Mr. Heckman
remaining an employee of the Company at that point in time.
47
(8) Stock awards include the following restricted stock granted during 2022 to Mr. Han: 5,000 shares at $21.40 per share that vest 20% annually on the anniversary of January 7
from 2023 to 2027, subject to Mr. Han remaining an employee of the Company at that point in time.
(9) Mr. Han was appointed Chief Operating Officer on December 13, 2021, thus Mr. Han’s 2021 compensation was set by management prior to his appointment as a named
executive officer of the Company.
Name and Principal Position
Stanton E. Ross
Chairman, CEO and President
Thomas J. Heckman
CFO, Treasurer and Secretary
Peng Han (9)
COO
All Other Compensation Table
401(k) Plan
contribution
by
Company
$
$
$
$
$
$
8,606
10,039
9,138
4,800
4,885
10,000
Company
paid
healthcare
insurance
20,556
$
20,319
$
$
$
$
$
12,848
10,021
-
-
Year
2021
2022
2021
2022
2021
2022
Flexible &
health
savings
account
contributions
by Company
1,100
$
1,100
$
Company
paid life,
accident
&
disability
insurance
543
$
576
$
$
$
$
$
800
895
-
-
$
$
$
$
543
576
543
576
Other
Contractual
payments
$
$
$
$
$
$
-
-
-
-
-
-
Total
($)
$ 30,805
$ 32,034
$ 23,329
$ 16,292
5,428
$
$ 10,576
Compensation Policy. Our executive compensation plan is based on attracting and retaining qualified professionals who possess the skills and leadership necessary to enable us
to achieve earnings and profitability growth to satisfy its stockholders. We must, therefore, create incentives for these executives to achieve both our and individual performance
objectives using performance-based compensation programs. No one component is considered by itself, but all forms of the compensation package are considered in total.
Wherever possible, objective measurements will be utilized to quantify performance, but many subjective factors still come into play when determining performance.
Compensation Components. The main elements of its compensation package consist of base salary, stock options or restricted stock awards and bonus.
Base Salary. The base salary for each executive officer is reviewed and compared to the prior year, with considerations given for increase or decrease. The review is generally
on an annual basis but may take place more often in the discretion of the Compensation Committee.
On January 7, 2021, the Compensation Committee restored the annual base salaries of Stanton E. Ross, President and Chief Executive Officer, Thomas J. Heckman, Chief
Financial Officer, Treasurer and Secretary, at $250,000 and $230,000, respectively for 2021.
The Compensation Committee plans to review the base salaries for possible adjustments on an annual basis. Base salary adjustments will be based on both individual and our
performances and will include both objective and subjective criteria specific to each executive’s role and responsibility with us.
48
Stock Options and Restricted Stock Awards. The Compensation Committee determined stock option and restricted stock awards based on numerous factors, some of which
include responsibilities incumbent with the role of each executive with us, tenure with us, as well as our performance. The vesting period of options and restricted stock is also
tied, in some instances, to our performance directly related to certain executive’s responsibilities with us. The Compensation Committee determined that Messrs. Ross and
Heckman were eligible for awards of stock options or restricted stock in 2021 based on their performance. Refer to the “Grants of Plan-Based Awards” table below for
restricted stock awards made in 2021. The Committee also determined that Messrs. Ross, Heckman, and Han would be eligible in 2022 for awards of restricted stock or stock
options.
Bonuses. The Compensation Committee determined to award bonuses to each of the executive officers in 2022 and 2021, as set forth in the foregoing table. Refer to the
“Summary Compensation Table” above for the bonuses paid to Messrs. Ross and Heckman in 2022 and 2021. In fiscal 2022, Messrs. Ross and Heckman were eligible for
bonuses of up to $250,000 and $120,000, respectively. Mr. Ross was awarded a partial 2022 bonus of $100,000. The Compensation Committee reviews each executive officer’s
performance on a quarterly basis and determines what, if any, portion of the bonus he has earned and will be paid as of such point.
Other. In July 2008, we amended and restated our 401(k) Plan. The amended 401(k) Plan requires us to provide a 100% matching contribution for employees who elect to
contribute up to 3% of their compensation to the plan and a 50% matching contribution for employees’ elective deferrals between 4% and 5%. We have made matching
contributions for executives who elected to contribute to the 401(k) Plan during 2021. Each participant is 100% vested at all times in employee and employer matching
contributions. As of December 31, 2022, a total of 23,120 shares of our Common Stock were held in the 401(k) Plan. Mr. Heckman, as trustee of the 401(k) Plan, holds the
voting power as to the shares of our Common Stock held in the 401(k) Plan. We have no profit-sharing plan in place for our employees. However, we may consider adding such
a plan to provide yet another level of compensation to our compensation plan.
The following table presents information concerning the grants of plan-based awards to the Named Executive Officers during the year ended December 31, 2022:
Grant of Plan-Based Awards
All other stock
awards:
Number
of shares of
stock
or units:
(#) (1)
(2)(3)
Date
approved by
Compensation
Committee
Name
Grant date
Stanton E. Ross
Chairman, CEO and President
Thomas J. Heckman
CFO, Treasurer and Secretary
Peng Han
COO
January 7, 2022
January 7, 2022
17,500(1)
January 7, 2022
January 7, 2022
3,750(2)
January 7, 2022
January 7, 2022
5,000(3)
Exercise or base
price of option
awards
($/Share)
Grant date fair
value of stock
awards ($) (4)
$
$
$
21.40
21.40
21.40
$
$
$
374,500
80,250
107,000
(1) These restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a two-year period (50% on January 7, 2023 and
50% on January 7, 2024) contingent upon whether the individual is still employed by us at that point.
49
(2) These restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a one-year period contingent upon whether the
individual is still employed by us at that point.
(3) These restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a five-year period (20% on each anniversary of
January 7 from 2023 to 2027) contingent upon whether the individual is still employed by us at that point.
(4) Stock awards noted represent the aggregate amount of grant date fair value as determined under ASC Topic 718. Please refer to Note 14 to the consolidated financial
statements that appear in our Annual Report on Form 10-K, filed with the SEC on April 15, 2022, for a further description of the awards and the underlying assumptions utilized
to determine the amount of grant date fair value related to such grants.
Employment Contracts; Termination of Employment and Change-in-Control Arrangements
We do not have any employment agreements with any of our executive officers. However, on December 23, 2008, we entered into retention agreements with the following
executive officers: Stanton E. Ross and Thomas J. Heckman. In April 2018 we amended these agreements.
Retention Agreements - Potential Payments upon Termination or Change of Control
The following table sets forth for each named executive officer potential post-employment payments and payments on a change in control and assumes that the triggering event
took place on January 1, 2023 and that the amendments to the retention agreements of each person were in effect.
Stanton E. Ross
Thomas J. Heckman
Total
Name
Retention Agreement Compensation
Change in control
payment due based
upon successful
completion of
transaction
Severance payment
due based on
termination after
Change of
Control occurs
$
$
$
125,000
115,000
240,000
$
$
$
500,000
460,000
960,000
$
$
$
Total
625,000
575,000
1,200,000
The retention agreements guarantee the executive officers’ specific payments and benefits upon a Change in Control of the Company. The retention agreements also provide for
specified severance benefits if, after a Change in Control of the Company occurs, the executive officer voluntarily terminates employment for “Good Reason” or is involuntarily
terminated without “Cause.”
50
Under the retention agreements, a “Change in Control” means (i) one party alone, or acting with others, has acquired or gained control over more than 50% of the voting shares
of the Company; (ii) the Company merges or consolidates with or into another entity or completes any other corporate reorganization, if more than 50% of the combined voting
power of the surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of
the Company immediately prior to such merger, consolidation or other reorganization; (iii) a majority of the Board of Directors is replaced and/or dismissed by the stockholders
of the Company without the recommendation of or nomination by the Company’s current Board of Directors; (iv) the Company’s Chief Executive Officer (the “CEO”) is
replaced and/or dismissed by stockholders without the approval of the Board of Directors; or (v) the Company sells, transfers or otherwise disposes of all or substantially all of
the consolidated assets of the Company and the Company does not own stock in the purchaser or purchasers having more than 50% of the voting power of the entity owning all
or substantially all of the consolidated assets of the Company after such purchase.
“Good Reason” means either (i) a material adverse change in the executive’s status as an executive or other key employee of the Company, including without limitation, a
material adverse change in the executive’s position, authority, or aggregate duties or responsibilities; (ii) any adverse change in the executive’s base salary, target bonus or
benefits; or (iii) a request by the Company to materially change the executive’s geographic work location.
“Cause” means (i) the executive has acted in bad faith and to the detriment of the Company; (ii) the executive has refused or failed to act in accordance with any specific lawful
and material direction or order of his or her supervisor; (iii) the executive has exhibited, in regard to employment, unfitness or unavailability for service, misconduct,
dishonesty, habitual neglect, incompetence, or has committed an act of embezzlement, fraud or theft with respect to the property of the Company; (iv) the executive has abused
alcohol or drugs on the job or in a manner that affects the executive’s job performance; and/or (v) the executive has been found guilty of or has plead nolo contendere to the
commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. Prior to termination for Cause, the Company shall give the executive
written notice of the reason for such potential termination and provide the executive a 30-day period to cure such conduct or act or omission alleged to provide grounds for such
termination.
If any Change in Control occurs and the executive continues to be employed as of the completion of such Change in Control, upon completion of such Change in Control, as
payment for the executive’s additional efforts during such Change in Control, the Company shall pay the executive a Change in Control benefit payment equal to three months
of the his base salary at the rate in effect immediately prior to the Change in Control completion date, payable in a lump sum net of required tax withholdings. If any Change in
Control occurs, and if, during the one-year period following the Change in Control, the Company terminates the executive’s employment without Cause or the executive
submits a resignation for Good Reason (the effective date of such termination or resignation, the “Termination Date”), then:
a) The Company shall pay the executive severance pay equal to 12 months of his base salary at the higher of the rate in effect immediately prior to the Termination Date
or the rate in effect immediately prior to the occurrence of the event or events constituting Good Reason, payable on the Termination Date in a lump sum net of
required tax withholdings, plus all other amounts then payable by the Company to the executive less any amounts then due and owing from the executive to the
Company;
b) The Company shall provide continuation of the executive’s health benefits at the Company’s expense for 18 months following the Termination Date; and
c) The executive’s outstanding employee stock options shall fully vest and be exercisable for a 90-day period following the Termination Date.
51
The executive is not entitled to the above severance benefits for a termination based on death or disability, resignation without Good Reason or termination for Cause.
Following the Termination Date, the Company shall also pay the executive all reimbursements for expenses in accordance with the Company’ policies, within ten days of
submission of appropriate evidence thereof by the executive.
The following table presents information concerning the outstanding equity awards for the Named Executive Officers as of December 31, 2022:
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Stock Awards
Number of
securities
underlying
unexercised
options (#)
exercisable
(1)
Number of
securities
underlying
unexercised
options (#)
unexercisable
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
Option
exercise
price
($)
Option
expiration
date
Equity
incentive
plan
awards:
Market
or
Payout
value of
unearned
shares,
units or
other
rights
that have
not
vested
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights
that have
not
vested
Market
value
of
shares
or
units of
stock
that
have
not
vested
(2)
Number
of
shares
or units
of stock
that
have
not
vested
(1)
-
-
-
-
-
-
-
-
-
-
-
-
25,000
$115,000
7,500
$ 34,500
6,250
$ 28,750
-
-
-
$
$
$
-
-
-
-
-
Name
Stanton E. Ross
Chairman, CEO and President
Thomas J. Heckman
CFO, Treasurer and Secretary
Peng Han (9)
COO
(1) These stock option and restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over the prescribed period
contingent upon whether the individual is still employed by the Company at that point.
(2) Market value based upon the closing market price of $4.60 on December 31, 2022.
52
The following table presents information concerning the stock options exercised and the vesting of restricted stock awards during 2021 for the Named Executive
Officers for the year ended December 31, 2022:
Stanton E. Ross
Chairman, CEO and President
Thomas J. Heckman
CFO, Treasurer and Secretary
Peng Han
COO
Option Exercises and Restricted Stock Vested
Option Awards
Stock Awards
Number of Shares
acquired realized on
exercise (#)
Value realized
on exercise ($)
Number of
Shares
acquired on
vesting (#)
Value on
vesting ($)
-
-
331
$
$
$
-
-
28,520
7,500
3,750
1,250
$
$
$
160,500(1)
80,250(1)
15,000(2)
(1) Based on the closing market price of our Common Stock of $21.40 on January 7, 2022, the date of vesting for 7,500 shares of Common Stock for Mr. Ross, and 3,750
shares of Common Stock for Mr. Heckman.
(2) Based on the closing market price of our Common Stock of $12.00 on September 20, 2022, the date of vesting for 1,250 shares of Common Stock for Mr. Han.
The number of stock options and restricted stock awards that an employee, director, or consultant may receive under our Plans (defined below under “Information Regarding
Plans and Other Arrangements Not Subject to Security Holder Action”) is in the discretion of the administrator and therefore cannot be determined in advance. The Board of
Directors’ policy in 2022 was to grant officers an award of 17,500 restricted shares of Common Stock to our CEO/President and 3,750 restricted shares of Common Stock to our
CFO/Treasurer and each non-employee director an award of options to purchase 5,000 shares of Common Stock, all subject to vesting requirements.
The following table sets forth (a) the aggregate number of shares of Common Stock subject to options granted under the Plans during the year ended December 31, 2022 and (b)
the average per share exercise price of such options.
Stock Options and Restricted Stock Grants
Name of Individual or Group
Stanton E. Ross, Chairman of the Board of Directors, CEO & President
Leroy C. Richie, Director
Daniel F. Hutchins, Director
Michael J. Caulfield, Director
Thomas J. Heckman, Vice President, CFO, Treasurer & Secretary
Peng Han
All executive officers, as a group
All directors who are not executive officers, as a group
All employees who are not executive officers, as a group
Director Compensation
Number of Restricted
Shares of Common
Stock Granted
Number of
Options
Granted
Average per
Share Exercise
Price
17,500
-
-
-
3,750
5,000
26,250
-
5,500
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
Our non-employee directors received the stock option grants noted in the “Director Compensation” table below for their service on the Board of Directors in 2022, including on
the Audit, Nominating and Compensation Committees.
In July 2021, we granted to Messrs. Richie, Caulfield and Hutchins each options exercisable to acquire 5,000 shares of Common Stock at an exercise price of $33.40 per share
for their service on the Board of Directors until the next annual meeting of stockholders with vesting to occur ratably through May 31, 2022, provided each person has remained
a director at such dates.
Director compensation for the year ended December 31, 2022 was as follows:
Director Compensation
Name
Stanton E. Ross, Chairman of the Board of Directors (1)
Leroy C. Richie
Daniel F. Hutchins
Michael J. Caulfield
Fees earned or paid
in
cash ($)
Stock
awards
($)
Option
awards
($)
$
$
$
$
—
95,000
90,000
87,917
$
$
$
$
—
—
—
—
$
$
$
$
Total
($)
—
95,000
90,000
87,917
—
—
—
—
$
$
$
$
(1) As a Named Executive Officer, Mr. Ross’s compensation and option awards are fully reflected in the “Summary Compensation” table, and elsewhere under “Executive
Compensation.” He did not receive compensation, stock awards or options for his services as a director.
53
Stock Option and Restricted Stock Grants to Directors
Name
Stanton E. Ross, Chairman of the Board of Directors
Leroy C. Richie, Director
Daniel F. Hutchins, Director
Michael J. Caulfield, Director
Number of Restricted
Shares of Common Stock
Granted
Number of Options
Granted
Average per Share
Exercise Price
-
-
-
-
-
5,000
5,000
5,000
$
$
$
$
-
33.40
33.40
33.40
Securities Authorized for Issuance Under Equity Compensation Plans
Our Board of Directors adopted the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”) on September 1, 2005. The 2005 Plan authorized us to reserve
15,625 shares of our Common Stock for issuance upon exercise of options and grant of restricted stock awards. The 2005 Plan terminated in 2015 with 1,078 shares of Common
Stock reserved for awards that are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding as of December 31, 2022
total 284.
On January 17, 2006, our Board adopted the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”). The 2006 Plan authorizes us to reserve 9,375 shares of
Common Stock for future grants under it. The 2006 Plan terminated in 2016 with 2,739 shares of Common Stock reserved for awards that are now unavailable for issuance.
Stock options granted under the 2006 Plan that remain unexercised and outstanding as of December 31, 2022 total 531.
On January 24, 2007, our Board adopted the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”). The 2007 Plan authorizes us to reserve 9,375 shares of
Common Stock for future grants under it. The 2007 Plan terminated in 2017 with 4,733 shares of Common Stock reserved for awards that are now unavailable for issuance.
There are no stock options granted under the 2007 Plan that remain unexercised and outstanding as of December 31, 2022.
On January 2, 2008, our Board adopted the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”). The 2008 Plan authorizes us to reserve 6,250 shares of
Common Stock for future grants under it. The 2008 Plan terminated in 2018 with 2,025 shares of Common Stock reserved for awards that are now unavailable for issuance.
There are no stock options granted under the 2008 Plan that remain unexercised and outstanding as of December 31, 2022.
On March 18, 2011, our Board adopted the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”). The 2011 Plan authorizes us to reserve 3,125 shares of
Common Stock for future grants under it. At December 31, 2022, there were 438 shares of Common Stock reserved for awards available for issuance under the 2011 Plan.
Stock options granted under the 2011 Plan that remain unexercised and outstanding as of December 31, 2022 total 50.
On March 22, 2013, our Board adopted the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”). The 2013 Plan was amended on March 28, 2014 and
November 14, 2014 to increase the number of shares of Common Stock authorized and reserved for issuance under the 2013 Plan to a total of 15,000. At December 31, 2022,
there were no shares of Common Stock reserved for awards available for issuance under the 2013 Plan. Stock options granted under the 2013 Plan that remain unexercised and
outstanding as of December 31, 2022 total 1,000.
On March 27, 2015, our Board of Directors adopted the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”). The 2015 Plan was amended on February 25,
2016 and May 31, 2017 to increase the number of shares of Common Stock authorized and reserved for issuance under the 2015 Plan to a total of 62,500. At December 31,
2022, there were no shares of Common Stock reserved for awards available for issuance under the 2015 Plan, as amended. Stock options granted under the 2015 Plan that
remain unexercised and outstanding as of December 31, 2022 total 6,500.
54
On April 12, 2018, our Board of Directors adopted the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”). The 2018 Plan was amended on May 21, 2019
to increase the number of shares of Common Stock authorized and reserved for issuance under the 2018 Plan to a total of 87,500. At December 31, 2022, there were 31,275
shares of Common Stock reserved for awards available for issuance under the 2018 Plan. Stock options granted under the 2018 Plan that remain unexercised and outstanding as
of December 31, 2022 total 17,000.
Our Board of Directors adopted the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”) on June 30, 2020 and the Company’s stockholders approved the
2020 Plan at the Annual Meeting held on September 9, 2020. The Company’s stockholders approved an amendment to the 2020 Plan at the Annual Meeting held on June 22,
2021 which increased the number of shares of Common Stock authorized and reserved for issuance under the 2020 Plan to a total of 125,000. At December 31, 2022, there were
12,042 shares of Common Stock reserved for awards available for issuance under the 2020 Plan. Stock options granted under the 2020 Plan that remain unexercised and
outstanding as of December 31, 2022 total 29,000.
Our Board of Directors adopted the 2022 Stock Option and Restricted Stock Plan (the “2022 Plan”) on October 28, 2022 and the Company’s stockholders approved the
2022 Plan at the Annual Meeting held on December 7, 2022. The number of shares of Common Stock authorized and reserved for issuance under the 2022 Plan totals 125,000.
At December 31, 2022, there were no shares of Common Stock reserved for awards available for issuance under the 2022 Plan. Stock options granted under the 2022 Plan that
remain unexercised and outstanding as of December 31, 2022 total 125,000.
The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan, 2020 Plan, and 2022 Plan are collectively referred to as the “Plans.”
The Plans authorize us to grant (i) to the key employees incentive stock options (except for the 2007 Plan) to purchase shares of Common Stock and non-qualified
stock options to purchase shares of Common Stock and restricted stock awards, and (ii) to non-employee directors and consultants’ non-qualified stock options and restricted
stock. The Compensation Committee of our Board (the “Compensation Committee”) administers the Plans by making recommendations to the Board or determinations
regarding the persons to whom options or restricted stock should be granted and the amount, terms, conditions and restrictions of the awards.
The Plans allow for the grant of incentive stock options (except for the 2007 Plan), non-qualified stock options and restricted stock awards. Incentive stock options
granted under the Plans must have an exercise price at least equal to 100% of the fair market value of the Common Stock as of the date of grant. Incentive stock options granted
to any person who owns, immediately after the grant, stock possessing more than 10% of the combined voting power of all classes of our stock, or of any parent or subsidiary
corporation, must have an exercise price at least equal to 110% of the fair market value of the Common Stock on the date of grant. Non-statutory stock options may have
exercise prices as determined by our Compensation Committee.
The Compensation Committee is also authorized to grant restricted stock awards under the Plans. A restricted stock award is a grant of shares of the Common Stock
that is subject to restrictions on transferability, risk of forfeiture and other restrictions and that may be forfeited in the event of certain terminations of employment or service
prior to the end of a restricted period specified by the Compensation Committee.
We have filed various registration statements on Form S-8 and amendments to previously filed Form S-8’s with the Securities and Exchange Commission (the “SEC”),
which registered a total of 408,750 shares of Common Stock issued or to be issued underlying the awards under the Plans.
The following table sets forth certain information regarding the Plans as of December 31, 2022:
Equity Compensation Plan Information
Plan category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total all plans
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a)
53,950
Weighted-average
exercise price of
outstanding options,
warrants and rights (b)
45.80
$
—
— $
45.80
$
53,950
55
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (c)
408,750
—
408,750
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of March 31, 2023, information regarding beneficial ownership of our Common Stock for:
● each person, or group of affiliated persons, known by us to beneficially own more than 5% of our Common Stock;
● each of our executive officers;
● each of our directors; and
● all of our current executive officers and directors as a group
Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses
sole or shared voting or investment power of that security, including securities that are currently exercisable or exercisable within sixty (60) days of March 31, 2023. Except as
indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with
respect to all shares of Common Stock shown that they beneficially own, subject to community property laws where applicable.
Common Stock subject to securities currently exercisable or exercisable within sixty (60) days of March 31, 2023 are deemed to be outstanding for computing the
percentage ownership of the person holding such securities and the percentage ownership of any group of which the holder is a member but are not deemed outstanding for
computing the percentage of any other person.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Digital Ally, Inc., 14001 Marshall Drive., Lenexa, KS 66215.
5% or Greater Stockholders:
None
Executive Officers and Directors:
Stanton E. Ross(2)
Leroy C. Richie(3)
Daniel F. Hutchins(4)
Michael J. Caulfield(5)
Thomas J. Heckman(6)
Peng Han(7)
All executive officers and directors as a group (five individuals)
* Represents less than 1%.
Number of Shares of Common
Stock Beneficially Owned (1)
Shares
%
% of Total
Voting
Power
—
116,065
18,211
17,885
16,393
76,687
13,781
259,022
—
4.2%
*
*
*
2.8%
*
9.2%
—
4.2%
*
*
*
2.8%
*
9.2%
(1) Based on 2,755,170 shares of Common Stock issued and outstanding as of March 31, 2023 and, with respect only to the ownership by all executive officers and directors as
a group.
(2) Mr. Ross’s total shares of Common Stock include 26,250 restricted shares that are subject to forfeiture to us.
(3) Mr. Richie’s total shares of Common Stock include 16,250 shares of Common Stock to be received upon the exercise of vested options.
(4) Mr. Hutchins’ total shares of Common Stock include 16,250 shares of Common Stock to be received upon the exercise of vested options.
(5) Mr. Caulfield’s total shares of Common Stock include 16,250 shares of Common Stock to be received upon the exercise of vested options.
(6) Mr. Heckman’s total shares of Common Stock include (i) 3,750 restricted shares that are subject to forfeiture to us and (ii) 23,120 shares of Common Stock held in the
Company’s 401(k) Plan (on December 31, 2022) as to which Mr. Heckman has voting power as trustee of the 401(k) Plan.
(7) Mr. Han’s total shares of Common Stock include (i) 10,250 restricted shares that are subject to forfeiture to us and (ii) 331 shares of Common Stock to be received upon the
exercise of vested options.
56
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Transactions with Managing Member of Nobility Healthcare
On January 27, 2022, the Board of Directors appointed Christian J. Hoffmann, III as a member of the Board, effective immediately. Mr. Hoffmann is a principal owner
and manager of Nobility, LLC which is currently the managing member of our consolidated subsidiary Nobility Healthcare, LLC.
The Company has advanced a total of $158,384 in the form of a working capital loan to Nobility, LLC in order to fund capital expenditures necessary for the initial
growth of the joint venture during 2022. The outstanding balance of the working capital loan was $138,384 as of December 31, 2022 and the Company anticipates full
repayment of this advance during the year ended December 31, 2023. The Company paid distributions to the noncontrolling in consolidated subsidiary totaling $15,692 and
$-0-, for the years ended December 31, 2022 and 2021, respectively.
On August 1, 2022, Mr. Hoffmann resigned as a member of the Board, effective immediately. He remains as a principal owner and manager of Nobility, LLC.
Item 14.
Principal Accountant Fees and Services.
The following table is a summary of the fees billed to us by RBSM LLP for the fiscal years ended December 31, 2022 and 2021:
Fee Category
Audit fees
Audit-related fees
Tax fees
All other fees
Total fees
Fiscal
2022 fees
Fiscal
2021 fees
327,415
—
—
—
327,415
$
$
189,250
61,500
—
—
250,750
$
$
Audit Fees. Such amount consists of fees billed for professional services rendered in connection with the audit of our annual financial statements and review of the
interim financial statements included in our quarterly reports. It also includes services that are normally provided by our independent registered public accounting firms in
connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial
statements and are not reported under “Audit Fees.” These services include employee benefit plan audits, consents issued for certain filings with the SEC, accounting
consultations in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting
standards.
Tax Fees. Tax fees consist of fees billed for professional services related to tax compliance, tax advice and tax planning. These services include assistance regarding
federal, state and international tax compliance, tax audit defense, customs and duties, mergers and acquisitions, and international tax planning.
All Other Fees. Consists of fees for products and services other than the services reported above.
Pre–Approval Policy of Services Performed by Independent Registered Public Accounting Firm. The Audit Committee’s policy is to pre–approve all audit and non
–audit related services, tax services and other services. Pre–approval is generally provided for up to one year, and any pre–approval is detailed as to the particular service or
category of services and is generally subject to a specific budget. The Audit Committee has delegated the pre–approval authority to its chairperson when expedition of services
is necessary. The independent registered public accounting firm and management are required to periodically report to the full Audit Committee regarding the extent of services
provided by the independent registered public accounting firm in accordance with this pre–approval and the fees for the services performed to date.
57
Item 15.
Exhibits and Financial Statement Schedules.
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Consolidated Financial Statements:
PART IV
The consolidated financial statements required to be included in Part II, Item 8, Financial Statements and Supplementary Data, begin on Page F-1 and are
submitted as a separate section of this Annual Report on Form 10-K.
2.
Financial Statement Schedules:
All schedules are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial
statements or notes in this Annual Report on Form 10-K.
3.
Exhibits:
Exhibit
Number
2.1
3.1(i)(a)
3.1(i)(b)
3.1(i)(c)
3.1(i)(d)
3.1(ii)
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.9
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
Description of Exhibit
Agreement and Plan of Merger.
Articles of Incorporation.
Articles of Merger.
Certificate of Amendment to Digital Ally, Inc.’s Articles of Incorporation.
Certificate of Amendment to Articles of Incorporation of Digital Ally, Inc.
Bylaws
Form of Common Stock Certificate.
Form of Series A-1 Warrant.
Form of Common Stock Purchase Warrant.
Common Stock Purchase Warrant of Digital Ally, Inc.
Form of Common Stock Purchase Warrant
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
2005 Stock Option and Restricted Stock Plan.
2006 Stock Option and Restricted Stock Plan.
Form of Stock Option Agreement (ISO and Non-Qualified) 2005 Stock Option Plan.
Form of Stock Option Agreement (ISO and Non-Qualified) 2006 Stock Option Plan.
Forms of Restricted Stock Agreement for 2005, 2006, 2007 and 2008 Stock Option and Restricted Stock Plans.
2011 Stock Option and Restricted Stock Plan
Form of Stock Option Agreement for 2011 Stock Option and Restricted Stock Plan
Amended and Restated 2015 Stock Option and Restricted Stock Plan
Form of 2015 Stock Option and Restricted Stock Plan Restricted Stock Grant Agreement.
Digital Ally, Inc. 2018 Stock Option and Restricted Stock Plan.
Form of 2018 Stock Option and Restricted Stock Plan Restricted Stock Grant Agreement.
Digital Ally, Inc. 2020 Stock Option and Restricted Stock Plan.
Amendment to Digital Ally, Inc. 2020 Stock Option and Restricted Stock Plan.
Form of 2020 Stock Option and Restricted Stock Plan Restricted Stock Grant Agreement.
Digital Ally, Inc. 2022 Stock Option and Restricted Stock Plan.
Form of 2022 Stock Option and Restricted Stock Plan Restricted Stock Grant Agreement under the 2022 Stock Option and Restricted Stock Plan.
Proceeds Investment Agreement, dated as July 31, 2018, by and between Digital Ally, Inc. and Brickell Key Investments LP
Letter Agreement, dated as July 31, 2018, by and between Digital Ally, Inc. and Brickell Key Investments LP
Form of Securities Purchase Agreement, dated as of January 11, 2021, by and between the Company and the Investors.
Form of Placement Agency Agreement, dated January 27, 2021, by and between the Company and Kingswood Capital Markets, division of
Benchmark Investments, Inc.
(19)
(19)
(19)
(22)
(23)
(19)
*
(6)
(7)
(8)
(10)
*
(2)
(2)
(2)
(2)
(3)
(4)
(4)
(5)
*
(9)
*
(11)
(14)
*
(21)
(24)
(8)
(8)
(12)
(13)
58
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
14.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
Form of Securities Purchase Agreement, dated as of January 27, 2021, by and between the Company and the Investors.
Commercial Real Estate Sales Contract, dated February 24, 2021, between the Company and DDG Holding, LLC.
Form of Operating Agreement of Nobility Healthcare, LLC, dated June 1, 2021
Warrant Exchange Agreement, dated August 19, 2021, by and among the Company and the warrant holders who are signatories thereto.
Unit Purchase Agreement, dated September 2, 2021
Form of Exchange Agreement.
Form of Securities Purchase Agreement between Digital Ally, Inc. and the investors thereto.
Form of Registration Rights Agreement by and among Digital Ally, Inc. and the investors named therein.
Code of Ethics and Code of Conduct.
Subsidiaries of Registrant
Consent of RBSM LLP
Power of Attorney
Certificate of Stanton E. Ross, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of Thomas J. Heckman, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of Stanton E. Ross, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certificate of Thomas J. Heckman, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(13)
(15)
(16)
(17)
(18)
(19)
(20)
(20)
(1)
*
*
*
*
*
*
*
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
104
Inline XBRL Instance Document **
Inline XBRL Taxonomy Schema **
Inline XBRL Taxonomy Calculation Linkbase **
Inline XBRL Taxonomy Label Linkbase **
Inline XBRL Taxonomy Presentation Linkbase **
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*Filed herewith.
** The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to liability of that Section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of
1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
(1) Filed as an exhibit to the Company’s Annual Report on Form 10KSB for the Year ended December 31, 2007.
(2) Filed as an exhibit to the Company’s October 2006 Form SB-2.
(3) Filed as an exhibit to the Company’s Annual Report on Form 10K for the Year ended December 31, 2009.
(4) Filed as an exhibit to the Company’s Form 8-K filed June 1, 2011.
(5) Filed as an exhibit to the Company’s Form S-8 filed May 23, 2016.
(6) Filed as an exhibit to the Company’s Form 8-K filed August 25, 2017.
(7) Filed as an exhibit to the Company’s Form 8-K filed April 4, 2018.
(8) Filed as an exhibit to the Company’s Form 8-K filed August 2, 2018.
(9) Filed as an exhibit to the Company’s Registration Statement on Form S-8 filed August 20, 2018.
(10) Filed as an exhibit to the Company’s Form 8-K filed August 5, 2019.
(11) Filed as an exhibit to the Company’s Registration Statement on Form S-8 filed November 16, 2020.
(12) Filed as an exhibit to the Company’s Form 8-K filed January 12, 2021.
(13) Filed as an exhibit to the Company’s Form 8-K filed January 28, 2021.
(14) Filed as Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed April 27, 2021.
(15) Filed as an exhibit to the Company’s Form 8-K filed May 3, 2021.
(16) Filed as an exhibit to the Company’s Form 8-K filed June 9, 2021.
(17) Filed as an exhibit to the Company’s Form 8-K filed August 19, 2021.
(18) Filed as an exhibit to the Company’s Form 8-K filed September 9, 2021.
(19) Filed as an exhibit to the Company’s Form 8-K filed August 23, 2022.
(20) Filed as an exhibit to the Company’s Form 8-K filed October 19, 2022.
(21) Filed as Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed October 28, 2022.
(22) Filed as an exhibit to the Company’s Form 8-K filed 8-K filed December 8, 2022.
(23) Filed as an exhibit to the Company’s Form 8-K filed 8-K filed February 7, 2023.
(24) Filed as an exhibit to the Company’s Registration Statement on Form S-8 filed February 28, 2023.
(b) No financial statement schedules have been provided because the information is not required or is shown either in the financial statements or the notes thereto.
59
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
DIGITAL ALLY, INC.,
a Nevada corporation
By:
/s/ STANTON E. ROSS
Stanton E. Ross
Chief Executive Officer
(Principal Executive Officer)
Dated: March 31, 2023
Each person whose signature appears below authorizes Stanton E. Ross to execute in the name of each such person who is then an officer or director of the registrant,
and to file, any amendments to this Annual Report on Form 10-K necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934 and any
rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such Report as such attorney-
in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature and Title
/s/ STANTON E. ROSS
Stanton E. Ross, Director and Chief Executive Officer
/s/ LEROY C. RICHIE
Leroy C. Richie, Director
/s/ MICHAEL J. CAULFIELD
Michael J. Caulfield, Director
/s/ DANIEL F. HUTCHINS
Daniel F. Hutchins, Director
/s/ THOMAS J. HECKMAN
Thomas J. Heckman, Chief Financial Officer, Secretary, Treasurer and Principal Accounting Officer (Principal Financial Officer and Principal
Accounting Officer)
60
Date
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
DIGITAL ALLY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No: 587)
Consolidated Financial Statements:
Consolidated Balance Sheets – December 31, 2022 and 2021
Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021
Notes to the Consolidated Financial Statements
F-1
Page(s)
F-2
F-5
F-6
F-7
F-8
F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Digital Ally, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Digital Ally, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related
consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two year period ended December 31, 2022, and the related notes
(collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2022 and 2021, and the results of its operations and its cash flow for each of the years in the two year period ended December 31, 2022, in conformity with
accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company has incurred substantial operating losses and will require additional capital to continue as a going concern. This raises substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Basis for Opinion
These financial statement are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to
be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements,
taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
F-2
Goodwill, Indefinite Life Intangibles and Other Intangibles Impairment Assessments – Entertainment/Ticketing Reporting Unit – Refer to Notes 1, 8 and 22 to the
consolidated financial statements
Critical Audit Matter Description
As described in Note 22 to the consolidated financial statements, the Company’s goodwill and indefinite life intangible asset balance was $5,886,547 and $600,000, respectively
as of December 31, 2022. The Company also has amortizable identifiable intangible assets of $5,600,000 and $600,000 which are being amortized over 5 years and 4 years,
respectively, and are related to the Entertainment/Ticketing reporting unit. Management tests these assets annually for impairment or more frequently when potential
impairment triggering events are present. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. Management uses a
market approach to estimate the fair value of its reporting unit. The key assumptions and estimates utilized in the market approach primarily include market multiples, peer
group and comparable transaction selection and selection of relevant financial matrices for concluding the fair value of reporting unit discount rates, and future levels of revenue
growth and operating margins.
The principal considerations for our determination that performing procedures relating to the goodwill and intangible asset impairment assessments of the
Entertainment/Ticketing reporting unit is a critical audit matter because (i) the significant judgment used by management when determining the fair value estimates of the
reporting units; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the significant assumptions used in management’s fair
value estimates; and (iii) the audit effort involved in the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter Was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
● These procedures included, among others, (i) testing management’s process for determining the fair value estimates of the entertainment/ticketing reporting unit; (ii)
testing the completeness and accuracy of the underlying data used in the market approach; and (iii) evaluating the reasonableness of the significant assumptions used
by management related to market multiples, peer group and comparable transaction selection and selection of relevant financial matrices for concluding the fair value
of reporting unit discount rates, and future levels of revenue growth and operating margins.
● Evaluating management’s assumptions related to the future levels of revenue growth and operating margins involved evaluating whether the assumptions were
reasonable considering (i) current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these
assumptions were consistent with evidence obtained in other areas of the audit.
● Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the market approach and (ii) the reasonableness of
significant assumptions related to the market multiples, peer group and comparable transaction selection and selection of relevant financial matrices for concluding the
fair value of reporting unit discount rates, and future levels of revenue growth and operating margins.
Goodwill and Other Intangibles arising from the acquisition of Healthcare Acquisition and Medical Billing Acquisitions – Refer to Notes 1, 8 and 21 to the
consolidated financial statements
Critical Audit Matter Description
As disclosed in Note 1, Goodwill arises in connection with acquisitions. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets
acquired is recorded as goodwill.
As disclosed in Note 21, on June 30, 2021, August 31, 2021 and January 1, 2022 the Company completed acquisitions in accordance with the stock purchase agreement. The
consideration included an initial payment of cash. In addition to the initial payment amount, the Company agreed to issue an earn-out agreement to the selling stockholders in
the contingent amount of $1,750,000 that is subject to an earn-out adjustment based on difference between projected revenue and cash basis revenue collected by the Company
in its normal course of business from the clients existing on the acquisition date during the measurement period. The Company gave a fair value of $1,750,000 to the earn-out
on the date of acquisition which is considered a contingent liability. Auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in
determining the fair values of identified intangible assets, which consisted of Client Agreements $664,034 and Goodwill of $5,480,966.
F-3
Given the significant judgments made by management to estimate the intangible assets acquired, performing audit procedures to evaluate the reasonableness of management’s
estimates and assumptions required a high degree of auditor judgment and an increased effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
These procedures included, among others:
● We utilized personnel with specialized knowledge and skill in valuation to assist in; a) assessing the appropriateness of Multi-Period Excess Earnings Method -
valuation methodology for the client agreements – intangible asset, b) evaluating the reasonableness of the growth rates, percent of revenues derived from acquired
customers, medical loss ratio, operating costs, contributory asset charge and discount rate used in the income approach, c) evaluating the reasonableness of the
assumptions and estimates used in the valuation methodologies.
● Evaluate the reasonableness of management’s significant estimates and assumptions including revenue growth rates, percent of revenues derived from acquired
customers, medical loss ratio, operating costs, contributory asset charge and discount rates and futures market conditions.
● Evaluate if there have been events and circumstances that might indicate Goodwill has been impaired.
● Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the income approach and (ii) the reasonableness of
significant assumptions.
● Reviewed and assessed the appropriateness of adjustments to Goodwill, Other Intangibles and other Assets and Liabilities acquired based on changes to their estimated
fair values.
/s/ RBSM LLP
We have served as the Company’s auditor since 2019.
New York, NY
March 31, 2023
PCAOB ID Number 587
F-4
DIGITAL ALLY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 AND 2021
Current assets:
Assets
Cash and cash equivalents
Accounts receivable-trade, less allowance for doubtful accounts of $152,736 – 2022 and $113,234 – 2021
Other receivables (including $138,384 due from related parties – 2022 and $158,384– 2021, refer to Note
19)
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
Other assets
Total assets
Current liabilities:
Liabilities and Equity
Accounts payable
Accrued expenses
Current portion of operating lease obligations
Contract liabilities – current
Debt obligations – current
Warrant derivative liabilities
Income taxes payable
Total current liabilities
Long-term liabilities:
Debt obligations – long term
Operating lease obligation – long term
Contract liabilities – long term
Total liabilities
Commitments and contingencies
Mezzanine equity:
$
$
$
2022
2021
3,532,199
2,044,056
$
$
$
4,076,522
6,839,406
8,466,413
24,958,596
7,898,686
17,872,970
782,129
5,155,681
56,668,062
9,477,355
1,090,967
294,617
2,154,874
485,373
—
8,097
13,511,283
442,467
555,707
5,818,082
20,327,539
32,007,792
2,727,052
2,021,813
9,659,536
9,728,782
56,144,975
6,841,026
16,902,513
993,384
2,107,299
82,989,197
4,569,106
1,175,998
373,371
1,665,519
389,934
14,846,932
1,827
23,022,687
727,278
688,207
2,687,786
27,125,958
Series A Convertible Redeemable Preferred stock, $0.001 par value; shares issued: 0 – 2022 and 0 – 2021
Series B Convertible Redeemable Preferred stock, $0.001 par value; shares issued: 0 – 2022 and 0 – 2021
—
—
—
—
Equity:
Common stock, $0.001 par value; 200,000,000 shares authorized; shares issued: 2,720,170 – 2022 and
2,545,220 – 2021
Additional paid in capital
Noncontrolling interest in consolidated subsidiary
Accumulated deficit
Total equity
Total liabilities and equity
2,721
127,869,342
448,694
(91,980,234)
36,340,523
2,545
124,476,447
56,453
(68,672,206)
55,863,239
$
56,668,062
$
82,989,197
See Notes to Consolidated Financial Statements.
F-5
DIGITAL ALLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2022 AND 2021
2022
2021
$
10,999,892
26,010,003
$
37,009,895
14,372,115
20,315,839
34,687,954
2,321,941
2,290,293
9,312,204
20,452,702
32,055,199
9,180,287
12,233,147
21,413,434
8,635,047
7,114,612
15,749,659
5,663,775
1,930,784
5,717,824
12,776,077
20,424,685
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 expense
Change in fair value of short-term investments
Change in fair value of warrant derivative liabilities
Change in fair value of contingent consideration promissory notes and earn-out agreements
Warrant modification expense
Gain on the extinguishment of debt
Gain on extinguishment of warrant derivative liabilities
Gain on sale of property, plant and equipment
Total other income
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Net income attributable to noncontrolling interests of consolidated subsidiary
Loss on redemption – Series A & B convertible redeemable preferred stock
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 Consolidated Financial Statements.
F-6
(29,733,258)
(14,760,910)
131,025
(37,196)
(230,744)
(84,818)
6,726,638
516,970
—
—
3,624,794
212,831
10,859,500
(18,873,758)
—
(18,873,758)
(407,933)
(2,385,000)
(21,666,691)
(8.50)
(8.50)
2,548,549
2,548,549
$
$
$
310,200
(28,600)
—
(101,645)
36,664,907
3,732,789
(295,780)
10,000
—
—
40,291,871
25,530,961
—
25,530,961
(56,453)
—
25,474,508
10.14
10.14
2,511,114
2,511,114
$
$
$
DIGITAL ALLY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2022 AND 2021
Balance, December 31, 2020
Stock-based compensation
Restricted common stock grant
Restricted common stock forfeitures
Issuance of common stock through registered direct offering at $61.90 per share and
accompanying warrants (net of offering expenses and placement agent discount)
Issuance of common stock through registered direct offering at $56.00 per share and
accompanying warrants (net of offering expenses and placement agent discount)
Exercise of pre-funded common stock purchase warrants at $61.90 per share
Exercise of pre-funded common stock purchase warrants at $56.00 per share
Issuance of pre-funded common stock purchase warrants in connection with the registered direct
offerings
Issuance of common stock purchase warrants at exercise price of $65.00 per share in connection
with the registered direct offerings
Issuance of common stock as consideration for acquisition
Repurchase and cancellation of common stock
Cancellation of treasury stock
Net income
Balance, December 31, 2021
Stock-based compensation
Restricted common stock grant
Restricted common stock forfeitures
Distribution to noncontrolling interest in consolidated subsidiary
Issuance of common stock under rule 144 restrictions related to contemplated spin-off
transaction
Repurchase and cancellation of common stock
Issuance of common stock through warrant exchange agreement
Loss on redemption of Series A and Series B Preferred Stock
Net income (loss)
Balance, December 31, 2022
Common Stock
Shares
1,341,735
Amount
$
1,342
Additional
Paid In
Capital
$ 106,526,889
Treasury
stock
$ (2,157,225)
Noncontrolling
Interest in
consolidated
subsidiary
Accumulated
deficit
$
— $ (90,014,500)
—
42,800
(385)
140,000
162,500
360,000
552,500
—
—
35,987
(86,742)
(3,176)
—
—
43
—
140
162
360
552
—
—
36
(87)
(3)
—
1,605,949
(43)
—
6,728,860
6,617,438
22,283,640
30,939,448
(1,817,548)
(49,398,510)
990,324
—
—
—
—
—
—
—
—
—
—
—
—
—
2,157,225
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,974,992)
(2,157,222)
Total
$ 14,356,506
1,605,949
—
—
6,729,000
6,617,600
22,284,000
30,940,000
(1,817,548)
(49,398,510)
990,360
(1,975,079)
—
—
—
56,453
25,474,508
25,530,961
2,545,220
$
2,545
$ 124,476,447
$
— $
56,453
$ (68,672,206)
$ 55,863,239
—
35,750
(3,250)
—
25,000
(186,299)
303,750
—
—
—
36
(3)
—
25
(186)
304
—
—
1,282,757
(36)
3
—
(25)
—
4,495,196
(2,385,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
(15,692)
—
—
—
—
—
—
—
—
—
(4,026,337)
—
—
1,282,757
—
—
(15,692)
—
(4,026,523)
4,495,500
(2,385,000)
407,933
(19,281,691)
(18,873,758)
2,720,171
$
2,721
$ 127,869,342
$
— $
448,694
$ (91,980,234)
$ 36,340,523
See Notes to Consolidated Financial Statements.
F-7
DIGITAL ALLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2022 AND 2021
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
Gain on sale of property, plant and equipment
Stock based compensation
Provision for doubtful accounts receivable
Provision for doubtful lease receivable
Gain on extinguishment of debt
Change in fair value of contingent consideration promissory notes and earn-out agreements
Change in fair value of warrant derivative liability
Gain of extinguishment of warrant derivative liabilities
Warrant modification expense
Provision for inventory obsolescence
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable – trade
Accounts receivable – other (including related party)
Inventories
Prepaid expenses
Operating lease right of use assets
Other assets
Increase (decrease) in:
Accounts payable
Accrued expenses
Income taxes payable
Operating lease obligations
Contract liabilities
Net cash used in operating activities
Cash Flows from Investing Activities:
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of intangible assets
Proceeds from sale of intangible assets
Cash paid for acquisition of Medical Billing Company
Cash paid for acquisition of Medical Billing Company
Cash paid for acquisition of Medical Billing Company
Cash paid for asset acquisition of Medical Billing Company
Cash paid for acquisition of TicketSmarter
Collection of notes receivable
Net cash used in investing activities
Cash Flows from Financing Activities:
Proceeds from issuance of common stock upon exercise of pre-funded warrants
Net proceeds from sale of common stock in registered direct offerings
Repurchase and cancellation of common stock
Distribution to noncontrolling interest in consolidated subsidiary
Principal payment on contingent consideration promissory notes
Proceeds from issuance of Series A & B convertible redeemable preferred shares, net of issuance costs
Redemption of Series A & B convertible redeemable preferred shares
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents, beginning of year
Cash, cash equivalents, end of year
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
Issuance of contingent consideration earn-out agreement for business acquisitions
Issuance of contingent consideration promissory note for business acquisitions
$
$
$
$
$
$
$
2022
2021
$
(18,873,758)
$
25,530,961
2,176,679
(212,831)
1,282,757
(39,502)
140,448
—
(516,970)
(6,726,638)
(3,624,794)
—
1,574,453
722,498
(2,195,157)
1,245,677
1,293,080
328,772
(3,048,382)
4,709,030
(112,896)
6,270
(328,772)
3,619,651
822,489
—
1,605,949
9,990
—
(10,000)
(3,732,789)
(36,664,907)
—
295,780
1,954,738
(29,838)
(693,992)
(1,431,080)
(3,839,458)
180,497
(738,466)
(1,907,608)
166,874
(5,331)
(195,884
856,967
(18,580,385)
(17,825,108)
(2,068,508)
609,559
(116,990)
18,975
—
—
(1,153,627)
(230,000)
—
—
(2,940,591)
—
—
(4,026,523)
(15,692)
(527,402)
13,365,000
(15,750,000)
(6,954,617)
(28,475,593)
32,007,792
3,532,199
49,070
8,730
61
3
750,000
—
$
$
$
$
$
$
$
(6,428,225)
—
(1,189,132)
—
(1,026,508)
(2,270,000)
—
—
(8,615,514)
405,000
(19,124,379)
53,224,000
13,346,600
(1,975,079)
—
—
—
—
64,595,521
27,646,034
4,361,758
32,007,792
—
1,224
43
—
3,700,000
1,000,000
Issuance of contingent consideration promissory note for asset acquisitions
Assets acquired in business acquisitions
Identifiable intangible assets acquired in business acquisitions
Goodwill acquired in business acquisitions
Liabilities assumed in business acquisitions
ROU and lease liability recorded on extension of lease
Common stock issued as consideration for business acquisitions
Amounts allocated to initial measurement of warrant derivative liabilities in connection to the warrants and
pre-funded warrants
Issuance of common stock through warrant exchange agreement
Cancellation of treasury stock
See Notes to Consolidated Financial Statements.
F-8
$
$
$
$
$
$
$
$
$
$
105,000
190,631
—
2,100,000
387,005
42,403
—
—
4,495,500
—
$
$
$
$
$
$
$
$
$
$
—
6,324,189
6,800,000
9,931,547
5,453,353
—
990,360
51,216,058
—
2,157,225
DIGITAL ALLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $0.001 per share (the
“Predecessor Common Stock”) automatically converted into one share of common stock, par value $0.001 per share, of the Registrant (“Registrant Common Stock”), (ii) each
outstanding option, right or warrant to acquire shares of Predecessor Common Stock converted into an option, right or warrant, as applicable, to acquire an equal number of
shares of Registrant Common Stock under the same terms and conditions as the original options, rights or warrants, and (iii) the directors and executive officers of the
Predecessor Registrant were appointed as directors and executive officers, as applicable, of the Registrant, each to serve in the same capacity and for the same term as such
person served with the Predecessor Registrant immediately before the Merger.
The business of the Registrant, Digital Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare,
LLC, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc., and its majority-owned subsidiary Nobility Healthcare,
LLC, collectively, “Digital Ally,” “Digital,” and the “Company”), is divided into three reportable operating segments: 1) the Video Solutions Segment, 2) the Revenue Cycle
Management Segment and 3) the Ticketing Segment. The Video Solutions Segment is our legacy business that produces digital video imaging, storage products, disinfectant
and related safety products for use in law enforcement, security and commercial applications. This segment includes both service and product revenues through our subscription
models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides working capital and
back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Ticketing Segment acts as an intermediary between ticket
buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms. The
accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected
information of those segments to be presented in financial statements. Such required segment information is included in Note 23.
Reverse Stock Split
On February 6, 2023, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to
effect a 1-for-20 reverse stock split (the “Reverse Stock Split”) of the shares of its common stock. The Reverse Stock Split was effective as of time of filing. No fractional
shares were issued in connection with the Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the Reverse Stock Split
were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the board of directors of the Company approved appropriate and proportional
adjustments to all outstanding securities or other rights convertible or exercisable into shares of the Company’s common stock, including, without limitation, all preferred stock,
warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout the Company’s consolidated financial statements and
other financial information in this Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share
of the Company’s common stock was not affected by the Reverse Stock Split.
F-9
The following is a summary of the Company’s Significant Accounting Policies:
Basis of Consolidation:
The accompanying financial statements include the consolidated accounts of Digital Ally, its wholly-owned subsidiaries, Digital Ally International, Inc., Shield
Products, LLC, Digital Ally Healthcare, LLC, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc., and its majority-
owned subsidiary Nobility Healthcare, LLC. All intercompany balances and transactions have been eliminated during consolidation.
The Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products. The Company formed Shield Products, LLC in
May 2020 to facilitate the sales of its Shield™ line of disinfectant/cleanser products and ThermoVu® line of temperature monitoring equipment. The Company formed Nobility
Healthcare, LLC (“Nobility Healthcare”) in June 2021 to facilitate the operations of its revenue cycle management solutions and back-office services for healthcare
organizations. The Company formed TicketSmarter, Inc. upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its global ticketing operations. The
Company formed Worldwide Reinsurance Ltd., which is a captive insurance company domiciled in Bermuda. It will provide primarily liability insurance coverage to the
Company for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Company formed Digital Connect, Inc. and
BirdVu Jets, Inc. for travel and transportation purposes in 2022. The Company formed Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for
consumers.
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 situation
where sales are to a distributor, the Company had concluded its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations
only with the distributor. As part of part of its consideration for the contract, the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For
each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction
price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled. As the Company’s
standard payment terms are less than one year, it has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing
component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase
order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is
recognized when control of the product is transferred to the customer (i.e. when the Company’s performance obligations is satisfied), which typically occurs at shipment.
Further in determining whether control has been transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of
ownership having transferred to the customer. Customers do not have a right to return the product other than for warranty reasons for which they would only receive repair
services or replacement products. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for product sales when incurred as the
amortization period of the commission asset the Company would have otherwise recognized is less than one year.
F-10
Service and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue is recognized upon
shipment of the product and acceptance of the service or materials by the end customer for repair services. Revenue for extended warranty, cloud service or other software-
based products is over the term of the contract warranty or service period. A time-elapsed method is used to measure progress because the Company transfers control evenly
over the contractual period. Accordingly, the fixed consideration related to these revenues is generally recognized on a straight-line basis over the contract term, as long as the
other revenue recognition criteria have been met.
The Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined points within a multi-year
contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s
best estimate of selling price.
Revenue Cycle Management
The Company reports revenue cycle management revenues on a net basis, as its primary source of revenue is its end-to-end service fees which is generally determined
as a percentage of the invoice amounts collected. These service fees are reported as revenue monthly upon completion of the Company’s performance obligation to provide the
agreed upon service.
Entertainment
The Company reports ticketing revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the
transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.
The Company sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation
of the order. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of sale, therefore controlling the ticket prior to
transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is
typically due upon delivery of the ticket.
The Company also acts as an intermediary between buyers and sellers through online secondary marketplace. Revenues derived from this marketplace primarily
consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being
satisfied at the time the order has been confirmed. As the Company does not control the ticket prior to the transfer, the Company acts as an agent in these transactions. Revenue
is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing.
Payment is due at the time of sale.
F-11
Other
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current
liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation
services and are generally recognized as the respective performance obligations are satisfied. During the year ended December 31, 2022, the Company recognized revenue of
$2.4 million related to its contract liabilities. Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are
reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud
services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. Total contract liabilities consist of the following:
Contract liabilities, current
Contract liabilities, non-current
Contract liabilities, current
Contract liabilities, non-current
December 31, 2021
1,665,519
$
2,687,786
$
4,353,305
December 31, 2020
1,647,469
$
1,848,869
$
3,496,338
$
$
$
$
December 31, 2022
Additions/Reclass
1,478,479
4,560,600
6,039,079
$
$
Recognized
Revenue
989,124
1,430,304
December 31, 2022
2,154,874
$
5,818,082
2,419,428
$
7,972,956
December 31, 2021
Additions/Reclass
696,936
2,432,884
3,129,820
$
$
Recognized
Revenue
678,886
1,593,967
December 31, 2021
1,665,519
$
2,687,786
2,272,853
$
4,353,305
Sales returns and allowances aggregated $118,027 and $45,298 for the years ended December 31, 2022 and 2021, respectively. Obligations for estimated sales returns and
allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables
affecting these return rates.
Use of Estimates:
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes
various other estimates, including but not limited to, determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair
value of warrants, options, the recognition of revenue, inventory valuation reserve, fair value of assets and liabilities acquired in a business combination, incremental borrowing
rate on leases, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the
financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the
period that they are determined to be necessary.
Cash and cash equivalents:
Cash and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less. The following table shows the
Company’s cash and cash equivalents by significant investment category as of December 31, 2022 and 2021:
Demand deposits
Short-term investments with original maturities of 90 days or less (Level 1):
Money market funds
Adjusted
Cost
Realized
Gains
Realized
Losses
December 31, 2022
897,745
2,634,454
3,532,199
$
$
—
—
—
$
$
—
—
—
$
$
Fair Value
897,745
2,634,454
3,532,199
$
$
F-12
Demand deposits
Short-term investments with original maturities of 90 days or less (Level 1):
Money market funds
Mutual funds
Adjusted
Cost
$
5,031,246
$
14,928,526
12,079,901
$
32,039,673
$
December 31, 2021
Unrealized
Gains
Unrealized
Losses
—
—
—
—
$
$
Fair Value
—
$
5,031,246
—
(31,881)
14,928,526
12,048,020
(31,881)
$
32,007,792
The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess
of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with numerous major financial institutions. At December 31,
2022 and 2021, the uninsured balance amounted to $2,495,189 and $29,836,142, respectively.
Accounts Receivable:
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a weekly
basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition,
credit history, and current economic conditions.
Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is
considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade
receivables.
Goodwill and Other Intangibles:
Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The
excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles -
Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might
be impaired.
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.
F-13
The Company determines the fair value of its reporting units using the market approach. Under the market approach, we estimate the fair value based on multiples of
comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying similar companies with comparable business factors
such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting
unit.
Long-lived and Other Intangible Assets - 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 December 31, 2022 and concluded that there was no impairment.
Long-lived assets such as property, plant and equipment and purchased intangible assets subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible
impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-
lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party appraisals, as considered necessary.
Intangible assets include deferred patent costs and license agreements. Legal expenses incurred in preparation of patent application have been deferred and will be
amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will be charged to expense at that time. The Company has
entered into several sublicense agreements under which it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements
generally require upfront payments to obtain the exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and amortizes such costs
over their estimated useful life on a straight-line method.
Inventories:
Inventories for the video solutions segment consist of electronic parts, circuitry boards, camera parts and ancillary parts (collectively, “components”), work-in-process
and finished goods. Finished goods that are manufactured and assembled by the Company are carried at the lower of cost or net realizable value, with cost determined by
standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead. Inventories for the entertainment
segment consists of tickets to live events purchased, which are held at lower of cost or net realizable value, and written-off after the event has occurred. Event tickets for the
entertainment segment are carried at lower of cost or net realizable value, and fully written off at the time the event occurs if the ticket is unsold and remaining in inventory after
the completion of the event. Management has established inventory reserves based on estimates of excess and/or obsolete current inventory.
Manufacturing inventory for the video solutions segment is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of
quantities on hand, which is determined based on past usage, planned changes to products and known trends in markets and technology. Changes in support plans or technology
could have a significant impact on obsolescence.
To support our world-wide service operations for the video solutions segment, we maintain service spare parts inventory, which consists of both consumable and
repairable spare parts. Consumable service spare parts are used within our service business to replace worn or damaged parts in a system during a service call and are generally
classified in current inventory as our stock of this inventory turns relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part
is still necessary to support systems under service contracts, the part is considered to be non-current and included within non-current inventories within our consolidated balance
sheet. Consumables are charged to cost of goods sold when issued during the service call.
F-14
As these service parts age over the related product group’s post-production service life, we reduce the net carrying value of our repairable spare part inventory on the
consolidated balance sheet to account for the excess that builds over the service life. The post-production service life of our systems is generally seven to twelve years and, at
the end of twelve years, the carrying value for these parts in our consolidated balance sheet is reduced to zero. We also perform periodic monitoring of our installed base for
premature end of service life events and expense, through cost of sales, the remaining net carrying value of any related spare parts inventory in the period incurred.
Property, plant and equipment:
Property, plant and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair
expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful life of the asset, which ranges from three to
thirty years, other than the infinite useful life of land. Amortization expense on capitalized leases is included with depreciation expense. The cost and accumulated depreciation
related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.
Leases:
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will evaluate whether to
account for the lease as an operating or finance lease. Operating leases are included in the right of use assets (ROU) and operating lease liabilities on the consolidated balance
sheet as of December 31, 2022. Finance leases would be included in property, plant and equipment, net and long-term debt and finance lease obligations on the balance sheet.
The Company had operating leases for copiers and its office and warehouse space at December 31, 2022 but no financing leases.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The
Company uses its incremental borrowing rate based on the information available at the commencement date in determining the operating lease liabilities if the operating lease
does not provide an implicit rate. Lease terms may include the option to extend when Company is reasonably certain that the option will be exercised. Lease expense for
operating leases is recognized on a straight-line basis over the lease term.
The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short term
leases.
Warranties:
The Company’s video solutions segment products carry explicit product warranties that extend up to two years from the date of shipment. The Company records a
provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts these provisions to reflect actual experience. Accrued warranty
costs are included in accrued expenses. Extended warranties are offered on selected products and when a customer purchases an extended warranty the associated proceeds are
treated as contract liabilities and recognized over the term of the extended warranty.
F-15
Shipping and Handling Costs:
Shipping and handling costs video solutions segment for outbound sales orders totaled $70,749 and $79,763 for the years ended December 31, 2022 and 2021,
respectively. Such costs are included in selling, general and administrative expenses in the Consolidated Statements of Operations.
Advertising Costs:
Advertising expense video solutions segment and entertainment segments includes costs related to trade shows and conventions, promotional material and supplies,
and media costs. Advertising costs are expensed in the period in which they are incurred. The Company incurred total advertising expenses of approximately $7,668,641 and
$4,110,032 for the years ended December 31, 2022 and 2021, respectively. Such costs are included in selling, advertising and promotional expenses in the Consolidated
Statements of Operations.
Income Taxes:
Deferred taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740 - Income Taxes that
provides a framework for accounting for uncertainty in income taxes and provided a comprehensive model to recognize, measure, present, and disclose in its financial
statements uncertain tax positions taken or expected to be taken on a tax return. It initially recognizes tax positions in the financial statements when it is more likely than not the
position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application requires numerous
estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, and it recognized tax positions
and tax benefits may not accurately anticipate actual outcomes. As it obtains additional information, the Company may need to periodically adjust its recognized tax positions
and tax benefits. These periodic adjustments may have a material impact on its Consolidated Statements of Operations.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements
of Operations. There was no interest expense related to the underpayment of estimated taxes during the years ended December 31, 2022 and 2021. There were no penalties in
2022 and 2021.
The Company is subject to taxation in the United States and various states. As of December 31, 2022, the Company’s tax returns filed for 2019, 2020 and 2021 and to
be filed for 2022 are subject to examination by the relevant taxing authorities. With a few exceptions, as of December 31, 2022, the Company is no longer subject to Federal,
state, or local examinations by tax authorities for taxable years prior to 2019.
Research and Development Expenses:
The Company expenses all research and development costs as incurred, which is generally incurred by the video solutions segment. Development costs of computer
software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a
product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Costs
incurred subsequent to achievement of technological feasibility were not significant, and software development costs were expensed as incurred during 2022 and 2021.
F-16
Warrant Derivative Liabilities:
In accordance with FASB ASC 815-40, Derivatives and Hedging: Contracts in an Entities Own Equity, entities must consider whether to classify contracts that may be
settled in its own stock, such as warrants to purchase shares of Common Stock, as equity of the entity or as an asset or liability. If an event that is not within the entity’s control
could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. We have determined because the terms of the warrants
issued during the first quarter of 2021, and remain outstanding, include a provision that entitles all the warrant holders to receive cash for their warrants in the event of a
qualifying cash tender offer, while only certain of the holders of the underlying shares of common stock would be entitled to cash, our warrants should be classified as liability
measured at fair value, with changes in fair value each period reported in earnings. Volatility in the price of our common stock may result in significant changes in the value of
the derivatives and resulting gains and losses on our statement of operations.
Stock-Based Compensation:
The Company grants stock-based compensation to its employees, board of directors and certain third-party contractors. Share-based compensation arrangements may
include the issuance of options to purchase common stock in the future or the issuance of restricted stock, which generally are subject to vesting requirements. The Company
records stock-based compensation expense for all stock-based compensation granted based on the grant-date fair value. The Company recognizes these compensation costs on a
straight-line basis over the requisite service period of the award.
The Company estimates the grant-date fair value of stock-based compensation using the Black-Scholes valuation model. Assumptions used to estimate compensation
expense are determined as follows:
●
●
●
●
●
Expected term is determined using the contractual term and vesting period of the award;
Expected volatility of award grants made in the Company’s plan is measured using the weighted average of historical daily changes in the market price of the
Company’s common stock over the period equal to the expected term of the award;
Expected dividend rate is determined based on expected dividends to be declared;
Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a maturity equal to the expected term of the awards; and
Forfeitures are accounted for as they occur.
Segment Reporting
The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and
requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate
discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on
how to allocate resources and assess performance. The Company’s three 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.
Contingent Consideration
In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to the fair value of the
contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value
through the consolidated statement of operations.
F-17
Repurchase and Cancellation of Shares
From time to time, the Company’s Board of Directors (the “Board”) may authorize share repurchases of common stock. Shares repurchased under Board authorizations
are held in treasury for general corporate purposes and cancelled when it is determined appropriate by management. The Company accounts for repurchases of common stock
under the cost method. Shares repurchased and cancelled during the period were recorded as a reduction to stockholders’ equity. See further discussion of the Company’s share
repurchase program in Note 18–Stockholders’ Equity.
Non-Controlling Interests
Non-controlling interests in the Company’s 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 Consolidated Statements of Operations.
Redeemable Preferred Stock
Preferred stock may be classified as a liability, temporary equity (i.e., mezzanine equity) or permanent equity. In order to determine the appropriate classification, an
evaluation of the cash redemption features is required. Where there exists an absolute right of redemption presently or in the future, the preferred stock would be classified as a
liability. If redemption is contingently redeemable upon the occurrence of an event that is outside of the issuer’s control, it should be classified as mezzanine equity. The
probability that the redemption event will occur is irrelevant. If no redemption features exist, or if a contingent redemption feature is within the Company’s control, the
preferred stock would be considered equity.
Lease Receivable
Lease receivable are carried at the original invoice amount less the total payments received pertaining to each individual customer’s lease agreement. These agreements
range from three to five years and are removed from lease receivables upon termination of the agreement. The Company determines if an allowance for doubtful accounts by
regularly evaluating individual customer lease receivables and considering a customer’s financial condition, credit history, and current economic conditions. No allowance was
deemed necessary for the year ended December 31, 2022.
Notes Receivable
Notes receivable are carried at the original note amount less an estimate made for doubtful receivables based on a review of all outstanding notes on a quarterly basis.
The Company determines the allowance for doubtful accounts by regularly evaluating each note receivable and considering the borrower’s financial condition, credit history,
and current economic conditions. The Company entered into a promissory note, through its entertainment segment, as part of a co-marketing agreement, with a principal amount
of $3,000,000. Principal payment, since its inception, on this promissory note totaled $1,401,660 as of December 31, 2022, resulting in a remaining balance of $1,598,340
maturing December 31, 2023.
New Accounting Standards
In 2020, FASB issued ASU No. 2020-06 to simplify the accounting for convertible debt instruments as the current accounting guidance was determined to be
unnecessarily complex and difficult to navigate. The ASU primarily does three things: (1) The ASU eliminates the beneficial conversion feature model and the cash conversion
model. The elimination of these models will result in more convertible instruments (convertible debt instruments or convertible preferred stock instruments) being reported as a
single liability instrument. The ASU also makes targeted improvements to the related disclosures, (2) The ASU eliminates certain settlement conditions that are required to
qualify for derivative scope exception which will allow for less equity contracts to be accounted for as a derivative and (3) The ASU aligns the diluted EPS calculation for
convertible instruments by requiring the use of the if-converted method and requiring share settlement be included in the calculation when the contract includes an option of
cash or share settlement. ASU No. 2020-06 is effective for fiscal years beginning after December 15, 2021 with early adoption permitted for fiscal years beginning after
December 15, 2020. The Company adopted this update for the quarter ended March 31, 2021, with no material effect on the financials.
In 2020, FASB issued ASU No. 2020-01 which represents a consensus of the Emerging Issues Task Force and it clarifies certain items related to ASU 2016-01,
Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU (1) clarifies that when an entity is
either applying the equity method or upon discontinuing the equity method it should consider observable price changes in orderly transactions for the identical or a similar
investment with the same issuer for valuing basis of the investment and (2) clarifies that when determining the accounting for certain forward contracts and purchased options
an entity should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. ASU No.
2020-01 is effective for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company adopted this update for the quarter ended March 31, 2021,
with no material effect on the financials.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - simplifying the accounting for income taxes (Topic 740), which is meant to simplify the
accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendment also improves consistent application and
simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption of this standard did not have a significant impact on the Company’s
financial position and results of operations.
F-18
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit losses for financial assets and net investment
in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects
expected credit losses. In April 2019 and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic
815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief”
which provided additional implementation guidance on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies
(“SRC”) as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since
the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the
Company’s consolidated financial statements.
Going Concern Matters and Management’s Plans
The accompanying 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, 2022 and December 31, 2021 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 $29.7
million for the year ended December 31, 2022 and $14.8 million during the year ended December 31, 2021 and it had an accumulated deficit of $92.0 million as of December
31, 2022. 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 $66.6 million in the year ended December 31, 2021 through two underwritten public offerings. These equity raises were utilized to fund its operations and
acquisitions. Management expects to continue this pattern until it achieves positive cash flows from operations, although it can offer no assurance in this regard.
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.
The Company has increased its contract liabilities to nearly $8.0 million as of December 31, 2022, which results in recurring revenue during the period of 2023 to
2026. The Company believes that its quality control and cost cutting initiatives, expansion to non-law enforcement sales channels and new product introduction will eventually
restore positive operating cash flows and profitability, although it can offer no assurances in this regard.
The Company has significantly cut costs in its entertainment segment through the removal of several large partnerships and sponsorships. These were not yielding the
results management expected; thus, it is not expected that these costs with significantly hinder total revenues in 2023 and beyond.
In addition to the initiatives described above, the Board of Directors is conducting a review of a full range of strategic alternatives to best position the Company for the
future including, but not limited to, the sale of all or certain assets, properties or groups of properties or individual businesses or merger or combination with another company.
The result of this review may also include the continued implementation of the Company’s business plan. There can be no assurance that any additional transactions or
financings will result from this process.
Based on the uncertainties described above, the Company believes its business plan does not alleviate 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 consolidated financial statements. The accompanying 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.
F-19
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. Sales to domestic customers are typically
made on credit and the Company generally does not require collateral while sales to international customers require payment before shipment or backing by an irrevocable letter
or credit. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated losses. Accounts are written off
when deemed uncollectible and accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts totaled $152,736 as of
December 31, 2022 and $113,234 as of December 31, 2021.
The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess
of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2022 and
2021, the uninsured balance amounted to $2,495,189 and $29,836,142, respectively. The Company uses primarily a network of unaffiliated distributors for international sales
and an employee-based direct sales force for domestic sales. No international distributor individually exceeded 10% of total revenues. No one individual customer receivable
balance exceeded 10% of total accounts receivable as of December 31, 2022.
The Company’s video solutions segment purchases finished circuit boards and other proprietary component parts from suppliers located in the United States and on a
limited basis from Asia. Although the Company obtains certain of these components from single source suppliers, it generally owns all tooling and management has located
alternative suppliers to reduce the risk in most cases to supplier problems that could result in significant production delays. The Company has not historically experienced
significant supply disruptions from any of its principal vendors and does not anticipate future supply disruptions. The Company acquires most of its components on a purchase
order basis and does not have long-term contracts with its suppliers.
NOTE 3. ACCOUNTS RECEIVABLE – ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts receivable was comprised of the following for the years ended December 31, 2022 and 2021:
Beginning balance
Provision for bad debts
Charge-offs to allowance, net of recoveries
Ending balance
NOTE 4. OTHER RECEIVABLES
Other receivables were the following at December 31, 2022 and December 31, 2021:
Notes receivable
Lease receivable
Other
Total other assets
December 31, 2022
December 31, 2021
113,234
126,018
(86,516)
152,736
December 31,
2022
1,598,340
2,339,799
138,383
4,076,522
$
$
$
$
123,224
7,154
(17,144)
113,234
December 31,
2021
470,000
1,376,518
175,295
2,021,813
$
$
$
$
Notes receivable increased by over $1.1 million at December 31, 2022 compared to December 31, 2021, primarily due to a note receivable issued by the Company
during 2022. The Company entered into a promissory note, through its entertainment segment, as part of a co-marketing agreement, with a principal amount of $3,000,000.
Principal payment, since its inception, on this promissory note totaled $1,401,660 as of December 31, 2022, resulting in a remaining balance of $1,598,340 maturing December
31, 2023. Lease receivable increased by nearly $1.0 million primarily due to increased sales under the Company’s subscription model during 2022. The Company determines if
an allowance for doubtful accounts by regularly evaluating notes receivable and individual customer lease receivables, by considering a customer’s financial condition, credit
history, and current economic conditions. No allowance was deemed necessary for the year ended December 31, 2022. Other receivables relate to a related party receivable
further described in Note 19.
NOTE 5. INVENTORIES
Inventories consisted of the following at December 31, 2022 and 2021:
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
December 31, 2022
December 31, 2021
$
$
4,509,165
3,164
6,846,091
970,527
12,328,947
(5,230,261)
(259,280)
6,839,406
$
$
3,062,046
—
8,410,307
2,102,272
13,574,625
(3,353,458)
(561,631)
9,659,536
Finished goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such units totaled $171,071 and
$153,976 as of December 31, 2022 and 2021, respectively.
F-20
NOTE 6. PREPAID EXPENSES
Prepaid expenses were the following at December 31, 2022 and 2021:
Prepaid inventory
Prepaid advertising
Other
Total prepaid expenses
December 31,
2022
December 31,
2021
$
$
6,110,321
1,931,628
424,464
8,466,413
$
$
6,546,100
2,455,527
727,155
9,728,782
Prepaid expenses decreased by nearly $1.3 million primarily due to a decline in prepaid inventory purchases and advertising expenses in 2022.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 2022 and 2021:
Building
Land
Office furniture, fixtures, equipment, and aircraft
Warehouse and production equipment
Demonstration and tradeshow equipment
Building improvements
Rental equipment
Total cost
Less: accumulated depreciation and amortization
Net property, plant and equipment
Estimated
Useful Life
December 31,
2022
December 31,
2021
25 years
Infinite
3-20 years
3-7 years
3-7 years
5-7 years
1-3 years
$
$
$
4,537,037
739,734
2,048,169
51,302
72,341
1,334,374
—
8,782,957
(884,271)
4,909,478
789,734
493,652
65,948
82,337
911,940
8,584
7,261,673
(420,647)
7,898,686
$
6,841,026
Depreciation and amortization of property, plant and equipment aggregated $614,121 and $258,999 for the years ended December 31, 2022 and 2021, respectively.
The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income. The Company
retired fixed assets during 2022 totaling $549,104 resulting in a gain on sale of assets of $212,831 for the year ended December 31, 2022 on the Company’s Consolidated
Statement of Operations. The Company retired fixed assets during 2021 totaling $391,535 all of which were fully depreciated resulting in no gain or loss for the year ended
December 31, 2021.
F-21
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2022 and 2021:
Amortized intangible assets:
Licenses (video solutions segment)
Patents and trademarks (video solutions segment)
Sponsorship agreement network (entertainment segment)
SEO content (entertainment segment)
Personal seat licenses (entertainment
segment)
Client agreements (revenue cycle management segments)
December 31, 2022
December 31, 2021
Gross
value
Accumulated
amortization
$
$
211,183
472,077
5,600,000
600,000
180,081
999,034
80,378
305,021
1,493,333
200,000
8,001
126,864
Net
carrying
value
Gross
value
Accumulated
amortization
$
130,805
167,056
4,106,667
400,000
$
194,286
493,945
5,600,000
600,000
$
172,080
872,170
201,931
—
65,578
233,471
373,333
50,000
2,244
—
Net
carrying
value
$
128,708
260,474
5,226,667
550,000
199,687
—
8,062,375
2,213,597
5,848,778
7,090,162
724,626
6,365,536
Indefinite life intangible assets:
Goodwill (entertainment and revenue cycle management segments)
Trade name (entertainment segment)
Patents and trademarks pending
(video solutions segment)
11,367,514
600,000
56,678
—
—
—
11,367,514
600,000
9,931,547
600,000
56,678
5,430
—
—
—
9,931,547
600,000
5,430
Total
$20,086,567
$
2,213,597
$17,872,970
$17,627,139
$
724,626
$16,902,513
Patents and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of the final patent or trademark is
denied, then the amount deferred will be immediately charged to expense.
Amortization expense for the years ended December 31, 2022 and 2021 was $1,562,558 and $563,490, respectively. Estimated amortization for intangible assets with
definite lives for the next five years ending December 31, 2022, and thereafter is as follows:
Year ending December 31:
2023
2024
2025
2026
2027 and thereafter
$
$
1,486,473
1,435,915
1,343,420
859,438
723,532
5,848,778
F-22
NOTE 9. OTHER ASSETS
Other assets were the following at December 31, 2022 and December 31, 2021:
Lease receivable
Sponsorship network
Other
Total other assets
NOTE 10. DEBT OBLIGATIONS
Debt obligations is comprised of the following:
Economic injury disaster loan (EIDL)
Contingent consideration promissory note – Nobility Healthcare Division Acquisition
Contingent consideration promissory note – Nobility Healthcare Division Acquisition
Contingent consideration promissory note – Nobility Healthcare Division Acquisition
Contingent consideration promissory note – Nobility Healthcare Division Acquisition
Debt obligations
Less: current maturities of debt obligations
Debt obligations, long-term
Debt obligations mature as follows as of December 31, 2022:
2023
2024
2025
2026
2027 and thereafter
Total
2020 Small Business Administration Notes.
December 31,
2022
December 31,
2021
$
$
$
$
4,700,923
116,828
337,930
5,155,681
December 31,
2022
150,000
388,955
176,456
208,083
4,346
927,840
485,373
442,467
$
$
$
$
1,921,021
30,752
155,526
2,107,299
December 31,
2021
150,000
317,212
650,000
—
—
1,117,212
389,934
727,278
December 31,
2022
485,374
297,971
3,412
3,542
137,541
927,840
$
$
On May 12, 2020, the Company received $150,000 in loan funding from the SBA under the EIDL program administered by the SBA, which program was expanded
pursuant to the recently enacted CARES Act. The EIDL is evidenced by an unsecured promissory note, dated May 8, 2020, in the original principal amount of $150,000 with
the SBA, the lender.
Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of such note is
thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal and interest payments began in November 2022, after being deferred
for thirty months after the date of disbursement and total $731.00 per month thereafter. Such note may be prepaid in part or in full, at any time, without penalty. The Company
granted the secured party a continuing interest in and to any and all collateral, including but not limited to tangible and intangible personal property.
Contingent Consideration Promissory Notes
On June 30, 2021, Nobility Healthcare, a subsidiary of the Company, issued a contingent consideration promissory note (the “June Contingent Note”) in connection
with a stock purchase agreement between Nobility Healthcare and a private company (the “June Seller”) of $350,000. The Contingent Note has a three-year term and bears
interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for six months and is due in equal quarterly installments on the seventh business
day of each quarter. The principal amount of the June Contingent Note is subject to an earn-out adjustment, being the difference between the $975,000 (the “June Projected
Revenue”) and the cash basis revenue (the “June Measurement Period Revenue”) collected by the June Seller in its normal course of business from the clients existing on June
30, 2021, during the period from October 1, 2021 through September 30, 2022 (the “June Measurement Period”) measured on a quarterly basis and annualized as of the relevant
period. If the June Measurement Period Revenue is less than the June Projected Revenue, such amount will be subtracted from the principal balance of this June Contingent
Note on a dollar-for-dollar basis. If the June Measurement Period Revenue is more than the June Projected Revenue, such amount will be added to the principal balance of this
June Contingent Note on a dollar-for-dollar basis. In no event will the principal balance of this June Contingent Note become a negative number. The maximum downward
earn-out adjustment to the principal balance will be to zero. There are no limits to the increases to the principal balance of the June Contingent Note as a result of the earn-out
adjustments.
F-23
The June Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at
the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration promissory note at
its estimated fair value of $350,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled $113,617. The
estimated fair value of the June Contingent Note at December 31, 2022 is $176,456, representing a decrease in its estimated fair value of $27,139 as compared to its estimated
fair value as of December 31, 2021. Therefore, the Company recorded a gain of $27,139 and $32,789 in the Consolidated Statements of Operations for the years ended
December 31, 2022 and December 31, 2021, respectively.
On August 31, 2021, Nobility Healthcare, issued another contingent consideration promissory note (the “August Contingent Payment Note”) in connection with a stock
purchase agreement between Nobility Healthcare and a private company (the “August Sellers”) of $650,000. The August Contingent Payment Note has a three-year term and
bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for six months and is due in equal quarterly installments on the seventh
business day of each quarter. The principal amount of the August Contingent Payment Note is subject to an earn-out adjustment, being the difference between the $3,000,000
(the “August Projected Revenue”) and the cash basis revenue (the “August Measurement Period Revenue”) collected by the August Sellers in its normal course of business from
the clients existing on September 1, 2021, during the period from December 1, 2021 through November 30, 2022 (the “August Measurement Period”) measured on a quarterly
basis and annualized as of the relevant period. If the August Measurement Period Revenue is less than the August Projected Revenue, such amount will be subtracted from the
principal balance of this August Contingent Payment Note on a dollar-for-dollar basis. If the August Measurement Period Revenue is more than the August Projected Revenue,
such amount will be added to the principal balance of this August Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this August
Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be to zero. There are no limits to the increases
to the principal balance of the August Contingent Payment Note as a result of the earn-out adjustments.
The August Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a
liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration
promissory note at its estimated fair value of $650,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled
$292,953. The estimated fair value of the August Contingent Note at December 31, 2022 is $388,954, representing an increase in its estimated fair value of $31,907 as
compared to is estimated fair value as of December 31, 2021. Therefore, the Company recorded a loss of $31,907 and $-0- in the Consolidated Statements of Operations for the
years ended December 31, 2022 and December 31, 2021, respectively.
On January 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “January Contingent Payment Note”) in connection with a stock
purchase agreement between Nobility Healthcare and a private company (the “January Sellers”) of $750,000. The January Contingent Payment Note has a two-and-a-half-year
term and bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for seven months and is due in equal quarterly installments on the
tenth business day of each quarter. The principal amount of the January Contingent Payment Note is subject to an earn-out adjustment, being the difference between $3,500,000
(the “January Projected Revenue”) and the cash basis revenue (the “January Measurement Period Revenue”) collected by the January Sellers in its normal course of business
from the clients existing on January 1, 2022, during the period from April 1, 2022 through March 31, 2023 (the “January Measurement Period”) measured on a quarterly basis
and annualized as of the relevant period. If the January Measurement Period Revenue is less than the January Projected Revenue, such amount will be subtracted from the
principal balance of this January Contingent Payment Note on a dollar-for-dollar basis. If the January Measurement Period Revenue is more than the January Projected
Revenue, such amount will be added to the principal balance of this January Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this
January Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no
limits to the increases to the principal balance of the January Contingent Payment Note as a result of the earn-out adjustments.
F-24
The January Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a
liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration
promissory note at its estimated fair value of $750,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled
$120,833. The estimated fair value of the January Contingent Note at December 31, 2022 is $208,083, representing a decrease in its estimated fair value of $421,085 as
compared to its estimated fair value as of the inception date. Therefore, the Company recorded a gain of $421,085 and $-0- in the Consolidated Statements of Operations for the
years ended December 31, 2022 and December 31, 2021, respectively.
On February 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “February Contingent Payment Note”) in connection with an
asset purchase agreement between Nobility Healthcare and a private company (the “February Sellers”) of $105,000. The February Contingent Payment Note has a three-year
term and bears interest at a rate of 3.00% per annum. Quarterly principal and interest payments are deferred for seven months and are due in equal quarterly installments on the
tenth business day of each quarter. The principal amount of the February Contingent Payment Note is subject to an earn-out adjustment, being the difference between $440,000
(the “February Projected Revenue”) and the cash basis revenue (the “February Measurement Period Revenue”) collected by the February Sellers in its normal course of business
from the clients existing on February 1, 2022, during the period from May 1, 2022 through April 30, 2023 (the “February Measurement Period”) measured on a quarterly basis
and annualized as of the relevant period. If the February Measurement Period Revenue is less than the February Projected Revenue, such amount will be subtracted from the
principal balance of this February Contingent Payment Note on a dollar-for-dollar basis. If the February Measurement Period Revenue is more than the February Projected
Revenue, such amount will be added to the principal balance of this February Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this
February Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no
limits to the increases to the principal balance of the February Contingent Payment Note as a result of the earn-out adjustments.
The February Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a
liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration
promissory note at its estimated fair value of $105,000 at the acquisition date. The estimated fair value of the February Contingent Note at December 31, 2022 is $4,346,
representing a decrease in its estimated fair value of $100,654 as compared to its estimated fair value as of the inception date. Therefore, the Company recorded a gain of
$100,654 and $-0- in the Consolidated Statements of Operations for the years ended December 31, 2022 and December 31, 2021, respectively.
Contingent consideration earn-out Agreement – TicketSmarter Acquisition
On September 1, 2021, TicketSmarter, Inc., a subsidiary of the Company, issued a contingent consideration earn-out agreement (the “TicketSmarter Earn-Out”) in
connection with the Stock Purchase Agreement between TicketSmarter, Inc., Goody Tickets, LLC and TicketSmarter, LLC (“TicketSmarter”) of up to $4,244,400 with a fair
value at acquisition of $3,700,000. The TicketSmarter Earn-Out shall be payable with ninety percent (90%) readily available funds and ten percent (10%) in stock consideration.
The principal amount of the TicketSmarter Earn-Out is subject to an earn-out adjustment, being the difference between the $2,896,829 (the “Projected EBITDA”) and the actual
EBITDA (the “Measurement Period EBITDA”) generated by TicketSmarter in its normal course of business, during the period from September 1, 2021 through December 31,
2021 (the “Measurement Period”). If the Measurement Period EBITDA is less than seventy percent (70%) of the Projected EBITDA, there will be zero contingent payment. If
the Measurement Period EBITDA is between seventy percent (70%) and one hundred percent (100%) of the Projected EBITDA, then a fractional amount of the contingent
payment will be paid out. If the Measurement Period EBITDA is more than the Projected EBITDA, the full principal balance of this TicketSmarter Earn-Out will be paid out. In
no event will the principal balance of this TicketSmarter Earn-Out become a negative number. The maximum downward earn-out adjustment to the earn-out balance will be to
reduce the balance to zero.
F-25
The contingent consideration earn-out is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability
at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration earn-out at its
estimated fair value of $3,700,000 at the acquisition date. Management determined that the actual Measurement Period EBITDA generated by TicketSmarter was less than 70%
of the Projected EBITDA threshold. Therefore, no TicketSmarter Earn-Out payments amounts were due under the agreement. Therefore, the fair value of the contingent
consideration earn-out agreement was reduced to zero, and the resulting gain of $-0- and $3,700,000 was reported in our Consolidated Statements of Operations for the years
ended December 31, 2022 and December 31, 2021, respectively.
NOTE 11. 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:
●
●
●
2021.
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 December 31, 2022 and
Liabilities:
Warrant derivative liabilities
Contingent consideration promissory notes and contingent
consideration earn-out agreement
Liabilities:
Warrant derivative liabilities
Contingent consideration promissory notes and contingent
consideration earn-out agreement
Level 1
Level 2
Level 3
Total
December 31, 2022
—
—
—
—
—
—
$
$
$
$
—
—
—
$
$
—
777,840
777,840
December 31, 2021
Level 2
Level 3
—
—
—
$
$
14,846,932
967,212
15,814,144
$
$
$
$
—
777,840
777,840
Total
14,846,932
967,212
15,814,144
$
$
$
$
Level 1
F-26
The following table represents the change in Level 3 tier value measurements:
Contingent
Consideration
Promissory Notes and Earn-
Out Agreement
Warrant Derivative
Liabilities
Balance, December 31, 2021
$
967,212
$
14,846,932
Issuance of contingent consideration promissory note - Revenue Cycle Management Segment Business
Acquisition
Issuance of contingent consideration promissory note - Revenue Cycle Management Segment Asset
Acquisition
Change in fair value of warrant derivative liabilities
Gain on extinguishment of warrant derivative liabilities
Issuance of common stock through warrant exchange agreement
Principal payments on contingent consideration promissory notes – Revenue Cycle Management
Acquisitions
Change in fair value of contingent consideration promissory notes - Revenue Cycle Management
Acquisitions
Balance, December 31, 2022
NOTE 12. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 2022 and 2021:
—
—
(6,726,638)
(3,624,794)
(4,495,500)
—
—
—
750,000
105,000
—
—
—
(527,402)
(516,970)
$
777,840
$
December 31,
2022
December 31,
2021
Accrued warranty expense
Accrued litigation costs
Accrued sales commissions
Accrued payroll and related fringes
Accrued sales returns and allowances
Accrued taxes
Other
$
$
Accrued warranty expense was comprised of the following for the years ended December 31, 2022 and 2021:
Beginning balance
Provision for warranty expense
Charges applied to warranty reserve
Ending balance
$
$
F-27
15,694
247,984
55,000
504,020
118,026
46,408
103,835
1,090,967
2022
13,742
71,734
(69,782)
$
$
$
13,742
250,000
30,213
453,858
45,298
180,486
202,401
1,175,998
2021
31,845
92,202
(110,305)
15,694
$
13,742
NOTE 13. INCOME TAXES
The components of income tax provision (benefit) for the years ended December 31, 2022, and 2021 are as follows:
2022
2021
Current taxes:
Federal
State
Total current taxes
Deferred tax provision (benefit)
Income tax provision (benefit)
$
$
— $
—
—
—
— $
—
—
—
—
—
A reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2022, and 2021 to the Company’s effective tax rate
is as follows:
2022
2021
U.S. Statutory tax rate
State taxes, net of Federal benefit
Stock based compensation
Change in valuation reserve on deferred tax assets
Termination of warrant derivative liabilities
Contingent consideration for acquisition
Other, net
Income tax (provision) benefit
21.0%
6.0%
(1.5)%
(91.2)%
57.0%
4.1%
4.6%
—%
21.0%
5.1%
(0.9)%
(26.7)%
—%
—%
(0.3)%
—%
The effective tax rate for the years ended December 31, 2022, and 2021 varied from the expected statutory rate due to the Company continuing to provide a 100%
valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of
December 31, 2022, primarily because of the current year operating losses.
Significant components of the Company’s deferred tax assets (liabilities) as of December 31, 2022 and 2021 are as follows:
2022
2021
Deferred tax assets:
Stock-based compensation
Start-up costs
Inventory reserves
Uniform capitalization of inventory costs
Allowance for doubtful accounts receivable
Property, plant and equipment depreciation
Deferred revenue
Accrued litigation reserve
Accrued expenses
Net operating loss carryforward
Research and development tax credit carryforward
State jobs credit carryforward
Charitable contributions carryforward
Total deferred tax assets
Valuation reserve
Total deferred tax assets
Deferred tax liabilities:
Warrant derivative liabilities
Intangible assets
Domestic international sales company
Total deferred tax liabilities
Net deferred tax assets (liability)
$
$
510,000
110,000
1,355,000
70,000
40,000
290,000
1,965,000
60,000
50,000
27,940,000
1,795,000
230,000
95,000
34,510,000
(34,200,000)
310,000
—
(165,000)
(145,000)
(310,000)
705,000
115,000
875,000
85,000
30,000
285,000
1,135,000
65,000
35,000
21,240,000
1,795,000
230,000
100,000
26,695,000
(16,980,000)
9,715,000
(9,495,000
(75,000
(145,000)
(9,715,000)
$
— $
—
F-28
The valuation allowance on deferred tax assets totaled $34,200,000 and $16,980,000 as of December 31, 2022, and 2021, respectively. The Company records the
benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740,
“Income Taxes,” the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
The Company incurred operating losses in 2022 but generated income 2021 and it continues to be in a three-year cumulative loss position at December 31, 2022 and
2021. 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 increase our valuation allowance by $17,220,000 but continue to fully
reserve its deferred tax assets at December 31, 2022. 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 December 31, 2022, the Company had available approximately $113,315,000 of Federal net operating loss carry-forwards available to offset future taxable
income generated. Such tax net operating loss carry-forwards expire between 2024 and 2042, with $63,726,000 of the tax net operating loss carry-forwards have an indefinite
life since the enactment of the Tax Cuts and Jobs Act of 2017. In addition, the Company had research and development tax credit carry-forwards totaling $1,795,000 available
as of December 31, 2022, which expire between 2023 and 2039.
The Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards in the event that it has
experienced a more than 50% change in ownership over a three-year period. Current estimates prepared by the Company indicate that due to ownership changes which have
occurred, approximately $765,000 of its net operating loss and $175,000 of its research and development tax credit carry-forwards are currently subject to an annual limitation
of approximately $1,151,000 and may be further limited by additional ownership changes which may occur in the future. As stated above, the net operating loss and research
and development credit carry-forwards expire between 2023 and 2039, allowing the Company to potentially utilize all of the limited net operating loss carry-forwards during the
carry-forward period.
As discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process. The Company first determines whether it is
more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to
determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being
realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross interest,
penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in the consolidated financial statements.
F-29
The effective tax rate for the years ended December 31, 2022, and 2021 varied from the expected statutory rate due to the Company continuing to provide a 100%
valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of
December 31, 2022, primarily because of the current year operating losses.
The Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2018 and all prior tax years.
NOTE 14. OPERATING LEASE
On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which served as its new principal executive office and primary
business location prior to the April 30 purchase and sale agreement. The original lease agreement was amended on August 28, 2020 to correct the footage under lease and
monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments ranging from
$12,398 to $14,741 thereafter, with a termination date of December 2026. The Company is responsible for property taxes, utilities, insurance and its proportionate share of
common area costs related to its new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and
warehouse operating lease as of December 31, 2022 was forty-eight months.
The Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes. The terms of the lease include 48
monthly payments of $1,598 with a maturity date of October 2023. The Company has the option to purchase such equipment at maturity for its estimated fair market value at
that point in time. The remaining lease term for the Company’s copier operating lease as of December 31, 2022 was ten months.
On June 30, 2021, the Company completed the acquisition of its first medical billing company, through Nobility Healthcare. Upon completion of this acquisition,
Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $2,648 to $2,774 thereafter,
with a termination date in July 2024. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this
location. The remaining lease term for the Company’s office and warehouse operating lease as of December 31, 2022 was nineteen months.
On August 31, 2021, the Company completed the acquisition of its second acquired medical billing company, through Nobility Healthcare. Upon completion of this
acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $11,579 to
$11,811 thereafter, with a termination date in March 2023. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs
related to this location. The Company took possession of the leased facilities on September 1, 2021. The remaining lease term for the Company’s office and warehouse
operating lease as of December 31, 2022 was three months. The Company plans to relocate the revenue cycle management operating segment acquired operations to existing
owned or leased facilities upon termination of this operating lease.
On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this
acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211 to
$7,364 thereafter, with a termination date of December 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area
costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company signed a six-month extension for the lease, extending
the remaining lease term for the Company’s office and the remaining lease term for the Company’s warehouse operating lease as of December 31, 2022 was six months.
On January 1, 2022, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion
of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $4,233 to
$4,626, with a termination date of June 2025. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this
location. The Company took possession of the leased facilities on January 1, 2022. The remaining lease term for the Company’s office and warehouse operating lease as of
December 31, 2022, was thirty months.
F-30
Lease expense related to the office spaces and copier operating leases was recorded on a straight-line basis over the lease term. Total lease expense under the five
operating leases was approximately $547,609 for the year ended December 31, 2022.
The weighted-average remaining lease term related to the Company’s lease liabilities as of December 31, 2022 and December 31, 2021 was 3.3 years and 3.8 years,
respectively.
The discount rate implicit within the Company’s operating leases was not generally determinable, and therefore, the Company determined the discount rate based on its
incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount
rate of 8%.
The following sets forth the operating lease right of use assets and liabilities as of December 31, 2022:
Assets:
Operating lease right of use assets
Liabilities:
Operating lease obligations-current portion
Operating lease obligations-less current portion
Total operating lease obligations
Following are the minimum lease payments for each year and in total.
Year ending December 31:
2023
2024
2025
2026
Total undiscounted minimum future lease payments
Imputed interest
Total operating lease liability
NOTE 15. COMMITMENTS AND CONTINGENCIES
Litigation.
$
$
$
$
$
$
782,129
294,617
555,707
850,324
349,811
245,761
196,462
175,113
967,147
(116,823)
850,324
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. (“defendant”) in the United States District Court for the District of Kansas. The lawsuit
arises from the defendant’s multiple breaches of its obligations to the Company. The Company seeks monetary damages and injunctive relief based on certain conduct by the
defendant. On July 18, 2022, the defendant filed its Answer to the Company’s Verified Complaint and included Counterclaims alleging breach of contract and seeking monetary
damages. On August 8, 2022, the Company filed its Reply and Affirmative Defenses to the Counterclaims by, among other things, denying the allegations and any and all
liability. We have not concluded that a material loss related to the allegations is probable, nor have we accrued a liability related to these claims. Although we believe a loss
could be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the
potential damages given that the dispute is yet to enter the discovery process. We will continue to vigorously pursue these claims, and we continue to believe that we have valid
grounds for recovery of the disputed deliverables. However, there can be no assurances as to the outcome of the dispute.
F-31
While the ultimate resolution is unknown, based on the information currently available, 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.
Notice of Delisting
On July 7, 2022, the Company, received a written notification (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”)
notifying the Company that it was not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market, as set forth under Nasdaq
Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”), because the closing bid price of the Company’s common stock was below $1.00 per share for the previous
thirty (30) consecutive business days. The Notice has no immediate effect on the listing of the Common Stock, which will continue to trade uninterrupted on the Nasdaq Capital
Market under the ticker “DGLY.”
Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been granted 180 calendar days from the date of the Notice, or until January 3, 2023 (the
“Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. If at any time during the Compliance Period, the bid price of the Common Stock closes
at or above $1.00 per share for a minimum of ten (10) consecutive business days, Nasdaq will provide the Company with written confirmation of compliance with the Minimum
Bid Price Requirement and the matter will be closed.
On February 23, 2023, the Company received notice from Nasdaq confirming that the Company has cured its bid price deficiency and has fully regained compliance
with the Minimum Bid Price Requirement.
General
401 (k) Plan. The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended, requires it to provide 100% matching
contributions for employees, who elect to contribute up to 3% of their compensation to the plan and 50% matching contributions for employee’s elective deferrals on the next
2% of their contributions. The Company made matching contributions totaling $223,084 and $127,293 for the years ended December 31, 2022 and 2021, respectively. Each
participant is 100% vested at all times in employee and employer matching contributions.
NOTE 16. STOCK-BASED COMPENSATION
The Company recorded pre-tax compensation expense related to the grant of stock options and restricted stock issued of $1,282,757 and $1,605,949 for the years ended
December 31, 2022 and 2021, respectively.
F-32
As of December 31, 2022, 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.”
These Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total of 333,750 shares of common
stock. The 2005 Plan terminated during 2015 with 1,078 shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under
the 2005 Plan that remain unexercised and outstanding as of December 31, 2022 total 284. The 2006 Plan terminated during 2016 with 2,739 shares not awarded or underlying
options, which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding as of December 31, 2022 total 531.
The 2007 Plan terminated during 2017 with 4,733 shares not awarded or underlying options, which shares are now unavailable for issuance. There are no stock options granted
under the 2007 Plan that remain unexercised and outstanding as of December 31, 2022. The 2008 Plan terminated during 2018 with 2,025 shares not awarded or underlying
options, which shares are now unavailable for issuance. There are no stock options granted under the 2008 Plan that remain unexercised and outstanding as of December 31,
2022.
Our Board of Directors adopted the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”) on June 30, 2020 and the Company’s stockholders approved the
2020 Plan at the Annual Meeting held on September 9, 2020. The Company’s stockholders approved an amendment to the 2020 Plan at the Annual Meeting held on June 22,
2021 which increased the number of shares of Common Stock authorized and reserved for issuance under the 2020 Plan to a total of 125,000. A total of 112,958 options and
restricted stock have been granted under the 2020 Plan to date. The 2020 Plan also authorizes us to grant (i) to the key employees’ incentive stock options to purchase shares of
Common Stock and non-qualified stock options to purchase shares of Common Stock and restricted stock awards and (ii) to non-employee directors and consultants non-
qualified stock options and restricted stock.
Our Board of Directors adopted the 2022 Stock Option and Restricted Stock Plan (the “2022 Plan”) on October 28, 2022 and the Company’s stockholders approved the
2022 Plan at the Annual Meeting held on December 7, 2022. The number of shares of Common Stock authorized and reserved for issuance under the 2022 Plan totals 125,000.
The 2022 Plan also authorizes us to grant (i) to the key employees’ incentive stock options to purchase shares of Common Stock and non-qualified stock options to purchase
shares of Common Stock and restricted stock awards and (ii) to non-employee directors and consultants non-qualified stock options and restricted stock.
The 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 137,042 shares remained available for awards under the various Plans as of December 31, 2022.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.
F-33
Activity in the various Plans during the years ended December 31, 2022 and 2021 is reflected in the following table:
Options
Options
Outstanding at January 1, 2021
Granted
Exercised
Forfeited
Outstanding at December 31, 2021
Exercisable at December 31, 2021
Outstanding at January 1, 2022
Granted
Exercised
Forfeited
Outstanding at December 31, 2022
Exercisable at December 31, 2022
Number of
Shares
Weighted
Average
Exercise Price
41,916
15,000
—
(2,613)
54,303
46,803
54,303
1,250
—
(1,603)
53,950
53,950
$
$
$
$
$
$
64.00
33.40
—
(232.20)
47.40
49.60
Weighted
Average
Exercise Price
47.40
19.60
—
(80.80)
45.80
45.80
Number of
Shares
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The total estimated grant date fair value stock
options issued during the year ended December 31, 2022 and 2021 was $22,768 and $466,831, respectively.
The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated grant date fair value of the options during
the years ended December 31, 2022 and 2021:
Volatility – range
Risk-free rate
Expected term
Exercise price
2022
Assumptions
2021
Assumptions
111.67%
1.81%
10.0 years
19.60
$
113%
1.30%
10.0 years
33.40
$
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 years ended December 31, 2022 and 2021.
At December 31, 2022 and 2021, the aggregate intrinsic value of options outstanding was approximately $-0- and $-0-, respectively, and the aggregate intrinsic value
of options exercisable was approximately $-0- and $-0-, respectively.
The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable options under the
Company’s option plans as of December 31, 2022:
Outstanding options
Exercisable options
Exercise price
range
Number of
options
$
$
$
0.01 to $49.99
50.00 to $69.99
70.00 to $89.99
Weighted
average
remaining
contractual life
7.6 years
5.5 years
2.8 years
6.8 years
F-34
37,000
15,100
1,850
53,950
Number of
options
Weighted average
remaining
contractual life
37,000
15,100
1,850
53,950
7.6 years
5.5 years
2.8 years
6.8 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.
A summary of all restricted stock activity under the equity compensation plans for the years ended December 31, 2022 and 2021 is as follows:
Nonvested balance, January 1, 2021
Granted
Vested
Forfeited
Nonvested balance, December 31, 2021
Nonvested balance, January 1, 2022
Granted
Vested
Forfeited
Nonvested balance, December 31, 2022
Number of
Restricted
shares
36,006
42,800
(25,563)
(375)
52,869
Number of
Restricted
shares
52,869
60,750
(31,244)
(3,250)
79,125
$
$
$
$
Weighted
average
grant date
fair value
Weighted
average
grant date
fair value
33.80
41.40
(38.80)
(21.60)
37.40
37.40
14.67
(34.73)
(21.20)
21.73
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 December 31, 2022,
there were $500,280 of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next forty-eight
months in accordance with their respective vesting scale.
The nonvested balance of restricted stock vests as follows:
Years ended
2023
2024
2025
2026
2027
Number of
shares
57,250
12,750
4,000
3,625
1,500
NOTE 17. COMMON STOCK PURCHASE WARRANTS
The Company has issued common stock purchase warrants in conjunction with various debt and equity issuances. The warrants are either immediately exercisable, or
have a delayed initial exercise date, no more than six months from their respective issue date and allow the holders to purchase up to 67,459 shares of common stock at $52.00
to $67.20 per share as of December 31, 2022. The warrants expire from February 23, 2023 through July 31, 2023 and certain of the outstanding warrants allow for cashless
exercise.
F-35
On January 14, 2021 and February 1, 2021, the Company issued warrants to purchase a total of 2,127,500 shares of Common Stock. The warrant terms provide for net
cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat these warrants as
derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated
statements of operations as the change in fair value of warrant derivative liabilities. Furthermore, the Company re-values the fair value of warrant derivative liability as of the
date the warrant is exercised with the resulting warrant derivative liability transitioned to change in fair value of warrant derivative liabilities through the consolidated statement
of operations.
On August 19, 2021, the Company entered into a Warrant Exchange Agreement (the “Exchange Agreement”) with the Investors cancelling February Warrants
exercisable for an aggregate of 384,077 shares of Common Stock in consideration for its issuance of (i) new warrants (the “Exchange Warrants”) to the Investors exercisable for
an aggregate of up to 384,077 shares of Common Stock. The Company also issued warrants (the “Replacement Original Warrants”) replacing the February Warrants for the
remaining shares of Common Stock exercisable thereunder, representing an aggregate of 330,923 shares of Common Stock, and extended the expiration date of the February
Warrants to September 18, 2026. The Exchange Warrants provide for an initial exercise price of $65.00 per share, subject to customary adjustments thereunder, and are
immediately exercisable upon issuance for cash and on a cashless basis. On the date of the exchange, the Company calculated the fair value, using the Black-Scholes method, of
the cancelled February Warrants and the newly issued Exchange Warrants, the difference in fair value measurement of the respective warrants was attributed to warrant
modification expense in the consolidated statement of operations.
On the date of the exchange, the February Warrants and Exchange Warrants were valued at $11,818,644 and $12,114,424 using the original and modified expiry date
of the warrants, respectively, using the Black-Scholes method. The difference of $295,780 was accordingly recorded as a warrant modification expense in the consolidated
statement of operations.
Volatility - range
Risk-free rate
Dividend
Remaining contractual term
Exercise price
Common stock issuable under the warrants
Original terms at August
19, 2021
Modified terms at August
19, 2021
109.3%
0.78%
0%
4.5 years
65.00
715,000
$
104.7%
0.78%
0%
5.1 years
65.00
715,000
$
On August 23, 2022, the Company entered into Warrant Exchange Agreements (the “Warrant Exchange Agreements”) with certain investors (the “Investors”),
pursuant to which the Company agreed to issue to the Investors an aggregate of 303,750 shares of Common Stock in exchange for the cancellation by the Investors of the
January Warrants, the Exchange Warrants and the Replacement Originals Warrants. On the date of the exchange, the Company calculated the fair value of the issuance of shares
of common stock pursuant to the Warrant Exchange Agreements, attributing that value to common stock and additional paid in capital. The remaining value of the warrant
derivative liability was attributed to an income from change in fair market value of warrant derivative liabilities and gain on extinguishment of warrant derivative liabilities in
the consolidated statement of operations. On the date of the Warrant Exchange Agreement, using the Black-Scholes method, the fair value of the warrant derivative liability was
$8.1 million, compared to $9.3 million at June 30, 2022, resulting in income from change in fair market value of warrant derivative liabilities of $1.2 million during the year
ended December 31, 2022. Further, the value of the issued shares of Common Stock was $4.5 million, applied to additional paid in capital, resulting in a gain on the
extinguishment of warrant derivative liabilities of $3.6 million during the year ended December 31, 2022.
Volatility - range
Risk-free rate
Dividend
Remaining contractual term
Exercise price
Common stock issuable under the warrants
F-36
Terms at
August 23, 2022
103.7%
3.17 - 3.36%
0%
3.4 - 4.1 years
65.00
1,215,000
$
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases
for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet.
Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The
simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value
measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
The following table summarizes information about shares issuable under warrants outstanding during the years ended December 31, 2022 and 2021:
Vested Balance, January 1, 2021
Granted
Exercised
Cancelled
Vested Balance, December 31, 2021
Vested Balance, January 1, 2022
Granted
Exercised
Forfeited/cancelled
Vested Balance, December 31, 2022
Warrants
169,418
2,127,500
(912,500)
(83,988)
1,300,430
Warrants
1,300,430
—
—
(1,232,971)
67,459
$
$
$
$
Weighted
average
exercise price
124.80
62.20
(58.40)
(188.40)
64.80
Weighted
average
exercise price
64.80
—
—
(65.08)
60.26
The total intrinsic value of all outstanding warrants aggregated $-0- as of December 31, 2022 and 2021, and the weighted average remaining term was 3.9 and 50.7
months as of December 31, 2022 and 2021, respectively.
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 December 31, 2022:
Exercise
price
Number of
warrants
Outstanding and exercisable warrants
Weighted average
remaining
contractual life
$
$
$
52.00
60.00
67.20
23,286
15,840
28,333
67,459
F-37
0.6 years
0.3 years
0.2 years
0.3 years
NOTE 18 - STOCKHOLDERS’ EQUITY
Registered Direct Offerings
On January 14, 2021, the Company consummated a registered direct offering (the “Offering”) of (i) 140,000 shares of common stock (“Shares”), (ii) pre-funded
warrants to purchase up to 360,000 shares of Common Stock (the “Pre-Funded Warrants”), issuable to investors whose purchase of shares of Common Stock would otherwise
result in such investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the holder, 9.99%) of the Company’s
outstanding Common Stock immediately following the consummation of the Registered Offering (“Pre-Funded Warrants”); and (iii) common stock purchase warrants
(“Warrants”) to purchase up to an aggregate of 500,000 shares of Common Stock (the “Warrant Shares”), which are exercisable for a period of five years after issuance at an
initial exercise price $65.00 per share, subject to certain adjustments, as provided in the Warrants. The Offering was conducted pursuant to a placement agency agreement, dated
January 12, 2021, between the Company and Kingswood Capital Markets, division of Benchmark Investments, Inc., who acted as the exclusive placement agent in connection
with the Offering pursuant to a placement agency agreement. The Shares and accompanying Warrants in the Offering were sold at a combined offering price of $61.90 per
Share and accompanying Warrant and the Pre-Funded Warrants and accompanying Warrants in the Offering were sold at a combined offering price of $61.70 per Pre-Funded
Warrant and accompanying Warrant.
The securities in the Offering were issued pursuant to a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (File No. 333-
239419). The placement agency agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification
obligations of the Company and the placement agent. The placement agent received discounts and commissions of six percent (6%) of the gross cash proceeds received by the
Company from the sale of the securities sold in the Offering and certain expenses.
The Company received approximately $28,941,000 ($29,013,000 upon full exercise of the prefunded warrants) in net proceeds from the Offering after deducting the
discounts, commissions, and other estimated offering expenses payable by the Company. As of December 31, 2021, all pre-funded warrants have been fully exercised. The
Company plans to use the net proceeds from the Offering for working capital, product development, order fulfilment and for general corporate purposes.
The Company received net proceeds from this offering as follows:
Description
Amount
Net proceeds received:
Proceeds from the sale of 140,000 shares of Common Stock at $61.90 per share
Proceeds from the sale of pre-funded warrants to purchase 360,000 shares of Common Stock at $61.70 per share
Less: Placement agent fees and other expenses of the offering
Net proceeds of the offering
$
$
8,666,000
22,212,000
(1,937,000)
28,941,000
In conjunction with this Offering, the Company issued prefunded Common Stock purchase warrants to purchase up to 360,000 shares Common Stock at $61.90 per
share ($61.70 prefunded at closing) and Common Stock purchase warrants to purchase up to 500,000 shares of Common Stock at $65.00 per share. The underlying warrant
terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat
these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the
consolidated statements of operations as the change in fair value of warrant derivative liabilities. Accordingly, the Company allocated a portion of the net proceeds of this
offering to warrant derivative liabilities based on their estimated fair value as follows (See Notes 11 and 17):
F-38
Description
Warrant derivative liabilities
Pre-funded warrant derivative liabilities
Total allocation of the net proceeds of the offering to warrant derivative liabilities
Registered Direct Offerings
Amount
$
$
21,922,158
378,615
22,300,773
On February 1, 2021, the Company consummated an registered direct offering (the “Second Offering”) of (i) 162,500 shares of common stock (“February 2021
Shares”), (ii) pre-funded warrants to purchase up to 552,500 shares of Common Stock (the “February 2021 Pre-Funded Warrants”), issuable to investors whose purchase of
shares of Common Stock would otherwise result in such investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election
of the holder, 9.99%) of the Company’s outstanding Common Stock immediately following the consummation of the Registered Offering; and (iii) common stock purchase
warrants (“February 2021 Warrants”) to purchase up to an aggregate of 715,000 shares of Common Stock (the “February 2021 Warrant Shares”), which are exercisable for a
period of five years after issuance at an initial exercise price $65.00 per share, subject to certain adjustments, as provided in the February 2021 Warrants. The Second Offering
was conducted pursuant to a placement agency agreement, dated January 28, 2021, between the Company and Kingswood Capital Markets, division of Benchmark Investments,
Inc., who acted as the exclusive placement agent in connection with the Second Offering pursuant to a placement agency agreement. The February 2021 Shares and
accompanying February 2021 Warrants in the Second Offering were sold at a combined offering price of $56.00 per February 2021 Share and accompanying February 2021
Warrant and the February 2021 Pre-Funded Warrants and accompanying February 2021 Warrants in the Offering were sold at a combined offering price of $55.80 per February
2021 Pre-Funded Warrant and accompanying February 2021 Warrant.
The securities in the Second Offering were issued pursuant to a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (File No.
333-239419). The placement agency agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,
indemnification obligations of the Company and the placement agent. The placement agent received discounts and commissions of six percent (6%) of the gross cash proceeds
received by the Company from the sale of the securities sold in the Second Offering and certain expenses.
F-39
The Company received approximately $37,447,100 ($37,557,600 upon full exercise of the prefunded warrants) in net proceeds from the Second Offering after
deducting the discounts, commissions, and other estimated offering expenses payable by the Company. As of December 31, 2021, all pre-funded warrants have been fully
exercised. The Company plans to use the net proceeds from the Second Offering for working capital, product development, order fulfilment and for general corporate purposes.
The Company received net proceeds from this offering as follows:
Description
Amount
Net proceeds received:
Proceeds from the sale of 162,500 shares of Common Stock at $56.00 per share
Proceeds from the sale of pre-funded warrants to purchase 552,500 shares of Common Stock at $55.80 per share
Less: Placement agent fees and other expenses of the offering
Net proceeds of the offering
$
$
9,100,000
30,829,500
(2,482,400)
37,447,100
In conjunction with the Second Offering, the Company issued prefunded Common Stock purchase warrants to purchase up to 552,500 shares of common Stock at
$56.00 per share ($55.80 prefunded at closing) and Common Stock purchase warrants to purchase up to 715,000 shares of Common Stock at $65.00 per share. The underlying
warrant terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to
treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported
in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Accordingly, the Company allocated a portion of the net proceeds of this
offering to warrant derivative liabilities based on their estimated fair value as follows (See Notes 11 and 17):
Description
Warrant derivative liabilities
Pre-funded warrant derivative liabilities
Total allocation of the net proceeds of the offering to warrant derivative liabilities
2022 Issuance of Restricted Common Stock.
Amount
$
$
27,476,352
1,438,934
28,915,286
On January 7, 2022, the board of directors approved the grant of 26,250 shares of common stock to officers of the Company. Such shares will vest over various periods
ranging from one to five years on the anniversary of the grant date, provided that each grantee remains an officer or employee on such dates.
On various dates in January 2022, the board of directors approved the grant of 9,500 shares of common stock to employees of the Company. Most shares will generally
vest in varying amounts over the next two to five years, provided that each grantee remains an employee on such vesting dates.
Cancellation of Restricted Stock
During the year ended December 31, 2022, the Company cancelled 3,250 shares for various reasons.
Preferred Stock Transaction
On October 13, 2022, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Preferred
Stock Investors”), pursuant to which the Company agreed to issue and sell, in a private placement (the “2022 Offering”), 1,400,000 shares of the Company’s Series A
Convertible Redeemable Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), and 100,000 shares of the Company’s Series B Convertible Redeemable
Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”, and together with the Series A Preferred Stock, the “Preferred Stock”), at an offering price of $9.50
per share, representing a 5% original issue discount to the stated value of $10.00 per share, for gross aggregate proceeds of $15 million in the 2022 Offering, before the
deduction of discounts, fees and offering expenses. The shares of Preferred Stock will, under certain circumstances, be convertible into shares of the Company’s common stock,
at the option of the holders of the Preferred Stock and, in certain circumstances, by the Company. In connection with the 2022 Offering, the Company paid A.G.P./Alliance
Global Partners (the “Financial Advisor”) an aggregate cash fee equal to $750,000 and reimbursed the Financial Advisor for certain of its expenses in an amount not to exceed
$135,000.
Pursuant to the Purchase Agreement, the Company filed on October 17, 2022 certificates of designation (the “Certificates of Designation”) with the Secretary of the
State of Nevada designating the rights, preferences and limitations of the shares of Series A Preferred Stock and Series B Preferred Stock. The Certificate of Designation for the
Series A Preferred Stock provides, in particular, that the Series A Preferred Stock will have no voting rights other than the right to vote on the Amendments on an as-if-
converted-to-Common-Stock basis. The Certificate of Designation for the Series B Preferred Stock provides, in particular, that the Series B Preferred Stock will have no voting
rights other than the right to vote on the Amendments and each share of Series B Preferred Stock entitles the holder thereof the right to cast 2,500 votes on the Amendments.
The holders of Preferred Stock will be entitled to dividends, on an as-if converted-to-Common-Stock basis, equal to dividends actually paid, if any, on shares of
Common Stock. The Preferred Stock is convertible, at the option of the holders and, in certain circumstances, by the Company, into shares of Common Stock at a conversion
price of $20.00 per share. The conversion price can be adjusted pursuant to the Certificates of Designation for stock dividends and stock splits, subsequent rights offering, pro
rata distributions of dividends or other distribution of its assets, or the occurrence of a fundamental transaction (as defined in the applicable Certificate of Designation).
The holders of the Series A Preferred Stock and Series B Preferred Stock have the right to require the Company to redeem their shares of the relevant series at a price
per share equal to 105% of the stated value of such shares commencing (i) after the earlier of (1) the receipt of stockholder approval of the Amendments and (2) sixty (60) days
after the closing of the 2022 Offering and (ii) before the date that is ninety (90) days after such closing. The Company has the option to redeem the Series A Preferred Stock and
Series B Preferred Stock at a price per share equal to 105% of the stated value of such shares commencing after the 90th day following the closing of the 2022 Offering, subject
to the holders’ rights to convert the shares prior to such redemption.
The proceeds of the 2022 Offering were held in an escrow account, along with the additional amount that would be necessary to fund the 105% redemption price until
the expiration of the redemption period for the Preferred Stock, as applicable, subject to the earlier payment to redeeming holders. Upon expiration of the redemption period,
any proceeds remaining in the escrow account will be disbursed to the Company.
The 2022 Offering closed on October 19, 2022. In December 2022, the Company redeemed 1,400,000 shares of Series A & 100,000 shares of Series B Preferred Stock,
for a redemption price of $15,750,000, with a $13,365,000 carrying amount, resulting in a $2,385,000 loss on redemption.
Issuance of Common Stock as Consideration for the Potential Spin-Off Transaction.
On December 28, 2022, the Company issued a total of 25,000 shares of common stock as a portion of the consideration paid for the advisory services associated with
the potential spin-off transaction.
F-40
Stock Repurchase Program
On December 6, 2021, the board of directors of the Company authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock under the
specified terms of a share repurchase program (the “Program”). During the year ended December 31, 2022, the Company repurchased 186,299 shares of its common stock for
$4,026,523, in accordance with the Program.
Period
December 2021
January 2022
February 2022
March 2022
April 2022
May 2022
June 2022
Total all plans
Total
Number of
Shares
Purchased
Average
Price
Paid per
Shares
86,742
34,855
34,649
24,298
29,774
35,846
26,878
273,041
$
$
22.80
22.20
22.40
21.20
22.80
21.60
19.20
22.00
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Program
Maximum
Approximate
Dollar Value
of
Shares that
May Yet Be
Purchased
Under the
Program
86,742
34,855
34,649
24,298
29,774
35,846
26,878
273,041
$
—
—
—
—
—
—
—
3,998,398
On June 30, 2022, the board of directors of the Company elected to terminate the Program, effective immediately. The Program began in December 2021, with the
Company purchasing a total of 273,041 shares at a cost of $6,001,602 through June 30, 2022.
Noncontrolling Interests
The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is
allocated 49% of the income/loss of Nobility Healthcare which is reflected in the statement of (income) loss as “net (income) loss attributable to noncontrolling interests of
consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $407,933 and $56,453 for the year ended December 31,
2022 and 2021, respectively.
NOTE 19. RELATED PARTY TRANSACTIONS
Transactions with Managing Member of Nobility Healthcare
On January 27, 2022, the board of directors appointed Christian J. Hoffmann, III as a member of the Board, effective immediately. Mr. Hoffmann is a principal owner
and manager of Nobility, LLC which is currently the managing member of our consolidated subsidiary Nobility Healthcare, LLC.
The Company has advanced a total of $158,384 in the form of a working capital loan to Nobility, LLC in order to fund capital expenditures necessary for the initial
growth of the joint venture during 2022. The outstanding balance of the working capital loan was $138,384 as of December 31, 2022 and the Company anticipates full
repayment of this advance during the year ended December 31, 2023. The Company paid distributions to the noncontrolling in consolidated subsidiary totaling $15,692 and
$-0-, for the years ended December 31, 2022 and 2021, respectively.
On August 1, 2022, Mr. Hoffmann resigned as a member of the Board, effective immediately. He remains as a principal owner and manager of Nobility, LLC.
F-41
NOTE 20. NET INCOME (LOSS) PER SHARE
The calculation of the weighted average number of shares outstanding and loss per share outstanding for the years ended December 31, 2022 and 2021 are as follows:
Year ended December 31,
2022
2021
Numerator for basic and diluted income (loss) per share – Net income (loss) attributable to
common stockholders
$
(21,666,691)
$
25,474,508
Denominator for basic 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
2,548,549
2,511,114
—
—
Denominator for diluted loss per share – adjusted weighted average shares outstanding
2,548,549
2,511,114
Net income (loss) per share:
Basic
Diluted
$
$
(8.50)
(8.50)
$
$
10.14
10.14
Basic income (loss) per share is based upon the weighted average number of shares of common stock outstanding during the period. For the years ended December 31,
2022 and 2021, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included
in the computation of diluted income (loss) per share.
NOTE 21. DIGITAL ALLY HEALTHCARE VENTURE
On June 4, 2021, Digital Ally Healthcare, a wholly-owned subsidiary of the Company, entered into a venture with Nobility LLC (“Nobility”), an eight-year-old
revenue cycle management (“RCM”) company servicing the medical industry, to form Nobility Healthcare, LLC (“Nobility Healthcare”). Digital Ally Healthcare is capitalizing
the venture with $13.5 million to support the venture’s business strategy to make acquisitions of RCM companies. Digital Ally Healthcare owns 51% of the venture that entitles
it to 51% of the distributable cash as defined in the venture’s operating agreement plus a cumulative preferred return of 10% per annum on its invested capital. Nobility will
receive a management fee and 49% of the distributable cash, subordinated to Digital Ally Healthcare’s preferred return. The venture comprises the Company’s revenue cycle
management segment.
On June 30, 2021, the Company’s revenue cycle management segment completed the acquisition of a private medical billing company (the “Healthcare Acquisition”).
In accordance with the stock purchase agreement, the Company’s revenue cycle management segment agreed to a non-refundable initial payment (the “Initial Payment
Amount”) of $850,000. In addition to the Initial Payment Amount, the Company’s revenue cycle management segment agreed to issue a promissory note to the stockholders of
the Healthcare Acquisition in the principal amount of $350,000 that is subject to an earn-out adjustment. Management’s estimate of the fair value of this Contingent Note at
December 31, 2021 is $317,212. The gain associated with the adjustment in the estimated fair value of this contingent promissory note is recorded as a gain in the Consolidated
Statements of Operations for the year ended December 31, 2021. Lastly, the Company’s revenue cycle management segment agreed to pay $162,552 representing the principal
and accrued interest balance due under a promissory note issued to the selling shareholders prior to the acquisition closing date. The Company’s revenue cycle management
segment anticipates the estimated fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price was determined to be
approximately $1,376,509. Total acquisition related costs aggregated $164,630, which was expensed as incurred. Subsequent to the acquisition date, the Company received
further information regarding the purchased assets and assumed liabilities. As a result, the initial allocation of the purchase price was adjusted by increasing accounts receivable
by $75,000 with a corresponding reduction of goodwill during the year ended December 31, 2021.
F-42
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 8 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the
Healthcare Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the
Healthcare Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our
financial statements. Our assumptions and estimates are based upon information obtained from the management of the Company’s revenue cycle management segment. The
acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be
amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the Healthcare Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the
time of the Healthcare Acquisition. The preliminary and final estimated fair value of assets acquired and liabilities assumed in the Healthcare Acquisition were as follows:
Assets acquired:
Description
Tangible assets acquired, consisting of acquired cash, accounts receivable and right of use asset
Intangible assets acquired – client agreements
Goodwill
Liabilities assumed consisting of a promissory note issued by the selling shareholders which was paid off
at closing, net of lease liability assumed
Net assets acquired and liabilities assumed
Consideration:
Cash paid at Healthcare Acquisition date
Contingent consideration earn-out agreement
Total Healthcare Acquisition purchase price
Purchase price allocation
Preliminary
as allocated
June 30, 2021
Final
as allocated
June 30, 2022
$
$
$
$
174,351
—
1,125,000
77,158
1,376,509
1,026,509
350,000
1,376,509
$
$
$
$
174,351
457,079
667,921
77,158
1,376,509
1,026,509
350,000
1,376,509
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
Identifiable intangible assets:
Client agreements
Cost
Amortization through
December 31,
2022
Estimated
useful life
$
457,079
$
68,562
10 years
F-43
For the period from the date of the Healthcare Acquisition to June 30, 2022, the Company adjusted its preliminary fair value estimates and estimated useful lives based
upon information obtained through June 30, 2022, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to
estimated identifiable intangible asset fair values of client agreements and goodwill.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such
information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously
recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the
recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 10, “Debt Obligations”.
On August 31, 2021, the Company’s revenue cycle management segment completed the acquisition of another private medical billing company (the “Medical Billing
Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcare agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $2,270,000.
In addition to the Initial Payment Amount, the Company’s revenue cycle management segment agreed to issue a contingent promissory note to the stockholders of the Medical
Billing Acquisition in the principal amount of $650,000 that is subject to an earn-out adjustment. The Company’s revenue cycle management segment anticipates the estimated
fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price was determined to be approximately $2,920,000. Total acquisition
related costs aggregated $5,602, which was expensed as incurred.
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May
21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and
related pro forma information under Article 8 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the
Healthcare Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the
Healthcare Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our
financial statements. Our assumptions and estimates are based upon information obtained from the management of the Company’s revenue cycle management segment. The
acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be
amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the Medical Billing Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the
time of the Medical Billing Acquisition. The preliminary and final estimated fair value of assets acquired, and liabilities assumed in the Medical Billing Acquisition were as
follows:
Description
Assets acquired:
Tangible assets acquired
Identifiable intangible assets acquired – client agreements
Goodwill
Liabilities assumed pursuant to stock purchase agreement
Net assets acquired and liabilities assumed
Consideration:
Cash paid at Healthcare Acquisition date
Contingent consideration earn-out agreement
Total Healthcare Acquisition purchase price
F-44
Purchase price
allocation
Preliminary As
allocated
September 30,
2021
Final As
allocated
September 30,
2022
$
$
$
$
401,547
—
2,920,000
(401,547)
2,920,000
2,270,000
650,000
2,920,000
$
$
$
$
401,547
206,955
2,713,045
(401,547)
2,920,000
2,270,000
650,000
2,920,000
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
Identifiable intangible assets:
Client agreements
Cost
Amortization through
December 31, 2022
Estimated
useful life
$
206,955
$
27,594
10 years
For the period from the date of the Healthcare Acquisition to August 31, 2022, the Company adjusted its preliminary fair value estimates and estimated useful lives
based upon information obtained through August 31, 2022, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily
related to estimated identifiable intangible asset fair values of client agreements and goodwill.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such
information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously
recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the
recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 10, “Debt Obligations”.
On January 1, 2022, the Company’s revenue cycle management segment completed the acquisition of another private medical billing company (the “Medical Billing
Acquisition”). In accordance with the stock purchase agreement, Nobility Healthcare agreed to a non-refundable initial payment (the “Initial Payment Amount”) of $1,153,626.
In addition to the Initial Payment Amount, the Company’s revenue cycle management segment agreed to issue a contingent promissory note to the stockholders of the Medical
Billing Acquisition in the principal amount of $750,000 that is subject to an earn-out adjustment. The Company’s revenue cycle management segment anticipates the estimated
fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price was determined to be approximately $1,903,626. Total acquisition
related costs aggregated $7,996, which was expensed as incurred.
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May
21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and
related pro forma information under Article 8 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the
Healthcare Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the
Healthcare Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our
financial statements. Our assumptions and estimates are based upon information obtained from the management of the Company’s revenue cycle management segment. The
acquisition was structured as stock purchase, therefore the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will not be
amortized for income tax filing purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the Medical Billing Acquisition was allocated to the tangible assets, and assumed liabilities based on their preliminary estimated fair values at the
time of the Medical Billing Acquisition. There was no change from the preliminary estimated fair value to the final estimated fair value of assets acquired, and liabilities
assumed in the Healthcare Acquisition, those value were as follows:
Description
Amount
Assets acquired:
Tangible assets acquired
Goodwill
Liabilities assumed pursuant to stock purchase agreement
Total assets acquired and liabilities assumed
Consideration:
Cash paid at acquisition date
Contingent consideration promissory note
Total acquisition purchase price
F-45
$
$
$
$
190,631
2,100,000
(387,005)
1,903,626
1,153,626
750,000
1,903,626
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such
information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously
recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the
recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 10, “Debt Obligations”.
On February 1, 2022, the Company’s revenue cycle management segment completed an asset acquisition from another private medical billing company (the “Medical
Billing Asset Acquisition”). In accordance with the asset purchase agreement, Nobility Healthcare agreed to a non-refundable initial payment (the “Initial Payment Amount”) of
$230,000. In addition to the Initial Payment Amount, the Company’s revenue cycle management segment agreed to issue a contingent promissory note to the stockholders of the
Medical Billing Asset Acquisition in the principal amount of $105,000 that is subject to an earn-out adjustment. The Company’s revenue cycle management segment anticipates
the estimated fair value of the contingent promissory note to be paid in full, therefore, the total aggregate purchase price was determined to be approximately $335,000. Total
acquisition related costs aggregated $10,322, which was expensed as incurred.
In accordance with ASC 805, “Business Combinations”, the acquisition method of accounting is used, and recognition of the assets acquired is at fair value as of the
acquisition dates. All acquisition costs were expensed as incurred. The consideration paid has been allocated to the assets acquired based on their estimated fair values at the
acquisition date. The estimate of fair values for the intangible assets acquired were agreed to by both buyer and seller. The estimated fair value of intangible assets acquired in
the Medical Billing Asset Acquisition were as follows:
Description
Amount
Assets acquired:
Intangible assets acquired – client agreements
Total assets acquired and liabilities assumed
Consideration:
Cash paid at acquisition date
Contingent consideration promissory note
Total acquisition purchase price
$
$
$
$
335,000
335,000
230,000
105,000
335,000
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
Identifiable intangible assets:
Client agreements
Cost
Amortization through
December 31,
2022
Estimated
useful life
$
335,000
$
30,708
10 years
The change in fair value of the contingent consideration is more fully described in Note 10, “Debt Obligations” and will be estimated on a quarterly basis.
F-46
NOTE 22. TICKETSMARTER ACQUISITION
On September 1, 2021, Digital Ally, Inc. formed TicketSmarter, Inc. (“TicketSmarter”), through which the Company completed the acquisition of Goody Tickets,
LLC, a Kansas limited liability company (“Goody Tickets”) and TicketSmarter, LLC, a Kansas limited liability company (“TicketSmarter LLC”), collectively the
“TicketSmarter Acquisition”. TicketSmarter, Inc. comprises the Company’s entertainment business segment. In accordance with the stock purchase agreement, the Company
agreed to an initial payment (the “Initial Payment Amount”) of $9,403,600 through a combination of cash and common stock. In addition to the Initial Payment Amount, the
Company agreed to issue an earn-out agreement to the stockholders of Goody Tickets and TicketSmarter LLC in the contingent amount of $4,244,400 that is subject to an earn-
out adjustment based on actual EBITDA achieved in 2021, of which the Company gave a fair value of $3,700,000 on the date of acquisition. However, following the
completion of 2021, it was determined that the actual EBITDA threshold for any earn-out adjustment to be paid was not met. Thus, in accordance with U.S. GAAP, the fair
value of the contingent earn-out is reduced to zero, and the associated gain related to this revaluation is recorded in our Consolidated Statements of Operations for the year
ended December 31, 2021. Lastly, included in the agreement, the Company agreed to place $500,000 in escrow, subject to a working capital adjustment based on actual
working capital amounts on the acquisition date as defined in the agreement, this amount was subject to disbursement 45 days following the close of the acquisition. The parties
completed the working capital adjustment resulting in the Company retaining $297,726 of the escrow amount with the $202,274 released to the Sellers. The total acquisition
related costs aggregated $40,625, which was expensed as incurred.
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May
21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and
related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the
TicketSmarter Acquisition has been allocated to Goody Tickets’ and TicketSmarter LLC’s acquired tangible and identifiable intangible assets and assumed liabilities based on
their estimated fair values at the time of the TicketSmarter Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect
the timing or amounts recognized in our financial statements. The TicketSmarter Acquisition was structured as a stock purchase; however the parties agreed to coordinate the
election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired
was recorded as goodwill, which will be amortized over 15 years for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and is
deductible for income tax purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the TicketSmarter Acquisition was allocated to Goody Tickets’ and TicketSmarter LLC’s tangible assets, goodwill, identifiable intangible assets,
and assumed liabilities based on their preliminary estimated fair values at the time of the TicketSmarter Acquisition. The Company retained the services of an independent
valuation firm to determine the fair value of these identifiable intangible assets. The preliminary and final estimated fair value of assets acquired, and liabilities assumed in the
TicketSmarter Acquisition were as follows:
Description
Assets acquired:
Tangible assets acquired, including $51,432 of cash acquired
Identifiable intangible assets acquired
Goodwill
Liabilities assumed
Net assets acquired and liabilities assumed
Consideration:
Cash paid at TicketSmarter Acquisition date
Common stock issued as consideration for TicketSmarter Acquisition at date of acquisition
Contingent consideration earn-out agreement
Cash paid at closing to escrow amount
Cash retained from escrow amount pursuant to settlement of working capital target
Total TicketSmarter Acquisition purchase price
F-47
Purchase price allocation
As allocated
September 30, 2021
Final as allocated
December 31, 2021
$
$
$
$
$
$
$
7,139,930
—
11,839,308
(5,128,964)
13,850,274
8,413,240
990,360
4,244,400
500,000
(297,726)
5,748,291
6,800,000
5,886,547
(5,128,964)
13,305,874
8,413,240
990,360
3,700,000
500,000
(297,726)
13,850,274
$
13,305,874
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
Identifiable intangible assets:
Trademarks
Sponsorship agreement network
Search engine optimization/content
Cost
Amortization through
December 31, 2022
Estimated
useful life
$
$
600,000
5,600,000
600,000
6,800,000
$
$
—
1,493,333
200,000
1,693,333
indefinite
5 years
4 years
For the period from the date of the TicketSmarter Acquisition to December 31, 2021, the Company adjusted its preliminary fair value estimates and estimated useful
lives based upon information obtained through December 31, 2021, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments
primarily related to estimated identifiable intangible asset fair values (primarily related to the sponsorship agreement network), the estimated fair value of the contingent earn-
out agreement liability and goodwill. There were no adjustments to the allocation of the purchase price during the year ended December 31, 2022.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such
information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously
recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the
recognition of these assets or liabilities as of that date. The change in fair value of the contingent consideration is more fully described in Note 10, “Debt Obligations”.
NOTE 23. SEGMENT DATA
The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and
requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate
discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on
how to allocate resources and assess performance. The Company’s three operating segments are Video Solutions, Revenue Cycle Management, and 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. The Company’s captive insurance subsidiary provides services to the Company’s other business segments and not to outside customers.
Therefore, its operations are eliminated in consolidation and is not considered a separate business segment for financial reporting purposes.
F-48
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.
Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of December 31, 2022, and December
31, 2021:
Net Revenues:
Video Solutions
Revenue Cycle Management
Entertainment
Total Net Revenues
Gross Profit:
Video Solutions
Revenue Cycle Management
Entertainment
Total Gross Profit
Operating Income (loss):
Video Solutions
Revenue Cycle Management
Entertainment
Corporate
Total Operating Income (Loss)
Depreciation and Amortization:
Video Solutions
Revenue Cycle Management
Entertainment
Total Depreciation and Amortization
Assets (net of eliminations):
Video Solutions
Revenue Cycle Management
Entertainment
Corporate
Total Identifiable Assets
Years Ended December 31,
2022
2021
8,252,288
7,886,107
20,871,500
37,009,895
(1,250,277)
3,303,477
268,741
2,321,941
(9,278,721)
357,705
(7,369,241)
(13,443,001)
(29,733,258)
769,228
128,082
1,279,369
2,176,679
28,509,706
2,201,570
11,190,491
14,766,295
56,668,062
$
$
$
$
$
$
$
$
$
$
9,073,626
1,630,048
10,709,760
21,413,434
2,002,345
521,047
3,140,383
5,663,775
(4,497,196)
93,763
235,432
(10,592,909)
(14,760,910)
395,361
—
427,128
822,489
25,983,348
934,095
12,260,780
43,810,974
82,989,197
$
$
$
$
$
$
$
$
$
$
F-49
The segments recorded noncash items effecting the gross profit and operating income (loss) through the established inventory reserves based on estimates of excess
and/or obsolete current and non-current inventory. The Company recorded a reserve for excess and obsolete inventory in the video solutions segment of $5,230,261 and a
reserve for the entertainment segment of $259,280 as of December 31, 2022.
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 24. SUBSEQUENT EVENTS
2023 Issuance of Restricted Common Stock
On January 9, 2023, the compensation committee (“the “Compensation Committee”) of the board of directors awarded Stanton E. Ross 17,500 shares of restricted
common stock that will vest one half on January 10, 2024 and one half on January 10, 2025 provided that he remains an officer on such dates. Peng Han was awarded 5,000
shares of restricted common stock that will vest 1,000 shares on January 10, 2024, January 10, 2025, January 10, 2026, January 10, 2027 and January 10, 2028 provided that he
remains an officer on such dates. The Compensation Committee awarded employees a total of 12,500 shares of restricted common stock that will vest one half on January 10,
2024 and one half on January 10, 2025 provided that they remain employees on such dates.
Reverse Stock Split
On February 6, 2023, we filed a Certificate of Amendment to the Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effect a
1-for-20 reverse stock split (the “Reverse Stock Split”) of the shares of our common stock. The Reverse Stock Split was effective as of time of filing. No fractional shares were
issued in connection with the Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded
up to the nearest whole number. In connection with the Reverse Stock Split, our board approved appropriate and proportional adjustments to all outstanding securities or other
rights convertible or exercisable into shares of our Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights.
All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information in this Report have been adjusted to reflect
the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of our common stock was not affected by the Reverse Stock Split.
Nasdaq Compliance
On February 23, 2023, the Company received notice from Nasdaq confirming that the Company has cured its bid price deficiency and has fully regained compliance
with the Minimum Bid Price Requirement.
F-50
ex10-14.htm
EX-10.14
1 of 4
03/31/2023 02:31 PM
Exhibit 10.14
2015 STOCK OPTION AND RESTRICTED STOCK PLAN RESTRICTED STOCK GRANT AGREEMENT
I.
NOTICE OF RESTRICTED STOCK GRANT:
Grantee’s Name and Address:
DIGITAL ALLY, INC.
14001 Marshall Drive
Lenexa, KS 66215
You have been granted restricted shares of Common Stock of the Company, subject to the terms and conditions of the Plan and this Restricted Stock Grant Agreement, as
follows:
Date of Grant:
January __, 2016
Market Value per Share:
$_____ (closing share price on date of grant).
Total Number of Shares Granted:
___________.
Total Value of Grant:
Vesting Schedule:
$___________ (number of shares multiplied by closing share price on date of grant).
The restricted shares of Common Stock will vest as follows:
●
●
Fifty percent (50.00%), or _______ shares, vests on January __, 2017.
Fifty percent (50.00%), or _______ shares, vests on January __, 2018.
2015 STOCK OPTION AND RESTRICTED STOCK PLAN
RESTRICTED STOCK GRANT AGREEMENT
DIGITAL ALLY, INC.
THIS RESTRICTED STOCK AGREEMENT (this “Restricted Stock Agreement) is dated January __, 2016 between DIGITAL ALLY, INC., a Nevada Company (the
“Company”) and _______________ (the “Recipient”). Unless otherwise defined herein, the terms defined in the Digital Ally, Inc. 2018 Stock Option and Restricted Stock Plan
(the “Plan”) shall have the same defined meanings in this Agreement.
1.
2.
3.
Grant. The Company hereby grants a Restricted Stock Award (the “Award”) with respect to ____________ (___,____) shares of common stock, $0.001 par value
(“Common Stock”) of the Company (the “Shares”), all in accordance with and subject to the Plan and the following terms and conditions.
Grant Date; Value. This Award was made as of January __, 2016 (the “Date of Grant”). The value of the Award is $__________, calculated as the Shares multiplied
by $__.__,the closing price per share on the Date of Grant.
Custody of Restricted Stock. The Shares granted hereunder may be evidenced in such manner as the Company shall determine. The Shares may be held, along with
any stock dividends and other non-cash distributions relating thereto, in custody by the Company or an agent for the Company until it shall become vested. If any
certificates are issued for the Shares, the certificates will bear an appropriate legend as determined by the Company referring to the applicable restrictions. Upon the
vesting of the Shares pursuant to the terms hereof and the satisfaction of any withholding tax obligations described below, the Recipient will receive vested shares of
Common Stock.
4.
Vesting Requirements. This Award shall become vested in accordance with the schedule set forth below:
Vesting Date
January __, 2017
January __, 2018
% of Shares Becoming Vested
Fifty percent (50.00%), or (__,000 shares)
Fifty percent (50.00%), or (__,000 shares)
5.
Accelerated Vesting. Notwithstanding the vesting schedule reflected in the preceding Section 4, “Vesting Requirements,” or Section 7, “Termination of
Employment,” in the event of a Change in Control all restrictions imposed on any then-restricted Shares shall terminate (such that any Shares shall vest and become
fully transferable) immediately prior to any such event. A “Change in Control” means (i) one party alone, or acting with others, has acquired or gained control over
more than fifty percent (50%) of the voting shares of the Company; or (ii) the Company merges or consolidates with or into another entity or completes any other
corporate reorganization, if more than fifty percent (50%) of the combined voting power of the surviving entity’s securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other
reorganization; or (iii) a majority of the Company’s Board of Directors is replaced and/or dismissed by the shareholders of the Company without the recommendation
of or nomination by the Company’s current Board of Directors; or (iv) the Company’s Chief Executive Officer (the “CEO”) is replaced and/or dismissed by
shareholders without the approval of the Company’s Board of Directors; or (v) the Company sells, transfers or otherwise disposes of all or substantially all of the
consolidated assets of the Company and the Company does not own stock in the purchaser or purchasers having more than fifty percent (50%) of the voting power of
the entity owning all or substantially all of the consolidated assets of the Company after such purchase.
6.
7.
8.
9.
10.
11.
12.
13.
Rights as Shareholder. The Recipient will have the right to vote the Shares and to receive any cash dividends. However, stock dividends, stock rights or others
securities issued with respect to the Shares shall subject to the same restrictions as exist regarding the original Shares.
Termination of Employment. If the Recipient ceases to be an employee of the Company for any reason, including, without limitation, death, disability, termination
for cause or without cause or voluntary separation, the Shares granted to the Recipient that have not vested prior to such time will no longer vest, and any such Shares,
if issued, shall be returned to the Company for cancellation, and neither the Recipient nor his or her heirs, executors, administrators or successors shall have any right
or interest in any of such unvested restricted stock.
No Guarantee of Employment. RECIPIENT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING SERVICE AS AN EMPLOYEE AT THE WILL OF THE COMPANY AND NOT THROUGH THE ACT OF BEING GRANTED THE AWARD. THE RECIPIENT
FURTHER ACKNOWLEDGES AND AGREES THAT THIS RESTRICTED STOCK AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED RETENTION AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR
AT ALL, AND SHALL NOT INTERFERE WITH THE RECIPIENT’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE RECIPIENT’S SERVICE AS AN EMPLOYEE AT ANY
TIME, WITH OR WITHOUT CAUSE.
Award Not Transferable. The Shares are not transferable except by will or the laws of descent and distribution, and may not be assigned, negotiated, or pledged in
any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process.
Conformity to Securities Laws. The Recipient acknowledges that the Plan is intended to conform, to the extent necessary, with all provisions of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and any and all regulations and rules promulgated thereunder by the Securities and Exchange
Commission. Notwithstanding anything herein to the contrary, the Plan shall be administered only in such a manner as to conform to such laws, rules and regulations.
To the extent permitted by applicable law, the Plan and this Restricted Stock Agreement shall be deemed amended to the extent necessary to conform to such laws,
rules and regulations.
Tax Withholding. The Company may require, as a condition to the vesting of any shares of the Shares, that the Recipient concurrently pay to the Company any taxes
which the Company is required to withhold by reason of such vesting. In lieu of part or all of such payment, the Recipient may request, subject to such rules and
regulations as the Board may adopt from time to time, that the Company withhold a portion of the shares otherwise becoming vested to defray all or a portion of any
applicable taxes, or request that the Company withhold the required amounts from other compensation, if any, payable to the Recipient.
Restricted Stock Legend. While the Recipient is a member of the Board of Directors of the Company or otherwise an Affiliate of the Company, the stock certificates
evidencing the Shares shall indicate that the Shares are restricted stock.
Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Restricted Stock Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Recipient with respect to
the subject matter hereof, and may not be modified adversely to the Recipient’s interest except by means of a writing signed by the Company and the Recipient. This
Restricted Stock Agreement is governed by Nevada law except for that body of law pertaining to conflict of laws.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
By your signature and the signature of the Company’s representative below, you and the Company agree that this Award is granted under and governed by the terms
and conditions of the Plan and this Restricted Stock Agreement. The Recipient has reviewed the Plan and this Restricted Stock Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Restricted Stock Agreement and fully understands all provisions of the Plan and Restricted Stock Agreement.
Recipient hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors upon any questions relating to the Plan and
Restricted Stock Agreement. The Recipient further agrees to notify the Company upon any change in the residence address indicated below.
RECIPIENT:
Signature
Residence Address
DIGITAL ALLY, INC.
By:
Signature
Thomas J. Heckman
Print Name
Title:
CFO, Treasurer & Secretary
CONSENT OF SPOUSE
The undersigned spouse of Recipient has read and hereby approves the terms and conditions of the Plan and this Restricted Stock Agreement. In consideration of the
Company’s granting his or her spouse the right to purchase Shares as set forth in the Plan and this Restricted Stock Agreement, the undersigned hereby agrees to be irrevocably
bound by the terms and conditions of the Plan and this Restricted Stock Agreement and further agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned’s spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this
Restricted Stock Agreement.
Spouse of Recipient
ex10-16.htm
EX-10.16
1 of 4
03/31/2023 02:31 PM
Exhibit 10.16
2018 STOCK OPTION AND RESTRICTED STOCK PLAN RESTRICTED STOCK GRANT AGREEMENT
I.
NOTICE OF RESTRICTED STOCK GRANT:
Grantee’s Name and Address:
DIGITAL ALLY, INC.
14001 Marshall Drive
Lenexa, KS 66215
You have been granted restricted shares of Common Stock of the Company, subject to the terms and conditions of the Plan and this Restricted Stock Grant Agreement, as
follows:
Date of Grant:
January __, 2019
Market Value per Share:
$_____ (closing share price on date of grant).
Total Number of Shares Granted:
___________.
Total Value of Grant:
Vesting Schedule:
$___________ (number of shares multiplied by closing share price on date of grant).
The restricted shares of Common Stock will vest as follows:
●
●
Fifty percent (50.00%), or _______ shares, vests on January __, 2020.
Fifty percent (50.00%), or _______ shares, vests on January __, 2021.
2018 STOCK OPTION AND RESTRICTED STOCK PLAN
RESTRICTED STOCK GRANT AGREEMENT
DIGITAL ALLY, INC.
THIS RESTRICTED STOCK AGREEMENT (this “Restricted Stock Agreement) is dated January __, 2019 between DIGITAL ALLY, INC., a Nevada Company (the
“Company”) and _______________ (the “Recipient”). Unless otherwise defined herein, the terms defined in the Digital Ally, Inc. 2018 Stock Option and Restricted Stock Plan
(the “Plan”) shall have the same defined meanings in this Agreement.
1.
2.
3.
Grant. The Company hereby grants a Restricted Stock Award (the “Award”) with respect to ____________ (___,____) shares of common stock, $0.001 par value
(“Common Stock”) of the Company (the “Shares”), all in accordance with and subject to the Plan and the following terms and conditions.
Grant Date; Value. This Award was made as of January __, 2019 (the “Date of Grant”). The value of the Award is $__________, calculated as the Shares multiplied
by $__.__,the closing price per share on the Date of Grant.
Custody of Restricted Stock. The Shares granted hereunder may be evidenced in such manner as the Company shall determine. The Shares may be held, along with
any stock dividends and other non-cash distributions relating thereto, in custody by the Company or an agent for the Company until it shall become vested. If any
certificates are issued for the Shares, the certificates will bear an appropriate legend as determined by the Company referring to the applicable restrictions. Upon the
vesting of the Shares pursuant to the terms hereof and the satisfaction of any withholding tax obligations described below, the Recipient will receive vested shares of
Common Stock.
4.
Vesting Requirements. This Award shall become vested in accordance with the schedule set forth below:
Vesting Date
January __, 2020
January __, 2021
% of Shares Becoming Vested
Fifty percent (50.00%), or (__,000 shares)
Fifty percent (50.00%), or (__,000 shares)
5.
Accelerated Vesting. Notwithstanding the vesting schedule reflected in the preceding Section 4, “Vesting Requirements,” or Section 7, “Termination of
Employment,” in the event of a Change in Control all restrictions imposed on any then-restricted Shares shall terminate (such that any Shares shall vest and become
fully transferable) immediately prior to any such event. A “Change in Control” means (i) one party alone, or acting with others, has acquired or gained control over
more than fifty percent (50%) of the voting shares of the Company; or (ii) the Company merges or consolidates with or into another entity or completes any other
corporate reorganization, if more than fifty percent (50%) of the combined voting power of the surviving entity’s securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other
reorganization; or (iii) a majority of the Company’s Board of Directors is replaced and/or dismissed by the shareholders of the Company without the recommendation
of or nomination by the Company’s current Board of Directors; or (iv) the Company’s Chief Executive Officer (the “CEO”) is replaced and/or dismissed by
shareholders without the approval of the Company’s Board of Directors; or (v) the Company sells, transfers or otherwise disposes of all or substantially all of the
consolidated assets of the Company and the Company does not own stock in the purchaser or purchasers having more than fifty percent (50%) of the voting power of
the entity owning all or substantially all of the consolidated assets of the Company after such purchase.
6.
7.
8.
9.
10.
11.
12.
13.
Rights as Shareholder. The Recipient will have the right to vote the Shares and to receive any cash dividends. However, stock dividends, stock rights or others
securities issued with respect to the Shares shall subject to the same restrictions as exist regarding the original Shares.
Termination of Employment. If the Recipient ceases to be an employee of the Company for any reason, including, without limitation, death, disability, termination
for cause or without cause or voluntary separation, the Shares granted to the Recipient that have not vested prior to such time will no longer vest, and any such Shares,
if issued, shall be returned to the Company for cancellation, and neither the Recipient nor his or her heirs, executors, administrators or successors shall have any right
or interest in any of such unvested restricted stock.
No Guarantee of Employment. RECIPIENT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING SERVICE AS AN EMPLOYEE AT THE WILL OF THE COMPANY AND NOT THROUGH THE ACT OF BEING GRANTED THE AWARD. THE RECIPIENT
FURTHER ACKNOWLEDGES AND AGREES THAT THIS RESTRICTED STOCK AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED RETENTION AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR
AT ALL, AND SHALL NOT INTERFERE WITH THE RECIPIENT’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE RECIPIENT’S SERVICE AS AN EMPLOYEE AT ANY
TIME, WITH OR WITHOUT CAUSE.
Award Not Transferable. The Shares are not transferable except by will or the laws of descent and distribution, and may not be assigned, negotiated, or pledged in
any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process.
Conformity to Securities Laws. The Recipient acknowledges that the Plan is intended to conform, to the extent necessary, with all provisions of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and any and all regulations and rules promulgated thereunder by the Securities and Exchange
Commission. Notwithstanding anything herein to the contrary, the Plan shall be administered only in such a manner as to conform to such laws, rules and regulations.
To the extent permitted by applicable law, the Plan and this Restricted Stock Agreement shall be deemed amended to the extent necessary to conform to such laws,
rules and regulations.
Tax Withholding. The Company may require, as a condition to the vesting of any shares of the Shares, that the Recipient concurrently pay to the Company any taxes
which the Company is required to withhold by reason of such vesting. In lieu of part or all of such payment, the Recipient may request, subject to such rules and
regulations as the Board may adopt from time to time, that the Company withhold a portion of the shares otherwise becoming vested to defray all or a portion of any
applicable taxes, or request that the Company withhold the required amounts from other compensation, if any, payable to the Recipient.
Restricted Stock Legend. While the Recipient is a member of the Board of Directors of the Company or otherwise an Affiliate of the Company, the stock certificates
evidencing the Shares shall indicate that the Shares are restricted stock.
Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Restricted Stock Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Recipient with respect to
the subject matter hereof, and may not be modified adversely to the Recipient’s interest except by means of a writing signed by the Company and the Recipient. This
Restricted Stock Agreement is governed by Nevada law except for that body of law pertaining to conflict of laws.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
By your signature and the signature of the Company’s representative below, you and the Company agree that this Award is granted under and governed by the terms
and conditions of the Plan and this Restricted Stock Agreement. The Recipient has reviewed the Plan and this Restricted Stock Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Restricted Stock Agreement and fully understands all provisions of the Plan and Restricted Stock Agreement.
Recipient hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors upon any questions relating to the Plan and
Restricted Stock Agreement. The Recipient further agrees to notify the Company upon any change in the residence address indicated below.
RECIPIENT:
Signature
Residence Address
DIGITAL ALLY, INC.
By:
Signature
Thomas J. Heckman
Print Name
Title:
CFO, Treasurer & Secretary
CONSENT OF SPOUSE
The undersigned spouse of Recipient has read and hereby approves the terms and conditions of the Plan and this Restricted Stock Agreement. In consideration of the
Company’s granting his or her spouse the right to purchase Shares as set forth in the Plan and this Restricted Stock Agreement, the undersigned hereby agrees to be irrevocably
bound by the terms and conditions of the Plan and this Restricted Stock Agreement and further agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned’s spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this
Restricted Stock Agreement.
Spouse of Recipient
ex10-19.htm
EX-10.19
1 of 4
03/31/2023 02:31 PM
Exhibit 10.19
2020 STOCK OPTION AND RESTRICTED STOCK PLAN RESTRICTED STOCK GRANT AGREEMENT
I.
NOTICE OF RESTRICTED STOCK GRANT:
Grantee’s Name and Address:
DIGITAL ALLY, INC.
14001 Marshall Drive
Lenexa, KS 66215
You have been granted restricted shares of Common Stock of the Company, subject to the terms and conditions of the Plan and this Restricted Stock Grant Agreement, as
follows:
Date of Grant:
January __, 2021
Market Value per Share:
$_____ (closing share price on date of grant).
Total Number of Shares Granted:
___________.
Total Value of Grant:
Vesting Schedule:
$___________ (number of shares multiplied by closing share price on date of grant).
The restricted shares of Common Stock will vest as follows:
●
●
Fifty percent (50.00%), or _______ shares, vests on January __, 2022.
Fifty percent (50.00%), or _______ shares, vests on January __, 2023.
2020 STOCK OPTION AND RESTRICTED STOCK PLAN
RESTRICTED STOCK GRANT AGREEMENT
DIGITAL ALLY, INC.
THIS RESTRICTED STOCK AGREEMENT (this “Restricted Stock Agreement) is dated January __, 2021 between DIGITAL ALLY, INC., a Nevada Company (the
“Company”) and _______________ (the “Recipient”). Unless otherwise defined herein, the terms defined in the Digital Ally, Inc. 2020 Stock Option and Restricted Stock Plan
(the “Plan”) shall have the same defined meanings in this Agreement.
1.
2.
3.
Grant. The Company hereby grants a Restricted Stock Award (the “Award”) with respect to ____________ (___,____) shares of common stock, $0.001 par value
(“Common Stock”) of the Company (the “Shares”), all in accordance with and subject to the Plan and the following terms and conditions.
Grant Date; Value. This Award was made as of January __, 2021 (the “Date of Grant”). The value of the Award is $__________, calculated as the Shares multiplied
by $__.__,the closing price per share on the Date of Grant.
Custody of Restricted Stock. The Shares granted hereunder may be evidenced in such manner as the Company shall determine. The Shares may be held, along with
any stock dividends and other non-cash distributions relating thereto, in custody by the Company or an agent for the Company until it shall become vested. If any
certificates are issued for the Shares, the certificates will bear an appropriate legend as determined by the Company referring to the applicable restrictions. Upon the
vesting of the Shares pursuant to the terms hereof and the satisfaction of any withholding tax obligations described below, the Recipient will receive vested shares of
Common Stock.
4.
Vesting Requirements. This Award shall become vested in accordance with the schedule set forth below:
Vesting Date
January __, 2022
January __, 2023
% of Shares Becoming Vested
Fifty percent (50.00%), or (__,000 shares)
Fifty percent (50.00%), or (__,000 shares)
5.
Accelerated Vesting. Notwithstanding the vesting schedule reflected in the preceding Section 4, “Vesting Requirements,” or Section 7, “Termination of
Employment,” in the event of a Change in Control all restrictions imposed on any then-restricted Shares shall terminate (such that any Shares shall vest and become
fully transferable) immediately prior to any such event. A “Change in Control” means (i) one party alone, or acting with others, has acquired or gained control over
more than fifty percent (50%) of the voting shares of the Company; or (ii) the Company merges or consolidates with or into another entity or completes any other
corporate reorganization, if more than fifty percent (50%) of the combined voting power of the surviving entity’s securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other
reorganization; or (iii) a majority of the Company’s Board of Directors is replaced and/or dismissed by the shareholders of the Company without the recommendation
of or nomination by the Company’s current Board of Directors; or (iv) the Company’s Chief Executive Officer (the “CEO”) is replaced and/or dismissed by
shareholders without the approval of the Company’s Board of Directors; or (v) the Company sells, transfers or otherwise disposes of all or substantially all of the
consolidated assets of the Company and the Company does not own stock in the purchaser or purchasers having more than fifty percent (50%) of the voting power of
the entity owning all or substantially all of the consolidated assets of the Company after such purchase.
6.
7.
8.
9.
10.
11.
12.
13.
Rights as Shareholder. The Recipient will have the right to vote the Shares and to receive any cash dividends. However, stock dividends, stock rights or others
securities issued with respect to the Shares shall subject to the same restrictions as exist regarding the original Shares.
Termination of Employment. If the Recipient ceases to be an employee of the Company for any reason, including, without limitation, death, disability, termination
for cause or without cause or voluntary separation, the Shares granted to the Recipient that have not vested prior to such time will no longer vest, and any such Shares,
if issued, shall be returned to the Company for cancellation, and neither the Recipient nor his or her heirs, executors, administrators or successors shall have any right
or interest in any of such unvested restricted stock.
No Guarantee of Employment. RECIPIENT ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING SERVICE AS AN EMPLOYEE AT THE WILL OF THE COMPANY AND NOT THROUGH THE ACT OF BEING GRANTED THE AWARD. THE RECIPIENT
FURTHER ACKNOWLEDGES AND AGREES THAT THIS RESTRICTED STOCK AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED RETENTION AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR
AT ALL, AND SHALL NOT INTERFERE WITH THE RECIPIENT’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE RECIPIENT’S SERVICE AS AN EMPLOYEE AT ANY
TIME, WITH OR WITHOUT CAUSE.
Award Not Transferable. The Shares are not transferable except by will or the laws of descent and distribution, and may not be assigned, negotiated, or pledged in
any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process.
Conformity to Securities Laws. The Recipient acknowledges that the Plan is intended to conform, to the extent necessary, with all provisions of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and any and all regulations and rules promulgated thereunder by the Securities and Exchange
Commission. Notwithstanding anything herein to the contrary, the Plan shall be administered only in such a manner as to conform to such laws, rules and regulations.
To the extent permitted by applicable law, the Plan and this Restricted Stock Agreement shall be deemed amended to the extent necessary to conform to such laws,
rules and regulations.
Tax Withholding. The Company may require, as a condition to the vesting of any shares of the Shares, that the Recipient concurrently pay to the Company any taxes
which the Company is required to withhold by reason of such vesting. In lieu of part or all of such payment, the Recipient may request, subject to such rules and
regulations as the Board may adopt from time to time, that the Company withhold a portion of the shares otherwise becoming vested to defray all or a portion of any
applicable taxes, or request that the Company withhold the required amounts from other compensation, if any, payable to the Recipient.
Restricted Stock Legend. While the Recipient is a member of the Board of Directors of the Company or otherwise an Affiliate of the Company, the stock certificates
evidencing the Shares shall indicate that the Shares are restricted stock.
Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Restricted Stock Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Recipient with respect to
the subject matter hereof, and may not be modified adversely to the Recipient’s interest except by means of a writing signed by the Company and the Recipient. This
Restricted Stock Agreement is governed by Nevada law except for that body of law pertaining to conflict of laws.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
By your signature and the signature of the Company’s representative below, you and the Company agree that this Award is granted under and governed by the terms
and conditions of the Plan and this Restricted Stock Agreement. The Recipient has reviewed the Plan and this Restricted Stock Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Restricted Stock Agreement and fully understands all provisions of the Plan and Restricted Stock Agreement.
Recipient hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors upon any questions relating to the Plan and
Restricted Stock Agreement. The Recipient further agrees to notify the Company upon any change in the residence address indicated below.
RECIPIENT:
Signature
Residence Address
DIGITAL ALLY, INC.
By:
Signature
Thomas J. Heckman
Print Name
Title:
CFO, Treasurer & Secretary
CONSENT OF SPOUSE
The undersigned spouse of Recipient has read and hereby approves the terms and conditions of the Plan and this Restricted Stock Agreement. In consideration of the
Company’s granting his or her spouse the right to purchase Shares as set forth in the Plan and this Restricted Stock Agreement, the undersigned hereby agrees to be irrevocably
bound by the terms and conditions of the Plan and this Restricted Stock Agreement and further agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned’s spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this
Restricted Stock Agreement.
Spouse of Recipient
ex21-1.htm
EX-21.1
Subsidiary Legal Name
Status
Subsidiaries of Registrant
State of
Organization
Digital Ally International, Inc.
Shield Products, LLC
Digital Ally Healthcare, Inc.
Nobility Healthcare, LLC.
TicketSmarter, Inc.
TicketSmarter, LLC
Goody Tickets, LLC
Worldwide Reinsurance, Ltd.
Digital Connect, Inc.
BirdVu Jets, Inc.
Kustom 440, Inc.
Kustom Entertainment, Inc.
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-51% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Subsidiary-100% owned
Nevada
Kansas
Nevada
Kansas
Nevada
Kansas
Kansas
Bermuda
Nevada
Nevada
Nevada
Nevada
Type of Organization
Corporation
Limited Liability Company
Corporation
Limited Liability Company
Corporation
Limited Liability Company
Limited Liability Company
Private Limited Company
Corporation
Corporation
Corporation
Corporation
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Exhibit 21.1
Entity
Organizational ID #
NV20091423731
9656117
NV20212106205
9920075
NV20211727915
9430463
6503932
47713
NV20222319342
NV20222550723
NV20222550723
NV20222805846
ex23-1.htm
EX-23.1
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement File No. 333-270129, File No. 333-146874, File No. 333-180393, File No. 333-190117, File No. 333-
199095, File No. 333-202943, File No. 333-205136, File No. 333-211534, File No.333-220086, File No. 333-226940, File No. 333-231810, File No. 333-250124 and File No.
333-270129 on Forms S-8 and on File No. 333-227664 and File No. 333-239419 on Forms S-3 of Digital Ally, Inc. of our report dated March 31, 2023, which includes an
explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statement of Digital Ally, Inc. as of
and for the years ended December 31, 2022 and 2021, which report is included in this Annual Report on Form 10-K of Digital Ally, Inc.
/s/ RBSM LLP
New York, NY
March 31, 2023
ex24-1.htm
EX-24.1
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EXHIBIT 24.1
Each person whose signature appears below, hereby authorizes and appoints Stanton E. Ross and Thomas J. Heckman or either of them as his attorneys-in-fact with
full power of substitution and re-substitution, to sign and file on his behalf individually and in each such capacity stated, below, the Annual Report of Digital Ally, Inc. on Form
10-K for the year ended December 31, 2022, and any amendments thereto to be filed with the Securities and Exchange Commission, the NASDAQ Stock Market or similar
body, and otherwise, as fully as such person could do in person, hereby verifying and confirming all that said attorneys-in-fact, or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
POWER OF ATTORNEY
SIGNATURE AND TITLE
/s/ Stanton E. Ross
Stanton E. Ross, Director and Chief Executive Officer
/s/ Leroy C. Richie
Leroy C. Richie, Director
/s/ Michael J. Caulfield
Michael J. Caulfield, Director
/s/ Daniel F. Hutchins
Daniel F. Hutchins, Director
/s/ Christian J. Hoffmann, III
Christian J. Hoffmann, III, Director
/s/ Thomas J. Heckman
Thomas J. Heckman, Chief Financial Officer, Secretary and Treasurer
DATE
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
ex31-1.htm
EX-31.1
I, Stanton E. Ross, Chief Executive Officer of Digital Ally, Inc., certify that:
1. I have reviewed this report on Form 10-K for the year ended December 31, 2022 of Digital Ally, Inc.
DIGITAL ALLY, INC.
CERTIFICATIONS
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EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15
(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation;
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial
reporting.
Date: March 31, 2023
By:
/s/ Stanton E. Ross
STANTON E. ROSS
Chief Executive Officer
(Principal Executive Officer)
ex31-2.htm
EX-31.2
I, Thomas J. Heckman, Chief Financial Officer of Digital Ally, Inc., certify that:
1. I have reviewed this report on Form 10-K for the year ended December 31, 2022 of Digital Ally, Inc.
DIGITAL ALLY, INC.
CERTIFICATIONS
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EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15
(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial
reporting.
Date: March 31, 2023
By:
/s/ Thomas J. Heckman
THOMAS J. HECKMAN
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
ex32-1.htm
EX-32.1
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EXHIBIT 32.1
DIGITAL ALLY, INC.
CERTIFICATION PURSUANT TO
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Digital Ally, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Stanton E. Ross, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Stanton E. Ross
STANTON E. ROSS
Chief Executive Officer
(Principal Executive Officer)
March 31, 2023
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to Digital Ally, Inc. and will be retained by Digital Ally, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
ex32-2.htm
EX-32.2
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EXHIBIT 32.2
DIGITAL ALLY, INC.
CERTIFICATION PURSUANT TO
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Digital Ally, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Thomas J. Heckman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Thomas J. Heckman
THOMAS J. HECKMAN
Chief Financial Officer
(Principal Financial Officer)
March 31, 2023
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to Digital Ally, Inc. and will be retained by Digital Ally, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.