What changed in this filing

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Item 9A. Controls and Procedures

2021-03-31 compared with 2020-04-06 · 1599 added, 1508 removed, 563 unchanged (85% of the section changed)

Controls and Procedures.

and Procedures.

Regarding the Effectiveness of Disclosure Controls and Procedures

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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 Securities

Exchange Act of 1934.

Based on their evaluation as of December 31, 2019, 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 effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted

under the Securities Exchange Act of 1934, including this Annual Report, were recorded, processed, summarized and reported within

to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange

Based on their evaluation as of December 31, 2020, 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 effective

at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the

Exchange Act, including this Annual Report on Form 10-K, was recorded, processed, summarized and reported within

the time periods specified in the SEC’s rules and forms, and was accumulated and communicated to management, including our

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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;

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.

to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of

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;

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.

internal control systems, no matter how well designed, have inherent limitations.

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that, as of December 31, 2020, our internal control over financial reporting is effective.

Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over

financial reporting.

Management’s report was not subject to attestation by our registered public accounting firm pursuant

to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this

Annual Report.

in Internal Control Over Financial Reporting

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affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information.

Executive Officers and Corporate Governance.

with respect to our directors and executive officers is incorporated herein by reference to our definitive proxy statement, to

be filed no later than 120 days after December 31, 2019 (our “2020 Proxy Statement”).

with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference

with respect to our directors and executive officers is incorporated herein by reference to our definitive proxy statement, which

we expect to file no later than 120 days after December 31, 2020 (our “2021 Proxy Statement”).

with respect to compliance with Section 16(a) of the Exchange Act, is incorporated herein by reference

to our 2021 Proxy Statement.

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herein by reference to our 2021 Proxy Statement.

about our Plans is incorporated herein by reference to Part II, Item 5 of this Annual Report on Form 10-K.

Relationships and Related Transactions, and Director Independence.

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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.

begin on Page F-1 and are submitted as a separate section of this Annual Report on Form 10-K.

Statement Schedules :

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.

in the consolidated financial statements or notes in this Annual Report on Form 10-K.

Plan of Merger among Vegas Petra, Inc., a Nevada corporation, and Digital Ally, Inc., a Nevada corporation, and its stockholders, dated November 30, 2004.

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Form of Series C Common Stock Purchase Warrant.

Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934

Opinion of Quarles & Brady, LLP

3 unchanged sentences

Form of Stock Option Agreement (ISO and Non-Qualified) 2006 Stock Option Plan.

Promissory Note Extension between Registrant and Acme Resources, LLC, dated May 4, 2006, in the principal amount of $500,000.

Promissory Note between Registrant and Acme Resources, LLC, dated September 1, 2004, in the principal amount of $500,000.

Promissory Note Extension between Registrant and Acme Resources, LLC, dated October 31, 2006.

Software License Agreement with Ingenient Technologies, Inc., dated March 15, 2004.*

Software License Agreement with Ingenient Technologies, Inc., dated April 5, 2005.*

Stock Option Agreement with Daniels & Kaplan, P.C., dated September 25, 2006.

Memorandum of Understanding with Tri Square Communications (Hong Kong) Co., Ltd.

dated November 29, 2005.

2007 Stock Option and Restricted Stock Plan.

3 unchanged sentences

Form of Stock Option Agreement (ISO and Non-Qualified) 2008 Stock Option Plan.

Promissory Note with Enterprise Bank dated February 13, 2009.

First Amendment to Promissory Note with Enterprise Bank dated February 13, 2009.

First Amendment to Promissory Note with Enterprise Bank dated June 30, 2009.

Modification and Renewal of Promissory Note with Enterprise Bank dated February 1, 2010.

Forms of Restricted Stock Agreement for 2005, 2006, 2007 and 2008 Stock Option and Restricted Stock Plans.

Loan Modification or Renewal Agreement of Promissory Note with Enterprise Bank dated March 2, 2011.

2011 Stock Option and Restricted Stock Plan

Form of Stock Option Agreement for 2011 Stock Option and Restricted Stock Plan

8% Subordinated Promissory Note in principal amount of $1,500,000

Common Stock Purchase Warrant

8% Subordinated Promissory Note in principal amount of $1,000,000

Common Stock Purchase Warrant

Allonge to 8% Subordinated Promissory Note in principal amount of $1,000,000

Amendment to Common Stock Purchase Warrant

Second Allonge to 8% Subordinated Note, dated July 24, 2012.

Allonge to 8% Subordinated Note ($1.0 million) dated July 24, 2012.

Second Amendment to Common Stock Purchase Warrants (300,000 shares) dated July 24, 2012.

Amendment to Common Stock Purchase Warrants (150,000 shares) dated July 24, 2012.

Third Allonge to 8% Subordinated Note, dated December 4, 2013.

Second Allonge to 8% Subordinated Note ($1.0 million) dated December 4, 2013.

Common Stock Purchase Warrant (40,000 shares), dated December 4, 2013

Securities Purchase Agreement

Registration Rights Agreement

Form of Senior Secured Convertible Note

Form of Warrant to Purchase Common Stock

Pledge and Security Agreement

Patent Assignment for Security

Trademarks Assignment for Security

Deposit Account Control Agreement

Form of Voting Agreement

Form of Lock-Up Agreement

Securities Purchase Agreement

Registration Rights Agreement

Form of Senior Secured Convertible Note

Form of Warrant to Purchase Common Stock

Amended and Restated Pledge and Security Agreement

Patent Assignment for Security

Trademarks Assignment for Security

Amended and Restated Guaranty Agreement

Deposit Account Control Agreement-incorporated by reference to Exhibit 10.46 to the Company’s Current Report on Form 8-K filed on March 25, 2014

Form of Voting Agreement

Form of Lock-Up Agreement

Reaffirmation Agreement

Senior Secured Convertible Note

Warrant to Purchase Common Stock

Fourth Allonge to 8% Subordinated Note ($1.5 million) dated May 27, 2015

Third Allonge to 8% Subordinated Note ($1.0 million) dated May 27, 2015

Fifth Allonge to 8% Subordinated Note ($1.5 million) dated July 15, 2015

Fourth Allonge to 8% Subordinated Note ($1.0 million) dated July 15, 2015

Common Stock Purchase Warrant

Securities Purchase Agreement

Amended and Restated 2015 Stock Option and Restricted Stock Plan

Series A Warrant Amendment Agreement

Series B Warrant Amendment Agreement

Series C Warrant Amendment Agreement

Securities Purchase Agreement

8% Senior Secured Convertible Debenture

Common Stock Purchase Warrant

Security Agreement

Subsidiary Guarantee

Form of Series A-1 Warrant

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Form of Series A-3 Warrant

Form of Securities Purchase Agreement, dated as of August 21, 2017, by and among Digital Ally, Inc.

and the purchasers signatory thereto.

Form of Securities Purchase Agreement, by and among the Company and the purchaser signatories thereto

Form of Secured Convertible Promissory Note

Form of Common Stock Purchase Warrant

Form of Security Agreement, by and among the Company and each of the secured parties thereto

Form of Intellectual Property Security Agreement, between the Company and the secured lender thereto

Form of Subsidiary Guarantee, by and among the Company, the purchasers under the Securities Purchase Agreement, and each of the Company’s subsidiaries

Common Stock Purchase Warrant of Digital Ally, Inc.

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2018 Stock Option and Restricted Stock Plan

Form of Lock-Up Agreement

Form of Common Stock Purchase Warrant.

Form of Securities Purchase Agreement, dated as of August 5, 2019, by and between the Company and the Investors.

Form of Security Agreement, dated August 5, 2019, by and among the Company, certain of the Company’s subsidiaries and the Secured Parties.

Form of IP Security Agreement, dated August 5, 2019, by the Company, in favor of the Agent and the Secured Parties.

Form of Subsidiary Guarantee, dated August 5, 2019, made by certain of the Company’s subsidiaries in favor of the Investors.

Form of Consent (August 2019 Warrant Modification)

Form of Consent and Waiver (August 2019 Warrant Modification)

Form of Wholesale Distribution Agreement, dated April 3, 2020.

Form of Placement Agency Agreement, dated January 11, 2021, by and between the Company and Kingswood Capital Markets, division of Benchmark Investments, Inc.

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.

Form of Securities Purchase Agreement, dated as of January 27, 2021, by and between the Company and the Investors.

Code of Ethics and Code of Conduct.

Subsidiaries of Registrant

of RSM US LLP

Consent of RBSM LLP

Consent of Quarles & Brady LLP (included in Exhibit 5.1)*

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Heckman, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Financial Statements of Digital Ally, Inc.

as of and for the years ended December 31, 2019 and 2018.

Instance Document **

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as an exhibit to the Company’s Form SB-2, filed October 16, 2006, No.

as an exhibit to the Company’s Annual Report on Form 10KSB for the Year ending December 31, 2007.

as an exhibit to the Company’s Annual Report on Form 10KSB for the Year ended December 31, 2007.

as an exhibit to the Company’s Current Report on Form 8-K dated November 20, 2009.

as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2009.

as an exhibit to the Company’s Annual Report on Form 10K for the Year ended December 31, 2009.

as an exhibit to the Company’s Form 8-K filed August 30, 2012.

1 unchanged sentence

as an exhibit to the Company’s Form 8-K filed July 17, 2015

as an exhibit to the Company’s Amendment No.

1 to Form SB-2, filed January 31, 2007, No.

as an exhibit to the Company’s Form S-8, filed October 23, 2007, No.

as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2008.

as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2009.

as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2010.

as an exhibit to the Company’s Form 8-K filed June 1, 2011

as an exhibit to the Company’s Annual Report on Form 10K for the Year ended December 31, 2009.

as an exhibit to the Company’s Form 8-K filed June 1, 2011.

as an exhibit to the Company’s Form 8-K filed November 10, 2011

as an exhibit to the Company’s Form 8-K filed July 30, 2012

as an exhibit to the Company’s Form 8-K filed December 9, 2013

as an exhibit to the Company’s Form 8-K filed March 21, 2014

as an exhibit to the Company’s Form 8-K filed August 25, 2014

as an exhibit to the Company’s Form 8-K filed May 28, 2015

as an exhibit to the Company’s Form 8-K filed July 15, 2015

as an exhibit to the Company’s Form 8-K filed July 17, 2015

as an exhibit to the Company’s Form S-8 filed May 23, 2016.

as an exhibit to the Company’s Form 8-K filed November 16, 2016

as an exhibit to the Company’s Form 8-K filed January 3, 2017

as an exhibit to the Company’s Form S-8 filed January 3, 2017.

as an exhibit to the Company’s Form 8-K filed August 25, 2017.

as an exhibit to the Company’s Form 8-K filed April 4, 2018.

as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2015.

as an exhibit to the Company’s Form 8-K filed August 2, 2018.

as an exhibit to the Company’s Registration Statement on Form S-8 filed August 20, 2018.

as an exhibit to the Company’s Form 8-K filed September 26, 2018

as an Exhibit 5.1 to the October 2006 Form SB-2.

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as an exhibit to the Company’s Form 8-K filed December 10, 2007.

Filed as an exhibit to the Company’s Registration

Statement on Form S-1/A filed February 7, 2020.

Filed as an exhibit to the Company’s Registration

Statement on Form S-1/A filed February 12, 2020.

as an exhibit to the Company’s Registration Statement on Form S-1/A filed February 7, 2020.

as an exhibit to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2020.

Filed as an exhibit to the Company’s Form 8-K filed

April 8, 2020.

Filed as an exhibit to the Company’s Form 8-K filed

January 12, 2021.

Filed as an exhibit to the Company’s Form 8-K filed

January 28, 2021.

financial statement schedules have been provided because the information is not required or is shown either in the financial

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TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

Report of Independent Registered Public Accounting Firm

Financial Statements:

9 unchanged sentences

on the Financial Statement

have audited the accompanying consolidated balance sheet of Digital Ally, Inc.

and its subsidiaries (the Company) as of December

31, 2019, the related consolidated statement of operation, stockholders’

deficit and cash flow for the year ended December

31, 2019, and the related notes to the consolidated financial statement (collectively, the financial statement).

In our opinion,

the financial statement present fairly, in all material respects, the financial position of the Company as of December 31, 2019,

and the results of its operation and its cash flow for the year then ended, in conformity with accounting principles generally

accepted in the United States of America.

in Accounting Principles

discussed in Note 1 and 12 to the financial statement, the Company changed its method of accounting for leases in 2019 due to

the adoption of ASU No.

2016-02, Leases (Topic 842), as amended, effective January 1, 2019, using the optional transitional method

and elected to use the package of three practical expedients which allows the Company not to reassess whether contracts are or

contain leases, lease classification and whether initial direct costs qualify for capitalization.

of Matter Regarding Going Concern

accompanying financial statement have been prepared assuming that the Company will continue as a going concern.

As discussed in

Note 1 to the financial statement, the Company has suffered recurring losses from operations and this raises substantial doubt

about the Company’s ability to continue as a going concern.

Management’s plans in regard to these matters also are

described in Note 1.

The financial statement do not include any adjustments that might result from the outcome of this uncertainty.

financial statement are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the

Company’s financial statement based on our audit.

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.

conducted our audit 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

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial

As part of our audit 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.

audit 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 audit provide a reasonable basis for our opinion.

have served as the Company’s auditor since 2019.

of Independent Registered Public Accounting Firm

the Stockholders and the Board of Directors of Digital Ally, Inc.

on the Financial Statements

have audited the accompanying consolidated balance sheet of Digital Ally, Inc.

and its subsidiaries (the Company) as of December

31, 2018, the related consolidated statements of operations, stockholders’

equity (deficit) and cash flows for the year

then ended, and the related notes to the consolidated financial statements (collectively, 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, 2018,

and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally

accepted in the United States of America.

of Matter Regarding Going Concern

accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

in Note 1 to the financial statements, the Company has suffered recurring losses from operations and this raises substantial doubt

about the Company’s ability to continue as a going concern.

Management’s plans in regard to these matters also are

described in Note 1.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have audited the accompanying consolidated

balance sheets of Digital Ally, Inc.

and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated

statements of operations, stockholders’

equity (deficit) and cash flows for each of the

two years in period ended December 31, 2020, and the related notes (collectively referred to as the financial statement).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company

as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two

years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in

the United States of America.

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on

the Company’s financial statements based on our audit.

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

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audit 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

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.

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

As part of our audit 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.

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.

audit 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 audit 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 audit provides a reasonable basis for our opinion.

have served as the Company’s auditor since 2015 until 2019.

City, Missouri

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

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 financial statements that were communicated or required to be communicated to the audit

committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our

especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any

way our opinion on the 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

Value of Inventories –

Notes 1 and 4 to the consolidated financial statements

Audit Matter Description

As disclosed in Note 1 and 4 to the consolidated

financial statements, inventories consist of various components, work-in-process and finished goods, and 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.

Management has established inventory reserves based on estimates

of excess and/or obsolete inventories.

We identified the inventory reserve for

certain inventory products as a critical audit matter because of the significant estimates and the assumptions management makes

to evaluate their ability to move inventories which have been slow moving during the year.

This required a high degree of subjective

and complex auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness

of related assumptions, as well as the viability of management’s plans to sell this inventory, to evaluate whether inventory

reserves for certain inventory products were appropriately recorded as of December 31, 2020.

How the Critical

Audit Matter Was Addressed in the Audit

Our audit procedures related to the inventory

reserve for certain inventory products included the following, among others:

● We evaluated the appropriateness

and consistency of management’s methods and assumptions used in developing their estimate of the inventory reserves.

● We evaluated the reasonableness

of management’s plans and strategies to sell certain inventory products deemed to be slow moving and which are already partially

● We performed analysis over key

product metrics, inventory turnover, and margins, to identify and evaluate slow-moving inventory categories, negative margins,

or other trends which may indicate a requirement to reserve.

have served as the Company’s auditor since 2019.

BALANCE SHEETS

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Current assets:

Cash and cash equivalents

Accounts receivable-trade, less allowance for doubtful accounts

Cash and cash

Accounts receivable-trade,

less allowance for doubtful accounts

of $123,224 –

2020 and $123,224 –

Accounts receivable-other

Other Receivables (including $500,000 due from Related Parties

2020 and $0 –

2019, refer to Note 16)

Inventories, net

Income tax refund receivable, current

Prepaid expenses

Total current assets

Income tax refund receivable,

current assets

Furniture, fixtures and equipment, net

Intangible assets, net

Operating lease right of use assets

Income tax refund receivable

Operating lease right of use assets, net

Liabilities and Stockholders’

Equity (Deficit)

Current liabilities:

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Accrued expenses

Current portion of operating lease obligations

Current portion of operating

lease obligations

Contract liabilities-current

Unsecured promissory note payable, net of unamortized discount of

Secured convertible notes at fair value –

Unsecured promissory note

payable, net of unamortized discount of $0 and $66,061, respectively

Secured convertible notes

at fair value –

current portion

Income taxes payable

Total current liabilities

Subordinated notes payable

current portion

taxes payable

current liabilities

Long-term liabilities:

Proceeds investment agreement, at fair value

Operating lease obligation, long term

Contract liabilities-long term

Proceeds investment agreement,

at fair value

Subordinated notes payable

Operating lease obligation,

liabilities-long term

Total liabilities

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Common stock, $0.001 par value;

50,000,000 shares authorized;

and 50,000,000 shares authorized, respectively;

shares issued:

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Additional paid in capital

Treasury stock, at cost (63,518 shares)

Accumulated deficit

Treasury stock, at cost

(63,518 shares)

(90,014,500 )

(87,388,619 )

Total stockholders’

Total liabilities and stockholders’

stockholders’

equity (deficit)

liabilities and stockholders’

equity (deficit)

Notes to Consolidated Financial Statements.

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31, 2020 AND 2019

Service and other

Total revenue

Cost of revenue:

Service and other

Total cost of revenue

Selling, general and administrative expenses:

Research and development expense

Selling, advertising and promotional expense

Stock-based compensation expense

General and administrative expense

Patent litigation settlement

Total selling, general and administrative expenses

Operating loss

(10,556,057 )

Research and development

Selling, advertising and

promotional expense

General and administrative

litigation settlement

Total selling, general

and administrative expenses

Other income (expense)

1 unchanged sentence

Interest expense

Change in warrant derivative liabilities

Change in fair value of secured convertible notes

Change in fair value of secured convertible debentures

Change in fair value of proceeds investment agreement

Loss on the extinguishment of secured convertible debentures

Secured convertible notes issuance expense

Change in fair value of secured convertible

Change in fair value of proceeds investment

Gain on the extinguishment of debt

Secured convertible

notes issuance expense

Total other income (expense)

Loss before income tax (benefit)

(10,005,713 )

Loss before income tax expense (benefit)

(10,005,713 )

Income tax (benefit)

Income tax expense (benefit)

$ (2,625,881 )

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ENDED DECEMBER 31, 2020 AND 2019

December 31, 2017

$ (2,157,226 )

Balance, December 31, 2018

$ (2,157,226 )

effects adjustment for adoption of ASC 606 (Note 1)

common stock grant

common stock forfeitures

of common stock through underwritten public offering (net of offering expenses and underwriters’

of common stock purchase warrants in connection with issuance of subordinated notes payable

of common stock purchase warrants in connection with issuance of secured convertible debentures

of common stock purchase warrants in connection with issuance of proceeds investment agreement

of common stock upon conversion of secured convertible debentures and accrued interest

of common stock upon conversion of secured notes payable and accrued interest

of common stock upon exercise of common stock purchase warrants

of common stock upon conversion of accounts payable

$ (77,382,906 )

$ (1,412,180 )

December 31, 2018

Stock-based compensation

Restricted common stock grant

Restricted common stock forfeitures

Issuance of common stock upon conversion of

secured convertible notes and interest

Issuance of common stock In connection with

issuance of secured convertible notes

Issuance of common stock purchase warrants

in connection with issuance of secured convertible debentures

Issuance of common stock upon exercise of warrants

Issuance of common stock purchase warrants

in connection with issuance of unsecured promissory note payable

(10,005,713 )

common stock grant

common stock forfeitures

of common stock upon conversion of secured convertible notes and interest

of common stock In connection with issuance of secured convertible notes

of common stock purchase warrants in connection with issuance of secured convertible debentures

of common stock upon exercise of warrants

of common stock purchase warrants in connection with issuance of unsecured promissory note payable

(10,005,713 )

Balance, December 31, 2019

(87,388,619 )

December 31, 2019

Stock-based compensation

Restricted common stock grant

Restricted common stock forfeitures

Issuance of common stock upon conversion of

secured convertible notes and interest

Issuance of common stock through underwritten

public offering at $1.15 per share (net of offering expenses and underwriters’

Issuance of common stock through underwritten

public offering at $1.65 per share (net of offering expenses and underwriters’

Issuance of common stock through underwritten

public offering at $2.15 per share (net of offering expenses and underwriters’

Issuance of common stock upon exercise of common

stock purchase warrants

Issuance of common stock purchase warrants

in connection with issuance of secured convertible notes

Issuance of common stock upon exercise of stock

Issuance of common stock for services rendered

Issuance of common stock purchase warrants

in connection with issuance of unsecured promissory note payable

Balance, December 31, 2020

$ 106,501,396

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$ (10,005,713 )

Adjustments to reconcile net loss to net cash flows used in operating activities:

Depreciation and amortization

(Gain) on disposal of equipment

Adjustments to reconcile

net loss to net cash flows used in operating activities:

Depreciation and

Stock based compensation

Change in fair value of warrant derivative liabilities

Amortization of debt discount

Provision for doubtful accounts receivable

Interest paid through issuance of common stock

Loss on extinguishment of secured convertible debentures

Secured convertible debentures issuance expense

Change in fair value of secured convertible debentures

Change in fair value of proceeds investment agreement

Provision for inventory obsolescence

Change in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable –

Issuance of common

stock for services

Amortization of

debt discount

Provision for doubtful

accounts receivable

Interest paid through

issuance of common stock

Gain on extinguishment

Secured convertible

debentures issuance expense

Change in fair value

of secured convertible debentures

Change in fair value

of proceeds investment agreement

Provision for inventory

Change in operating

assets and liabilities:

(Increase) decrease

Accounts receivable

other (including related party)

Prepaid expenses

Income tax refund receivable

Operating lease right of use assets

Increase (decrease) in:

Income tax refund

Operating lease

right of use assets

Increase (decrease)

Accounts payable

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Income taxes payable

Operating lease obligations

Contract liabilities

Net cash used in operating activities

Operating lease

cash used in operating activities

(13,284,715 )

Cash Flows from Investing Activities:

Purchases of furniture, fixtures and equipment

Additions to intangible assets

Proceeds from the sale of equipment

Net cash used in investing activities

Purchases of furniture,

fixtures and equipment

Additions to intangible

of notes receivable

cash used in investing activities

Cash Flows from Financing Activities:

Proceeds from unsecured promissory note payable

Payoff of proceeds investment agreement

Proceeds from proceeds investment agreement and detachable

common stock warrants

Proceeds from secured convertible debentures and detachable common stock purchase warrants

Secured convertible debenture issuance expense

Proceeds from sale of common stock in underwritten public offering

Principal payment on subordinated notes payable

Principal payment on secured convertible debentures

Proceeds from issuance of common stock upon exercise of warrants

Loss on extinguishment of secured convertible debentures

Payments on capital lease obligations

Net cash (used in) provided by financing activities

Net (decrease) increase 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

Impact of Adoption of ASC 842 - obtaining right of use asset for lease liability

Amounts allocated to common stock purchase warrants in connection with proceeds from secured convertible debentures

Issuance of common stock upon conversion of secured convertible notes

Issuance of common stock related to the issuance of secured convertible notes

Amounts allocated to common stock purchase warrants in connection with issuance of unsecured promissory note payable

Amounts allocated to common stock purchase

warrants in connection with proceeds investment agreement

Issuance of common stock upon conversion of accounts payable

Issuance of common stock upon conversion of secured notes payable and accrued interest

Issuance of common stock upon exercise of common stock purchase warrants accounted for as derivative warrant liabilities

Amounts allocated to common stock purchase warrants in connection with proceeds from subordinated notes payable

Proceeds from unsecured

promissory note payable, related party

Proceeds from unsecured

promissory note payable

Proceeds from PPP/EIDL

Repayment of proceeds

investment agreement

Proceeds from issuance

of common stock and warrants, net of issuance costs

Proceeds from secured

convertible debentures

Secured convertible

debenture issuance expense

Principal payments

on related party note payable

Principal payment

on unsecured notes payable

Principal payment

on secured convertible debentures

Proceeds from issuance

of common stock upon exercise of warrants

Proceeds from exercising

stock options

Net cash (used

in) provided by financing activities

Net increase (decrease) in cash and

cash equivalents

equivalents, beginning of year

Cash, cash equivalents,

Supplemental disclosures of cash flow

payments for interest

payments for income taxes

Supplemental disclosures of non-cash

investing and financing activities:

common stock grant

common stock forfeitures

of Adoption of ASC 842 - obtaining right of use asset for lease liability

allocated to common stock purchase warrants in connection with proceeds from secured convertible debentures

of common stock upon conversion of secured convertible notes

of common stock related to the issuance of secured convertible notes

allocated to common stock purchase warrants in connection with issuance of unsecured promissory note payable

Notes to Consolidated Financial Statements.

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

and subsidiary (collectively, “Digital Ally,”

(with its wholly-owned subsidiaries, Digital Ally International, Inc.

and Shield Products, LLC collectively, “Digital

“Digital,”

and the “Company”) produces

digital video imaging and storage products for use in law enforcement, security and commercial applications.

Its products are

an in-car digital video/audio recorder contained in a rear-view mirror for use in law enforcement and commercial fleets;

that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free automatic

activation of body-worn cameras and in-car video systems;

a miniature digital video system designed to be worn on an individual’s

and the “Company”) produces digital video imaging, storage products and disinfectant

and related safety products for use in law enforcement, security and commercial applications.

The Company’s products include,

among others;

in-car digital video/audio recorders contained in a rear-view mirror for use in law enforcement and commercial fleets;

a system that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free

automatic activation of body-worn cameras and in-car video systems;

a miniature digital video system designed to be worn on an

individual’s body;

and cloud storage solutions.

The Company has active research and development programs to adapt its technologies to other

applications.

It can integrate electronic, radio, computer, mechanical, and multi-media technologies to create unique solutions

to address needs in a variety of other industries and markets, including mass transit, school bus, taxicab and the military.

Company sells its products to law enforcement agencies, private security customers and organizations and consumer and commercial

fleet operators through direct sales domestically and third-party distributors internationally.

The Company has recently added two new lines of branded products:

ThermoVu™

line, which is a line of self-contained temperature monitoring stations that provides alerts and controls facility

access when an individual’s temperature exceeds a pre-set threshold and (2) the Shield™

disinfectant and cleanser

line, which is for use against viruses and bacteria and which we began offering to the Company’s law enforcement and commercial

customers beginning late in the second quarter of 2020.

Both product lines are manufactured by third parties.

the Company has active research and development programs to adapt its technologies to other applications.

It can integrate electronic,

radio, computer, mechanical, and multi-media technologies to create unique solutions to address needs in a variety of other industries

and markets, including mass transit, school bus, taxicab and the military.

The Company sells its products to law enforcement agencies,

private security customers and organizations, and consumer and commercial fleet operators through direct sales domestically and

third-party distributors internationally.

Company was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc.

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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.

Management’s

Liquidity Plan and Going Concern

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 operating losses in the year

ended December 31, 2019 and substantial operating losses for the year ended December 31, 2018 primarily due to reduced revenues

and gross margins caused by competitors’

willful infringement of its patents, specifically the auto-activation of body-worn

and in-car video systems, and by competitors’

introduction of newer products with more advanced features together with significant

price cutting of their products.

The Company incurred net losses of approximately $10.0 million for the year ended December 31,

2019 and $15.5 million during the year ended December 31, 2018 and it had an accumulated deficit of $87.4 million as of December

During the year ended December 31, 2019, the Company settled one of its patent infringement cases and received a lump

sum payment of $6.0 million, which was used to pay its obligations under its Proceeds Investment Agreement as more fully described

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 $1,564,000 in the year ended December 31, 2019 from the exercise of warrants,

the Company borrowed $300,000 pursuant to a short-term promissory note payable on December 23, 2019 with detachable warrants to

purchase 107,000 shares of common stock and on August 5, 2019, the Company raised funds from the issuance of $2.78 million principal

balance of secured convertible notes with detachable warrants to purchase 571,248 shares of common stock with the net proceeds

being used for working capital purposes as more fully described in Note 6.

Additionally, the Company raised funding in the form

of subordinated debt, secured debt and Proceeds Investment Agreement totaling $16,500,000 and net proceeds of $7,324,900 from

an underwritten public offering of common stock during the year ended December 31, 2018.

These debt and equity raises were utilized

to fund its operations and management expects to continue this pattern until it achieves positive cash flows from operations,

although it can offer no assurance in this regard.

Company settled its lawsuit with the PGA Tour and the case was dismissed by the Plaintiff with prejudice on April 17, 2019.

Additionally,

the Company settled its lawsuit with WatchGuard on May 13, 2019 and the case was dismissed.

See Note 12, “Contingencies”

for the details respecting the settlements.

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.

Company has increased its addressable market to non-law enforcement customers and obtained new non-law enforcement contracts in

2019 and 2018, which contracts include recurring revenue during the period 2020 to 2023.

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.

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, monetizing its patent portfolio and related patent

infringement litigation against Axon Enterprise, Inc.

(“Axon”

formerly Taser International, Inc.), 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.

The Company’s

August 5, 2019 issuance of $2.78 million principal balance of convertible notes was part of this strategic alternatives review.

The Company has an active shelf registration statement on Form S-3, which it utilized to raise $2.9 million in gross proceeds

through the issuance of 2,521,740 common shares in an underwritten public offering at $1.15 per share on March 3, 2020.

such funding addressed the Company’s near-term liquidity needs, it continues to consider strategic alternatives to address

longer-term liquidity needs and operational issues.

There can be no assurance that any additional transactions or financings will

result from this process.

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

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.

entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital

following is a summary of the Company’s Significant Accounting Policies:

of Consolidation:

accompanying financial statements include the consolidated accounts of Digital Ally and its wholly-owned subsidiaries, Digital

Ally International, Inc.

accompanying financial statements include the consolidated accounts of Digital Ally and its wholly-owned subsidiaries, Digital Ally International,

and Shield Products, LLC.

All intercompany balances and transactions have been eliminated during consolidation.

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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.

Value of Financial Instruments:

1 unchanged sentence

notes payable approximate fair value because of the short-term nature of these items.

The Company accounts for its derivative

liabilities, secured convertible debentures and proceeds investment agreement on a fair value basis.

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.

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’

The Company accounts for its secured convertible

debentures and proceeds investment agreement on a fair value basis.

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.

Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the

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).

contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance

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

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

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.

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

Customers do not have a right to return the product other than for warranty reasons for which they would only receive repair

services or replacement product.

The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for

product sales when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than

Company sells its products and services to law enforcement and commercial customers in the following manner:

to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through

its sales force, which is composed of its employees.

to domestic customers are made direct to the end customer (typically a law enforcement agency or a commercial customer) through its

sales force, which is composed of its employees.

Revenue is recorded when the product is shipped to the end customer.

to international customers are made through independent distributors who purchase products from the Company at a wholesale

price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price.

The distributor

retains the margin as its compensation for its role in the transaction.

The distributor generally maintains product inventory,

customer receivables and all related risks and rewards of ownership.

Accordingly, upon application of steps one through five

above, revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.

to international customers are made through independent distributors who purchase products from the Company at a wholesale price

and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price.

The distributor retains

the margin as its compensation for its role in the transaction.

The distributor generally maintains product inventory, customer receivables

and all related risks and rewards of ownership.

Accordingly, upon application of steps one through five above, revenue is recorded

when the product is shipped to the distributor consistent with the terms of the distribution agreement.

parts and services for domestic and international customers are generally handled by its inside customer service employees.

Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.

taxes collected on products sold are excluded from revenues and are reported as accrued expenses in the accompanying balance sheets

until payments are remitted.

is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer.

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

payments are remitted.

and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software 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

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.

recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services.

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.

with some of the Company’s customers contain multiple performance obligations that are distinct and accounted for separately.

The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”).

The Company determined SSP for all the performance obligations using observable inputs, such as standalone sales and historical

SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of service

being provided.

SSP also reflects the amount the Company would charge for the performance obligation if it were sold separately

in a standalone sale.

transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”).

Company determined SSP for all the performance obligations using observable inputs, such as standalone sales and historical pricing.

SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of service being provided.

SSP also reflects the amount the Company would charge for the performance obligation if it were sold separately in a standalone sale.

Multiple performance obligations consist of product, software, cloud subscriptions and extended warranties.

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.

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, 2018, the Company recognized revenue of $1.7 million related to

its contract liabilities at January 1, 2018.

Total contract liabilities consist of the following:

Contract liabilities

consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately

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.

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.

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, 2020, the Company recognized revenue of $1.6 million related to its contract liabilities at January

Total contract liabilities consist of the following:

December 31, 2019

December 31, 2018

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,

Total contract liabilities

returns and allowances aggregated $26,069 and $134,825 for the years ended December 31, 2020 and 2019, respectively.

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.

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.

for the years ended December 31, 2020 and 2019 were derived from the following sources:

ended December 31,

service revenue

and other revenues

Shield disinfectants/sanitizers

Repair and service

Cloud service revenue

Accessories and other

of Estimates:

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.

preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States

of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during

the reporting period.

Actual results could differ from those estimates.

Management utilizes various other

estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment

of long-lived assets, the fair value of warrants, options, proceeds investment agreement and convertible debt, the recognition

of revenue, inventory valuation reserve, 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.

Management utilizes various other estimates, including but not

limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair

value of warrants, options, proceeds investment agreement and convertible debt, the recognition of revenue, inventory valuation reserve,

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.

and cash equivalents:

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

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

and cash equivalents that are restricted as to withdrawal or use under the terms of the secured convertible debentures are presented

2 unchanged sentences

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.

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.

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.

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.

3 unchanged sentences

Inventory costs include material, labor and manufacturing overhead.

Service inventories that exceed

the estimated requirements for the next 12 months based on recent usage levels are reported as other long-term assets.

has established inventory reserves based on estimates of excess and/or obsolete current and non-current inventory.

Service inventories that exceed the

estimated requirements for the next 12 months based on recent usage levels are reported as other long-term assets.

Management has established

inventory reserves based on estimates of excess and/or obsolete current and non-current inventory.

Manufacturing

inventory 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.

in support plans or technology could have a significant impact on obsolescence.

inventory 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.

support our world-wide service operations, we maintain service spare parts inventory, which consists of both consumable and repairable

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.

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.

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.

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

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.

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.

fixtures and equipment:

fixtures 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 ten years.

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.

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 ten years.

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.

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.

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.

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, 2019.

Finance leases would

be included in furniture, fixtures and equipment, net and long-term debt and finance lease obligations on the balance sheet.

Company had operating leases for copiers and its office and warehouse space at December 31, 2019 but no financing leases.

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.

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.

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, 2020.

Finance leases would be included in

furniture, fixtures 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, 2020 but no financing leases.

assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement

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.

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.

convertible debentures:

Company has elected to record its debentures at fair value.

Accordingly, the debentures are marked-to-market at each reporting

date with the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations.

All issuance costs related

to the debentures were expensed as incurred in the Consolidated Statement of Operations.

Accordingly, the debentures are marked-to-market at each reporting date with

the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations.

All issuance costs related to the debentures

were expensed as incurred in the Consolidated Statement of Operations.

investment agreement:

Company has elected to record its proceeds investment agreement at its fair value.

Accordingly, the proceeds investment agreement

will be marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement

of Operations.

All issuance costs related to the proceeds investment agreement were expensed as incurred in the Consolidated Statement

of Operations.

Accordingly, the proceeds investment agreement will

be marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations.

All issuance costs related to the proceeds investment agreement were expensed as incurred in the Consolidated Statement of Operations.

Convertible Notes:

Company has elected to record its senior convertible notes at its fair value.

Accordingly, the senior convertible notes will be

marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement

of Operations.

All issuance costs related to the senior convertible notes were expensed as incurred in the Consolidated Statement

of Operations.

Accordingly, the senior convertible notes will be marked-to-market

at each reporting date with the change in fair value reported as a gain (loss) in the Consolidated Statement of Operations.

costs related to the senior convertible notes were expensed as incurred in the Consolidated Statement of Operations.

assets such as furniture, fixtures 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.

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.

is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party appraisals,

as considered necessary.

Company’s products carry explicit product warranties that extend up to two years from the date of shipment.

records a provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts these

provisions to reflect actual experience.

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.

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.

and Handling Costs:

2 unchanged sentences

expense includes costs related to trade shows and conventions, promotional material and supplies, and media costs.

costs are expensed in the period in which they are incurred.

The Company incurred total advertising expense of approximately $1,019,707

and $384,113 for the years ended December 31, 2019 and 2018, respectively.

Such costs are included in selling, advertising and

promotional expenses in the Consolidated Statements of Operations.

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.

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.

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.

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, 2019 and 2018.

Advertising costs

are expensed in the period in which they are incurred.

The Company incurred total advertising expense of approximately $990,975 and $1,019,707

for the years ended December 31, 2020 and 2019, respectively.

Such costs are included in selling, advertising and promotional expenses

in the Consolidated Statements of Operations.

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.

Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

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

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

These periodic adjustments may have a material impact on its Consolidated Statements of Operations.

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, 2020 and 2019.

There were no penalties in 2020 and 2019.

Company is subject to taxation in the United States and various states.

As of December 31, 2019, the Company’s tax returns

filed for 2016, 2017, and 2018 and to be filed for 2019 are subject to examination by the relevant taxing authorities.

exceptions, as of December 31, 2018, the Company is no longer subject to Federal, state, or local examinations by tax authorities

for years before 2016.

As of December 31, 2020, the Company’s tax returns filed

for 2017, 2018, and 2019 and to be filed for 2020 are subject to examination by the relevant taxing authorities.

With few exceptions,

as of December 31, 2020, the Company is no longer subject to Federal, state, or local examinations by tax authorities for years before

and Development Expenses:

Company expenses all research and development costs as incurred.

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 2019 and 2018.

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 2020 and 2019.

Stock Purchase Warrants:

Company has common stock purchase warrants that are accounted for as liabilities under the caption of derivative liabilities on

the consolidated balance sheet and recorded at fair value due to the warrant agreements containing anti-dilution provisions.

change in fair value is being recorded in Consolidated Statement of Operations.

Company has common stock purchase warrants that are accounted for as equity based on their relative fair value and are not subject

to re-measurement.

Company has common stock purchase warrants outstanding that are accounted for as equity based on their relative fair value and are not

subject to re-measurement.

Compensation:

Company grants stock-based compensation to its employees, board of directors and certain third-party contractors.

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.

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.

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:

Assumptions used to

estimate compensation expense are determined as follows:

term is determined using the contractual term and vesting period of the award;

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;

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;

dividend rate is determined based on expected dividends to be declared;

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;

Treasury bonds with a maturity equal to the expected term of

are accounted for as they occur.

Company has determined that its operations are comprised of one reportable segment:

the sale of digital audio and video recording

and speed detection devices.

the sale of digital audio and video recording and

speed detection devices.

For the year ended December 31, 2020 and 2019, sales by geographic area were as follows:

Year ended December 31,

ended December 31,

Sales by geographic area:

1 unchanged sentence

to customers outside of the United States are denominated in U.S.

All Company assets are physically located within the

United States.

All Company assets are physically located within the United

Reclassification

1 unchanged sentence

prior year amounts have been reclassified for consistency with the current year presentation.

These reclassifications had no effect

on the reported results of operations.

Adopted Accounting Standards

These reclassifications had no effect on

the reported results of operations.

Accounting Standards

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.

2020-06 is effective for fiscal years beginning after December 15, 2021 with early adoption permitted for fiscal years beginning

after December 15, 2020.

Based on a preliminary analysis, the Company does not expect the adoption of this new accounting standard will

have a significant impact on the Company’s financial position and results of operations.

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

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.

2020-01 is effective

for fiscal years beginning after December 15, 2020 with early adoption permitted.

Based on a preliminary analysis, the Company does not

expect the adoption of this new accounting standard will have a significant impact on the Company’s financial position and results

of operations.

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.

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.

February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (“Topic 842”).

The guidance requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in

a manner similar to today’s accounting.

Lessees initially recognize a lease liability for the obligation to make lease payments

and a right-of-use asset for the right to use the underlying asset for the lease term.

The lease liability is measured at the

present value of the lease payments over the lease term.

The right-of-use asset is measured at the lease liability amount, adjusted

for lease prepayments, lease incentives received and the lessee’s initial direct costs.

The standard is effective for public

business entities for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period,

which is the first quarter of 2019 for the Company.

Company adopted the new guidance on January 1, 2019 using the optional transitional method and elected to use the package of three

practical expedients which allows the Company not to reassess whether contracts are or contain leases, lease classification and

whether initial direct costs qualify for capitalization.

The Company has completed its assessment of the impact of the standard

and determined that the only lease that the Company held was an operating lease for its office and warehouse space.

Upon adoption

of the standard, the Company recorded Right of Use (ROU) assets of approximately $501,000 and lease liabilities of approximately

$582,000 related to it office and warehouse space operating leases.

The Company also removed deferred rent of approximately $81,000

when adopting the new guidance.

requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to

today’s accounting.

Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use

asset for the right to use the underlying asset for the lease term.

The lease liability is measured at the present value of the lease

payments over the lease term.

The right-of-use asset is measured at the lease liability amount, adjusted for lease prepayments, lease

incentives received and the lessee’s initial direct costs.

The standard is effective for public business entities for annual reporting

periods beginning after December 15, 2018, and interim periods within that reporting period, which is the first quarter of 2019 for the

Company adopted the new guidance on January 1, 2019 using the optional transitional method and elected to use the package of three practical

expedients which allows the Company not to reassess whether contracts are or contain leases, lease classification and whether initial

direct costs qualify for capitalization.

The Company has completed its assessment of the impact of the standard and determined that the

only lease that the Company held was an operating lease for its office and warehouse space.

Upon adoption of the standard, the Company

recorded Right of Use (ROU) assets of approximately $501,000 and lease liabilities of approximately $582,000 related to it office and

warehouse space operating leases.

The Company also removed deferred rent of approximately $81,000 when adopting the new guidance.

financial liabilities measured using the fair value option in ASC 825, ASU 2016-01, Financial Instruments —

Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities, issued in January 2016, requires entities

to recognize the changes in fair value of liabilities caused by a change in instrument specific credit risk (own credit risk)

in other comprehensive income.

Recognition and Measurement of Financial Assets and Financial Liabilities, issued in January 2016, requires entities to recognize the

changes in fair value of liabilities caused by a change in instrument specific credit risk (own credit risk) in other comprehensive income.

The ASU is effective for calendar-year public business entities beginning in 2018.

For all other

calendar-year entities, it is effective for annual periods beginning in 2019 and interim periods beginning in 2020.

early adopt certain provisions of the new standard, including this provision related to financial liabilities measured under the

fair value option.

We have considered this guidance and its impact on this debt accounted for at fair value.

Based on discussions

with our valuation expert and knowledge of the Company there was no change in valuation caused by a change in the Company’s

credit risk during the period from August 5, 2019 to December 31, 2019.

For all other calendar-year entities, it is effective

for annual periods beginning in 2019 and interim periods beginning in 2020.

Entities can early adopt certain provisions of the new standard,

including this provision related to financial liabilities measured under the fair value option.

We have considered this guidance and

its impact on this debt accounted for at fair value.

Based on discussions with our valuation expert and knowledge of the Company there

was no change in valuation caused by a change in the Company’s credit risk during the period ending December 31, 2020.

2018-09, Codification improvements, clarifies the accounting for a debt extinguishment when the fair value option is elected.

Upon extinguishment an entity shall include in net income the cumulative amount of the gain or loss previously recorded in other

comprehensive income for the extinguished debt that resulted from changes in instrument-specific credit risk.

The ASU is effective

for calendar-year public business entities beginning in 2019.

For all other calendar-year entities, it is effective for annual

periods beginning in 2020 and interim periods beginning in 2021.

Early adoption is permitted for any fiscal year or interim period

for which an entity’s financial statements have not yet been issued or have not been made available to be issued.

considered this guidance and its impact on this debt accounted for at fair value.

Based on discussions with our valuation expert

and knowledge of the Company there was no change in valuation caused by a change in the Company’s credit risk during the

period from August 5, 2019 to December 31, 2019.

Since there is no change accounted for as a change in Credit Risk (included in

other comprehensive income/loss) there is no impact to the Company’s financial statements from this new guidance.

Upon extinguishment

an entity shall include in net income the cumulative amount of the gain or loss previously recorded in other comprehensive income for

the extinguished debt that resulted from changes in instrument-specific credit risk.

The ASU is effective for calendar-year public business

entities beginning in 2019.

For all other calendar-year entities, it is effective for annual periods beginning in 2020 and interim periods

beginning in 2021.

Early adoption is permitted for any fiscal year or interim period for which an entity’s financial statements

have not yet been issued or have not been made available to be issued.

We have considered this guidance and its impact on this debt accounted

for at fair value.

Based on discussions with our valuation expert and knowledge of the Company there was no change in valuation caused

by a change in the Company’s credit risk during the period ending December 31, 2020.

Since there is no change accounted for as

a change in Credit Risk (included in other comprehensive income/loss) there is no impact to the Company’s financial statements

from this new guidance.

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.

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”

2019-05, “Financial Instruments-Credit

Losses (Topic 326):

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”

2019-05, “Financial Instruments-Credit Losses (Topic 326):

Targeted Transition Relief”

which provided additional implementation guidance on the previously issued

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.

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

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

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.

The Company will continue to evaluate the effect

of adopting ASU 2016-13 will have on the Company’s consolidated financial statements.

August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement , to improve the effectiveness

of disclosures.

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement , to improve the effectiveness of disclosures.

The amendments remove, modify, and add certain disclosure requirements in Topic 820, “Fair Value Measurement.”

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used

to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively

for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments should

be applied retrospectively to all periods presented upon their effective date.

The amendments are effective for fiscal years beginning

after December 15, 2019.

Early adoption is permitted, including adoption in an interim period.

Furthermore, an entity is permitted

to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures

until their effective date.

The Company is currently evaluating the effects the adoption of ASU 2018-13 will have on the disclosures.

The amendments

on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3

fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent

interim or annual period presented in the initial fiscal year of adoption.

All other amendments should be applied retrospectively to

all periods presented upon their effective date.

The amendments are effective for fiscal years beginning after December 15, 2019.

adoption is permitted, including adoption in an interim period.

Furthermore, an entity is permitted to early adopt any removed or modified

disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date.

The Company is currently

evaluating the effects the adoption of ASU 2018-13 will have on the disclosures.

August 2018, the FASB issued ASU No.

2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40) , or

ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement

that is a service contract.

The amendments under ASU 2018-15 are effective for interim and annual fiscal periods beginning after

December 15, 2019, with early adoption permitted.

The Company does not expect the adoption of ASU 2018-15 to have a material impact

on its financial statements.

2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40) , or ASU 2018-15.

ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement that is a service

The amendments under ASU 2018-15 are effective for interim and annual fiscal periods beginning after December 15, 2019, with

early adoption permitted.

The Company does not expect the adoption of ASU 2018-15 to have a material impact on its financial statements.

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

The amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending

existing guidance.

We do not expect the adoption of this standard to have a significant impact on our financial position and results

of operations.

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.

amendment also improves consistent application and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

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’

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 $123,224 as of December 31, 2019 and $70,000 as of December 31, 2018.

Company uses primarily a network of unaffiliated distributors for international sales and employee-based direct sales force for

domestic sales.

No international distributor individually exceeded 10% of total revenues and no customer receivable balance exceeded

10% of total accounts receivable for the years ended December 31, 2019 and 2018.

Company 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.

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 $123,224 as of December

31, 2020 and $123,224 as of December 31, 2019.

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, 2020 and 2019, the uninsured balance amounted to $3,653,192

and $-0-, respectively.

The Company uses primarily a network

of unaffiliated distributors for international sales and employee-based direct sales force for domestic sales.

No international

distributor individually exceeded 10% of total revenues and no customer receivable balance exceeded 10% of total accounts receivable

for the years ended December 31, 2020 and 2019.

Company 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.

ACCOUNTS RECEIVABLE –

1 unchanged sentence

allowance for doubtful accounts receivable was comprised of the following for the years ended December 31, 2020 and 2019:

December 31, 2019

December 31, 2018

Beginning balance

Provision for bad debts

Charge-offs to allowance, net of recoveries

Charge-offs to allowance,

net of recoveries

Ending balance

consisted of the following at December 31, 2020 and 2019:

December 31, 2019

December 31, 2018

Raw material and component parts

1 unchanged sentence

Finished goods

Reserve for excess and obsolete inventory

Reserve for excess and

obsolete inventory

Total inventories

goods inventory includes units held by potential customers and sales agents for test and evaluation purposes.

The cost of such

units totaled $80,711 and $115,456 as of December 31, 2019 and 2018, respectively.

The cost of such units

totaled $138,263 and $80,711 as of December 31, 2020 and 2019, respectively.

FURNITURE, FIXTURES AND EQUIPMENT

fixtures and equipment consisted of the following at December 31, 2020 and 2019:

Estimated Useful Life

December 31, 2019

December 31, 2018

Office furniture, fixtures and equipment

3 unchanged sentences

Rental equipment

accumulated depreciation and amortization

Net furniture, fixtures and equipment

and amortization of furniture, fixtures and equipment aggregated $254,491 and $385,104 for the years ended December 31, 2019 and

2018, 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 2019 totaling $1,127,368, all of which

were fully depreciated resulting in no gain or loss for the year ended December 31, 2019.

accumulated depreciation

and amortization

Net furniture, fixtures

and equipment

and amortization of furniture, fixtures and equipment aggregated $62,048 and $254,491 for the years ended December 31,

2020 and 2019, 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 2020 totaling $519,468, all of

which were fully depreciated resulting in no gain or loss for the year ended December 31, 2020.

INTANGIBLE ASSETS

assets consisted of the following at December 31, 2020 and 2019:

December 31, 2019

December 31, 2018

Accumulated amortization

Net carrying value

Accumulated amortization

Net carrying value

carrying value

Amortized intangible assets:

1 unchanged sentence

Unamortized intangible assets:

Patents and trademarks pending

Patents and trademarks

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.

If issuance of the final

patent or trademark is denied, then the amount deferred will be immediately charged to expense.

expense for the years ended December 31, 2020 and 2019 was $188,108 and $135,660, respectively.

1 unchanged sentence

assets with definite lives for the next five years ending December 31 and thereafter is as follows:

Year ending December 31:

2025 and thereafter

DEBT OBLIGATIONS

obligations is comprised of the following:

December 31, 2019

December 31, 2018

Economic injury disaster loan (EIDL)

Payroll protection program loan (PPP)

2019 Secured convertible notes, at fair value

2018 Proceeds investment agreement, at fair value

Unsecured promissory note payable, less unamortized discount of $66,061 at December 31, 2019

2018 Proceeds investment agreement, at fair

Unsecured promissory

note payable, less unamortized discount of $-0- and $66,061 at December 31, 2020 and 2019, respectively

Debt obligations

current maturities

of debt obligations

Debt obligations, long-term

obligations mature as follows as of December 31, 2020:

2025 and thereafter

Small Business Administration Notes .

May 4, 2020, the Company issued a promissory note in connection with the receipt of the PPP Loan of $1,418,900 under the SBA’s

PPP Program under the CARES Act.

The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum.

Monthly principal and

interest payments are deferred for nine months after the date of disbursement and total $79,850.57 per month thereafter.

may be prepaid at any time prior to maturity with no prepayment penalties.

The promissory note contains events of default and other provisions

customary for a loan of this type.

The PPP provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain

qualifying expenses as described in the CARES Act.

The Company intends to use the majority of the PPP Loan amount for qualifying expenses

and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act.

The Company is in process of applying for

forgiveness of the PPP Loan.

On December 10, 2020, the Company was fully forgiven of its $1,418,900 PPP Loan, thus we recorded a gain

on the extinguishment of debt in the amount of $1.4 million in the line item “Gain on Extinguishment of Debt”

in our Consolidated

Statements of Operations.

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.

the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum.

The term of such note is thirty years, though it may be payable sooner upon an event of default under such note.

Monthly principal

and interest payments are deferred for twelve months after the date of disbursement and total $731.00 per month thereafter.

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.

Secured Convertible Notes .

August 5, 2019, the Company, entered into a securities purchase agreement with several accredited investors providing for the

issuance of (i) the Company’s 8% secured convertible notes due August 4, 2020 with a principal face amount of $2,777,777.78,

which convertible notes are, subject to certain conditions, convertible into 1,984,126 shares of the Company’s common stock,

at a price per share of $1.40;

(ii) five-year warrants to purchase an aggregate of 571,428 shares of Common Stock at an exercise

price of $1.8125, which warrants are immediately exercisable upon issuance and on a cashless basis if the Warrants have not been

registered 180 days after the date of issuance;

and (iii) the issuance of shares of common stock equal to 5% of the aggregate

purchase price of the convertible notes, with an aggregate value of $125,000 (the “Commitment Shares”).

The accredited

investors purchased the foregoing securities for an aggregate cash purchase price of $2,500,000.

April 17, 2020, the Company entered into a securities purchase agreement with several accredited investors providing for the issuance

of (i) the Company’s 8% secured convertible notes due April 16, 2021 with a principal face amount of $1,666,666, which convertible

notes are, subject to certain conditions, convertible into 1,650,164 shares of the Company’s common stock, at a price per share

of $1.01 (the “2020 Convertible Notes”), and (ii) five-year warrants to purchase an aggregate of 1,237,624 shares of Common

Stock at an exercise price of $1.31, which warrants are immediately exercisable upon issuance and on a cashless basis if the Warrants

have not been registered 180 days after the date of issuance.

The accredited investors purchased the foregoing securities for an aggregate

cash purchase price of $1,500,000.

the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited from exercising

their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such holder, together with

its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after

giving effect to such exercise.

However, the investors may increase or decrease such percentage to any other percentage not in excess

of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the Company.

Company elected to account for the secured convertible notes on the fair value basis.

Therefore, the Company determined the fair value

of the secured convertible notes and the common stock purchase warrants which yielded estimated fair values of the secured convertible

notes including their embedded derivatives and the detachable common stock purchase warrants.

The following represents the resulting

fair value as determined on April 17, 2020, the date of origination:

Secured convertible notes

Common stock purchase

Gross cash proceeds

the year ended December 31, 2020, the holders of the 2020 Convertible Notes exercised their right to convert principal balances aggregating

$1,665,666 into equity.

In addition, on June 12, 2020, the Company exercised its right to prepay in cash the remaining outstanding principal

balance aggregating $1,000.

There remains no outstanding 2020 Convertible notes as of December 31, 2020 as a result of these conversions

and prepayments.

the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of the secured

convertible notes at each reporting date with the resulting charge or credit being reflected in the consolidated statement of operations.

Following is an analysis of the activity in the secured convertible notes during the year ended December 31, 2020:

Balance at December 31, 2019

2020 convertible notes at fair value

Principal repaid during

the period by issuance of common stock

Principal repaid during

the period by payment of cash

in fair value of secured convertible note during the period

Balance at December 31, 2020

is a range of certain estimates and assumptions utilized as of the April 17, 2020 issuance date to determine the fair value of secured

convertible notes:

Volatility –

Risk-free rate

Contractual term

the fair value basis, legal, accounting, and miscellaneous costs directly related to the issuance of the secured convertible notes are

charged to expense as incurred.

A total of $34,906 and $-0- of such issuance costs were charged to operations during the years ended

December 31, 2020 and 2019, respectively.

Secured Convertible Notes .

August 5, 2019, the Company, entered into a securities purchase agreement with several accredited investors providing for the issuance

of (i) the Company’s 8% secured convertible notes due August 4, 2020 with a principal face amount of $2,777,777.78, which convertible

notes are, subject to certain conditions, convertible into 1,984,126 shares of the Company’s common stock, at a price per share

(ii) five-year warrants to purchase an aggregate of 571,428 shares of Common Stock at an exercise price of $1.8125, which warrants

are immediately exercisable upon issuance and on a cashless basis if the Warrants have not been registered 180 days after the date of

and (iii) the issuance of shares of common stock equal to 5% of the aggregate purchase price of the convertible notes, with

an aggregate value of $125,000 (the “Commitment Shares”).

The accredited investors purchased the foregoing securities for

an aggregate cash purchase price of $2,500,000.

to the purchase agreement, an aggregate of $1,153,320 in principal amount of convertible notes (the “Registered Notes”),

the conversion shares underlying the Registered Notes and all of the Commitment Shares were issued to the accredited investors

in a registered direct offering pursuant to a prospectus supplement to the Company’s currently effective shelf registration

statement on Form S-3.

Accordingly, $1,153,320 in original principal amount of our convertible notes were issued as Registered

Notes pursuant to the shelf registration statement and therefore freely tradable.

a related transaction and in accordance with the purchase agreement, the Company issued to the accredited investors in a concurrent

private placement pursuant to an exemption from the registration requirements of the Securities Act provided in Section 4(a)(2)

of the Securities Act and/or Regulation D promulgated thereunder, (1) the remaining aggregate of $1,624,457.78 in principal amount

of convertible notes, (2) the shares of common stock issuable from time to time upon conversion of such convertible notes, and

(3) the common shares underlying the common stock purchase warrants.

On September 5, 2019, the Company filed a Registration Statement

on Form S-1 covering the securities issued in the concurrent private placement including an aggregate of $1,624,457.78 in principal

amount of previously non-registered convertible notes, the shares of common stock issuable from time to time upon conversion of

such non-registered convertible notes and the common stock underlying the common stock purchase warrants.

Such Registration Statement

on Form S-1 was declared effective by the Securities and Exchange Commission on September 12, 2019.

the conversion shares underlying the Registered Notes and all of the Commitment Shares were issued to the accredited investors in a registered

direct offering pursuant to a prospectus supplement to the Company’s currently effective shelf registration statement on Form S-3.

Accordingly, $1,153,320 in original principal amount of our convertible notes were issued as Registered Notes pursuant to the shelf registration

statement and therefore freely tradable.

a related transaction and in accordance with the purchase agreement, the Company issued to the accredited investors in a concurrent private

placement pursuant to an exemption from the registration requirements of the Securities Act provided in Section 4(a)(2) of the Securities

Act and/or Regulation D promulgated thereunder, (1) the remaining aggregate of $1,624,457.78 in principal amount of convertible notes,

(2) the shares of common stock issuable from time to time upon conversion of such convertible notes, and (3) the common shares underlying

the common stock purchase warrants.

On September 5, 2019, the Company filed a Registration Statement on Form S-1 covering the securities

issued in the concurrent private placement including an aggregate of $1,624,457.78 in principal amount of previously non-registered convertible

notes, the shares of common stock issuable from time to time upon conversion of such non-registered convertible notes and the common

stock underlying the common stock purchase warrants.

Such Registration Statement on Form S-1 was declared effective by the Securities

and Exchange Commission on September 12, 2019.

connection with the purchase agreement, the Company and its subsidiary entered into a security agreement, dated as of August 5, 2019,

2019, with the investors, pursuant to which the Company and its subsidiary granted a security interest in, among other items,

the Company and its subsidiary’s accounts, chattel paper, documents, equipment, general intangibles, instruments and inventory,

and all proceeds, as set forth in the security agreement.

In addition, pursuant to an intellectual property security agreement,

dated as of August 5, 2019, the Company granted a continuing security interest in all of the Company’s right, title and

interest in, to and under certain of the Company’s trademarks, copyrights and patents.

In addition, the Company’s

subsidiary jointly and severally agreed to guarantee and act as surety for the Company’s obligation to repay the convertible

notes pursuant to a subsidiary guarantee.

the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited

from exercising their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such

holder, together with its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock

outstanding immediately after giving effect to such exercise.

However, the investors may increase or decrease such percentage

to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61

days after such notice to the Company.

with the investors, pursuant to which the Company and its subsidiary granted a security interest in, among other items, the Company and

its subsidiary’s accounts, chattel paper, documents, equipment, general intangibles, instruments and inventory, and all proceeds,

as set forth in the security agreement.

In addition, pursuant to an intellectual property security agreement, dated as of August 5, 2019,

the Company granted a continuing security interest in all of the Company’s right, title and interest in, to and under certain of

the Company’s trademarks, copyrights and patents.

In addition, the Company’s subsidiary jointly and severally agreed to guarantee

and act as surety for the Company’s obligation to repay the convertible notes pursuant to a subsidiary guarantee.

the purchase agreement, the convertible notes and warrants contain provisions whereby the accredited investors are prohibited from exercising

their rights to convert the notes or exercise the warrants if, as a result of such conversion or exercise, such holder, together with

its affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after

giving effect to such exercise.

However, the investors may increase or decrease such percentage to any other percentage not in excess

of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the Company.

Company elected to account for the secured convertible notes on the fair value basis.

Therefore, the Company determined the fair

value of the (1) secured convertible notes, (2) the Commitment Shares and (3) the common stock purchase warrants which yielded

estimated fair values of the secured convertible notes including their embedded derivatives, the Commitment Shares and the detachable

common stock purchase warrants.

The following represents the resulting fair value as determined on August 5, 2019, the date of

Therefore, the Company determined the fair value

of the (1) secured convertible notes, (2) the Commitment Shares and (3) the common stock purchase warrants which yielded estimated fair

values of the secured convertible notes including their embedded derivatives, the Commitment Shares and the detachable common stock purchase

The following represents the resulting fair value as determined on August 5, 2019, the date of origination:

Secured convertible notes

Common stock issued as Commitment Shares

Common stock purchase warrants

Common stock purchase

Gross cash proceeds

the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of

the secured convertible notes at each reporting date with the resulting charge or credit being reflected in the consolidated statement

of operations.

Following is an analysis of the activity in the secured convertible notes during the year ended December 31, 2019:

the fair value basis, the Company determines the fair value of the secured convertible notes and adjusts the carrying value of the secured

convertible notes at each reporting date with the resulting charge or credit being reflected in the consolidated statement of operations.

Following is an analysis of the activity in the secured convertible notes during the years ended December 31, 2020 and 2019:

Balance at December 31, 2018

Issuance of convertible notes on August 5, 2019, at fair value

Principal repaid during the period by issuance of common stock

Principal repaid during the period by payment of cash

Change in fair value of secured convertible note during the period

convertible notes on August 5, 2019, at fair value

Principal repaid during

the period by issuance of common stock

Principal repaid during

the period by payment of cash

in fair value of secured convertible note during the period

Balance at December 31, 2019

Following is a range

of certain estimates and assumptions utilized as of December 31, 2019 and August 5.

2019 (inception date) to determine the

fair value of secured convertible notes:

December 31, 2019

August 5, 2019

Principal repaid during

the period by issuance of common stock

Principal repaid during

the period by payment of cash

in fair value of secured convertible note during the period

Balance at December 31, 2020

is a range of certain estimates and assumptions utilized as of December 31, 2020 to determine the fair value of secured convertible notes:

Volatility –

2 unchanged sentences

Calibrated stock price

the fair value basis, legal, accounting and miscellaneous costs directly related to the issuance of the secured convertible notes

are charged to expense as incurred.

A total of $89,148 of such issuance costs were charged to operations during the year ended

December 31, 2019.

the fair value basis, legal, accounting, and miscellaneous costs directly related to the issuance of the secured convertible notes are

charged to expense as incurred.

A total of $-0- and $89,148 of such issuance costs were charged to operations during the years ended

December 31, 2020 and 2019, respectively.

Proceeds Investment Agreement .

July 31, 2018, the Company entered into a Proceeds Investment Agreement (the “PIA Agreement”) with Brickell Key Investments

LP (“BKI”), pursuant to which BKI funded an aggregate of $500,000 (the “First Tranche”) to be used (i)

to fund the Company’s litigation proceedings relating to the infringement of certain patent assets listed in the PIA Agreement

and (ii) to repay the Company’s existing debt obligations and for certain working capital purposes set forth in the PIA

Pursuant to the PIA Agreement, BKI was granted an option to provide the Company with an additional $9.5 million, at

BKI’s sole discretion (the “Second Tranche”).

On August 21, 2018, BKI exercised its option on the Second Tranche

for $9.5 million which completed the $10 million funding.

to the PIA Agreement and in consideration for the $10 million in funding, the Company agreed to assign to BKI (i) 100% of all

gross, pre-tax monetary recoveries paid by any defendant(s) to the Company or its affiliates agreed to in a settlement or awarded

in judgment in connection with the patent assets, plus any interest paid in connection therewith by such defendant(s) (the “Patent

Assets Proceeds”), up to the minimum return (as defined in the Agreement) and (ii) if BKI has not received its minimum return

by the earlier of a liquidity event (as defined in the Agreement) and July 31, 2020, then the Company agreed to assign to BKI

100% of the Patent Asset Proceeds until BKI has received an amount equal to the minimum return on $4.0 million.

to the PIA Agreement, the Company granted BKI (i) a senior security interest in the Patent Assets, the claims (as defined in the

Agreement) and the Patent Assets Proceeds until such time as the minimum return is paid, in which case, the security interest

on the patent assets, the claims and the Patent Assets Proceeds will be released, and (ii) a senior security interest in all other

assets of the Company until such time as the minimum return is paid on $4.0 million, in which case, the security interest on such

other assets will be released.

security interest is enforceable by BKI if the Company is in default under the PIA Agreement which would occur if (i) the Company

fails, after five (5) days’

written notice, to pay any due amount payable to BKI under the PIA Agreement, (ii) the Company

fails to comply with any provision of the PIA Agreement or any other agreement or document contemplated under the PIA Agreement,

(iii) the Company becomes insolvent or insolvency proceedings are commenced (and not subsequently discharged) with respect to

the Company, (iv) the Company’s creditors commence actions against the Company (which are not subsequently discharged) that

affect material assets of the Company, (v) the Company, without BKI’s consent, incurs indebtedness other than immaterial

ordinary course indebtedness up to $500,000, (vi) the Company fails, within five (5) business days following the closing of the

second tranche, to fully satisfy its obligations to certain holders of the Company’s senior secured convertible promissory

notes listed in the PIA Agreement and fails to obtain unconditional releases from such holders as to the Company’s obligations

to such holders and the security interests in the Company held by such holders or (vii) there is an uncured non-compliance of

the Company’s obligations or misrepresentations by the Company under the PIA Agreement.

the PIA Agreement, the Company issued BKI a warrant to purchase up to 465,712 shares of the Company’s common stock, par

value $0.001 per share (the “PIA Warrant”), at an exercise price of $2.60 per share provided that the holder of the

PIA Warrant will be prohibited from exercising the PIA Warrant if, as a result of such exercise, such holder, together with its

affiliates, would own more than 4.99% of the total number of shares of the Company’s common stock outstanding immediately

after giving effect to such exercise.

However, such holder may increase or decrease such percentage to any other percentage not

in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days after such notice to the

The PIA Warrant is exercisable for five years from the date of issuance and is exercisable on a cashless exercise basis

if there is no effective registration statement.

No contractual registration rights were given.

LP (“BKI”), pursuant to which BKI funded an aggregate of $500,000 (the “First Tranche”) to be used (i) to fund

the Company’s litigation proceedings relating to the infringement of certain patent assets listed in the PIA Agreement and (ii)

to repay the Company’s existing debt obligations and for certain working capital purposes set forth in the PIA Agreement.

to the PIA Agreement, BKI was granted an option to provide the Company with an additional $9.5 million, at BKI’s sole discretion

(the “Second Tranche”).

On August 21, 2018, BKI exercised its option on the Second Tranche for $9.5 million which completed

the $10 million funding.

to the PIA Agreement and in consideration for the $10 million in funding, the Company agreed to assign to BKI (i) 100% of all gross,

pre-tax monetary recoveries paid by any defendant(s) to the Company or its affiliates agreed to in a settlement or awarded in judgment

in connection with the patent assets, plus any interest paid in connection therewith by such defendant(s) (the “Patent Assets Proceeds”),

up to the minimum return (as defined in the Agreement) and (ii) if BKI has not received its minimum return by the earlier of a liquidity

event (as defined in the Agreement) and July 31, 2020, then the Company agreed to assign to BKI 100% of the Patent Asset Proceeds until

BKI has received an amount equal to the minimum return on $4.0 million.

to the PIA Agreement, the Company granted BKI (i) a senior security interest in the Patent Assets, the claims (as defined in the Agreement)

and the Patent Assets Proceeds until such time as the minimum return is paid, in which case, the security interest on the patent assets,

the claims and the Patent Assets Proceeds will be released, and (ii) a senior security interest in all other assets of the Company until

such time as the minimum return is paid on $4.0 million, in which case, the security interest on such other assets will be released.

security interest is enforceable by BKI if the Company is in default under the PIA Agreement which would occur if (i) the Company fails,

after five (5) days’

written notice, to pay any due amount payable to BKI under the PIA Agreement, (ii) the Company fails to comply

with any provision of the PIA Agreement or any other agreement or document contemplated under the PIA Agreement, (iii) the Company becomes

insolvent or insolvency proceedings are commenced (and not subsequently discharged) with respect to the Company, (iv) the Company’s

creditors commence actions against the Company (which are not subsequently discharged) that affect material assets of the Company, (v)

the Company, without BKI’s consent, incurs indebtedness other than immaterial ordinary course indebtedness up to $500,000, (vi)

the Company fails, within five (5) business days following the closing of the second tranche, to fully satisfy its obligations to certain

holders of the Company’s senior secured convertible promissory notes listed in the PIA Agreement and fails to obtain unconditional

releases from such holders as to the Company’s obligations to such holders and the security interests in the Company held by such

holders or (vii) there is an uncured non-compliance of the Company’s obligations or misrepresentations by the Company under the

PIA Agreement.

the PIA Agreement, the Company issued BKI a warrant to purchase up to 465,712 shares of the Company’s common stock, par value $0.001

per share (the “PIA Warrant”), at an exercise price of $2.60 per share provided that the holder of the PIA Warrant will be

prohibited from exercising the PIA Warrant if, as a result of such exercise, such holder, together with its affiliates, would own more

than 4.99% of the total number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise.

However, such holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase

in such percentage shall not be effective until 61 days after such notice to the Company.

The PIA Warrant is exercisable for five years

from the date of issuance and is exercisable on a cashless exercise basis if there is no effective registration statement.

No contractual

registration rights were given.

Company elected to account for the PIA on the fair value basis.

Therefore, the Company determined the fair value of the PIA and

PIA Warrants which yielded estimated fair values of the PIA including their embedded derivatives and the detachable PIA Warrants

Therefore, the Company determined the fair value of the PIA and PIA Warrants

which yielded estimated fair values of the PIA including their embedded derivatives and the detachable PIA Warrants as follows:

Proceeds investment agreement

Common stock purchase warrants

Common stock purchase

Gross cash proceeds

Company utilized a probability weighted present value of expected patent asset proceeds for the litigation involving both Axon

and WatchGuard (see Note 12 –

Commitments and Contingencies) which involved estimates of the amount and timing of the expected

patent asset proceeds from the alleged patent infringement.

The fair value of the PIA is updated for actual and estimated activity

affecting the probability weighted present value of expected patent asset proceeds at each reporting date with the change charged/credited

to operations.

Following is a range of certain estimates and assumptions utilized as of December 31, 2019 and 2018 to probability

weighted present value of expected patent asset proceeds for the litigation involving both Axon and WatchGuard:

Company utilized a probability weighted present value of expected patent asset proceeds for the litigation involving both Axon and WatchGuard

(see Note 12 –

Commitments and Contingencies) which involved estimates of the amount and timing of the expected patent asset proceeds

from the alleged patent infringement.

The fair value of the PIA is updated for actual and estimated activity affecting the probability

weighted present value of expected patent asset proceeds at each reporting date with the change charged/credited to operations.

is a range of certain estimates and assumptions utilized as of December 31, 2019 to probability weighted present value of expected patent

asset proceeds for the litigation involving both Axon and WatchGuard:

Discount rate

1 unchanged sentence

years - 4 years

years - 1.1 years

Probability of success

1 unchanged sentence

Negotiation discount

the year ended December 31, 2019, the Company settled its patent infringement litigation with WatchGuard whereby it received a

lump-sum payment of $6.0 million as further described in Note 12.

In accordance with the terms of the PIA, the Company remitted

the $6.0 as a principal payment toward its minimum return payment obligations under the PIA.

The Company recorded the receipt

of the $6,000,000 settlement as Patent litigation settlement income in the accompanying condensed consolidated statement of operations.

following represents activity in the PIA during the year ended December 31, 2019 and 2018:

2019, the Company settled its patent infringement litigation with WatchGuard whereby it received a lump-sum payment of $6.0 million as

further described in Note 12.

In accordance with the terms of the PIA, the Company remitted the $6.0 as a principal payment toward its

minimum return payment obligations under the PIA.

The Company recorded the receipt of the $6,000,000 settlement as Patent litigation

settlement income in the accompanying consolidated statement of operations.

July 20, 2020, the Company and BKI executed a Termination Agreement and Mutual Release (the “Termination Agreement”).

the terms of the Termination Agreement the parties agreed to terminate the PIA and to release each other from any further liability under

the PIA obligation.

the terms of the Termination Agreement, upon payment of $1,250,000 by the Company to BKI both parties agreed to terminate the PIA and

to release each other from any further liability thereunder.

Such $1,250,000 payment was made on July 22, 2020.

In addition to the $1,250,000

payment, the Company further agreed to pay BKI the following:

(a) a contingent payment in the amount of $2,750,000 following the closing

of an asset purchase, membership interest purchase, or similar transaction between the Company and a specified third-party (the “Purchase

Transaction”) and (b) any and all future proceeds received from Watchguard and its successors and assigns by the Company for WatchGuard’s

8,781,292 and 9,253,452.

For clarity, the Company and BKI further agreed that the payment of the contingent payment

would only be due and payable upon the closing of the specified Purchase Transaction and the relevant contingent payment portion of the

Termination Agreement, and any obligations stemming therefrom, would automatically terminate if the specified Purchase Transaction is

abandoned prior to its closing, including its failure to close within three years from the date of the Termination Agreement.

parties abandoned the Purchase Transaction during the year ended December 31, 2020 and therefore, the contingent payment obligation automatically

terminated as the specified Purchase Transaction was abandoned prior to its closing.

Furthermore, the Company does not anticipate any

future recoveries from Watchguard and its successors and assigns relative to WatchGuard’s use of U.S.

8,781,292 and

As a result, the PIA obligation was extinguished upon the payment of the $1,250,000 required under the Termination Agreement.

following represents activity in the PIA during the years ended December 31, 2020 and 2019:

Beginning balance as of January 1, 2019

Origination date at fair value of the Debentures

Change in the fair value during the period

Repayment of obligation

Change in the fair value

during the period

Ending balance as of December 31, 2019

1 unchanged sentence

Repayment of obligation

Change in the fair value during the period

Change in fair value

during the period

Ending balance as of December 31, 2020

6 unchanged sentences

at an exercise price of $1.40 per share until December 23, 2024.

The Company allocated $71,869 of the proceeds of the promissory

note to additional paid-in-capital, which represented the grant date relative fair value of the warrants issued to the lender.

The discount will be amortized to interest expense ratably over the term of the promissory note which approximates the effective

interest method.

The amortization of discount resulted in $5,808 of the discount amortized to interest expense during the year

ended December 31, 2019.

Secured Convertible Debentures .

April 3, 2018, and May 11, 2018, the Company completed a private placement (the “2018 Private Placement”) of $6.875

million in principal amount of senior secured convertible promissory notes (the “2018 Debentures”) and warrants to

purchase 916,667 shares of common stock of the Company (the “2018 Warrants”) to institutional investors.

Debentures and 2018 Warrants were issued pursuant to a securities purchase agreement between the Company and the purchasers’

signatory thereto.

Additionally, a portion of the 2018 Debentures and 2018 Warrants were issued to two institutional investors

pursuant to their respective participation rights under a securities purchase agreement, dated August 21, 2017.

One of the institutional

investors that participated in the 2017 common stock issuance closed its tranche with the Company on May 11, 2018.

The 2018 Private

Placement resulted in gross cash proceeds of $6.25 million ($6.875 million par value) before placement agent fees and other expenses

associated with the transaction.

The proceeds were used primarily for full repayment of the 2016 Debentures described above, other

outstanding subordinated debt of the Company, working capital and general corporate purposes.

Company elected to account for the 2018 Debentures on the fair value basis.

Therefore, the Company determined the fair value of

the 2018 Debentures and 2018 Warrants which yielded estimated fair values of the 2018 Debentures including their embedded derivatives

and the detachable 2018 Warrants as follows:

convertible debentures

stock purchase warrants

cash proceeds

Company paid the remaining balances of the 2018 Debentures on August 21, 2018 from proceeds of the 2018 proceeds investment agreement

described below.

The change in fair value of the 2018 Debentures was $2,309,251 for the year ended December 31, 2018.

following represents activity in the 2018 Debentures during the year ended December 31, 2018:

balance as of January 1, 2018

date at fair value of the Debentures

exercised during the period

payments made on Debentures

in the fair value during the period

balance as of December 31, 2018

Secured Convertible Debentures .

December 30, 2016, the Company completed a private placement (the “2016 Private Placement”) of $4.0 million in principal

amount of the secured convertible debentures (the “2016 Debentures”) and common stock warrants (the “2016 Warrants”)

to two institutional investors.

The 2016 Debentures and 2016 Warrants were issued pursuant to a Securities Purchase Agreement

between the Company and the purchasers’

signatory thereto.

The 2016 Private Placement resulted in gross proceeds of $4.0

million before placement agent fees and other expenses associated with the transaction totaling $281,570, which was expensed as

Company elected to account for the 2016 Debentures on the fair value basis.

Therefore, the Company determined the fair value of

the 2016 Debentures utilizing Monte Carlo simulation models which yielded an estimated fair value of $4.0 million for the Debentures

including their embedded derivatives as of the origination date.

No value was allocated to the detachable 2016 Warrants as of

the origination date because of the relative fair value of the 2016 Debentures including their embedded derivative features approximated

the gross proceeds of the financing transaction.

The Company made principal payments of $750,000 on August 24, 2017 on the 2016

Company paid the remaining balance of the 2016 Debentures on April 3, 2018 from proceeds of the 2018 secured convertible debentures

described below.

The Company recorded debt extinguishment costs of $600,000 during the year ended December 31, 2018 related to

the repayment and extinguishment of the 2016 Debentures.

change in fair value of the 2016 Debentures was $-0- and $(12,807) for the years ended December 31, 2019 and 2018, respectively.

Promissory Notes Payable .

September 29, 2017, the Company borrowed $300,000 under an unsecured note payable with a private, third party lender.

bore interest at 8% per annum and was due and payable in full on November 30, 2017.

The note was unsecured and subordinated to

all existing and future senior indebtedness, as such term was defined in the note.

The Company issued warrants to the lender exercisable

to purchase 100,000 shares of common stock for $2.75 per share until September 30, 2022.

The Company allocated $117,000 of the

proceeds of the note to additional paid-in-capital, which represented the grant date relative fair value of the warrants issued

to the lender.

The discount was amortized to interest expense ratably over the terms of the note.

On December 29, 2017 the Company

borrowed an additional $350,000 with the same private, third party lender and combined the existing note payable plus accrued

interest into a new note (the “Secured Note”) for $658,500 that was due and payable in full on March 1, 2018 and could

be prepaid without penalty.

The Secured Note was secured by the Company’s intellectual property portfolio, as such term

is defined in the security agreement relating to the Secured Note.

In connection with issuance of the Secured Note, the Company

issued warrants to the lender exercisable to purchase 120,000 shares of common stock for $3.25 per share until December 28, 2022.

The Company treated the issuance and extension of this debt as an extinguishment for financial accounting purposes.

the estimated fair value of the warrants granted totaled $244,379, which was recorded as additional paid-in-capital and a loss

on extinguishment of subordinated notes payable.

Company paid the remaining balances of the Secured Note and subordinated note with an aggregate principal balance of $1,008,500

on April 3, 2018.

March 7, 2018 the Company borrowed $250,000 under a secured note payable with a private, third party lender (the “March

Note”).

The March Note bears interest at 12% per annum and contained an original maturity date of June 7, 2018.

negotiated an extension of the maturity date to September 30, 2018.

The March Note was secured by the inventory of the Company

and junior to senior liens held by the holders of the 2018 Debentures and subordinated to all existing and future senior indebtedness,

as such term was defined in the March Note.

Such Note was convertible at any time after its date of issue at the option of the

holder into shares of the Company’s common stock at a conversion price of $3.25 per share.

The conversion price and exercise

price were subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.

The Company issued warrants

to the lender exercisable to purchase 36,000 shares of common stock for $3.50 per share until March 7, 2019.

The Company allocated

$15,287 of the proceeds of the note to additional paid-in-capital, which represented the grant date relative fair value of the

warrants issued to the lender.

The discount was amortized to interest expense ratably over the terms of the note.

made a principal payment of $100,000 on August 21, 2018 on the March Note.

The holder converted the remaining principal and outstanding

interest of the March Note into 47,319 shares of the Company’s common stock on September 20, 2018.

discount amortized to interest expense totaled $-0- and $47,657 for the years ended December 31, 2019, and 2018, respectively.

When determining the fair value of these warrants, the assumptions

utilized in the Black-Scholes model include the expected volatility of stock price of 86%, discount rate of 1.75%, and expected

dividends of 0%.

The Company allocated $71,869 of the proceeds of the promissory note to additional paid-in-capital, which

represented the grant date relative fair value of the warrants issued to the lender.

The discount will be amortized to interest

expense ratably over the term of the promissory note which approximates the effective interest method.

The amortization of discount

resulted in $66,061 and $5,808 of the discount amortized to interest expense during the years ended December 31, 2020 and 2019,

respectively.

January 17, 2020, the Company borrowed $100,000 under an unsecured note payable to a private, third-party lender.

promissory note bore interest at the rate of 8% per annum with principal and accrued interest payable on or before its

maturity date of April 17, 2020.

The Company granted the lender warrants exercisable to purchase a total of 35,750 shares of

its common stock at an exercise price of $1.40 per share until January 17, 2025.

When determining the fair value of these

warrants, the assumptions utilized in the Black-Scholes model include the expected volatility of stock price of 86%, discount

rate of 2%, and expected dividends of 0%.

The Company allocated $20,806 of the proceeds of the promissory note to additional

paid-in-capital, which represented the grant date relative fair value of the warrants issued to the lender.

repaid in full on March 12, 2020 and the discount was amortized to interest expense through the date of payment.

amortization of discount resulted in $20,806 of the discount amortized to interest expense during the year ended December 31,

Promissory Notes Payable –

Related party

February and April 2020, the Company borrowed a total of $319,000 from the Company’s Chairman, CEO & President under an unsecured

promissory note bearing interest at 6% through its May 28, 2020 maturity date.

The proceeds from the note were used for general corporate

The principal balance and related accrued interest were paid in full during the year ended December 31, 2020.

Total interest

accrued and paid on this note was $5,236.

FAIR VALUE MEASUREMENT

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.

820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three

broad levels.

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

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:

2 unchanged sentences

Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)

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, 2019 and 2018.

December 31, 2019

Secured convertible debentures

Proceeds investment agreement

December 31, 2018

Secured convertible debentures

Proceeds investment agreement

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, 2020 and 2019.

Secured convertible

investment agreement

Secured convertible

investment agreement

following table represents the change in Level 3 tier value measurements:

4 unchanged sentences

Repayment of 2019 secured convertible notes

Change in fair value of secured convertible debentures and proceeds

investment agreement

Balance, December 31, 2019

Issuance of secured convertible debt

Conversion of secured convertible debentures

Repayment of proceeds investment agreement

Repayment of secured convertible notes

Change in fair value of secured convertible debentures and proceeds investment agreement

2 unchanged sentences

expenses consisted of the following at December 31, 2020 and 2019:

December 31, 2019

December 31, 2018

Accrued warranty expense

4 unchanged sentences

Accrued sales returns and allowances

Accrued sales taxes

warranty expense was comprised of the following for the years ended December 31, 2020 and 2019:

8 unchanged sentences

Income tax provision (benefit)

reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2019 and 2018

to the Company’s effective tax rate is as follows:

reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2020 and 2019 to the

Company’s effective tax rate is as follows:

Statutory tax rate

State taxes, net of Federal benefit

Federal Research and development tax credits

Stock based compensation

Revaluation of deferred tax assets based on changes in enacted tax laws

Change in valuation reserve on deferred tax assets

Change in valuation reserve on deferred tax

Forgiveness of Payroll Protection Plan loan

Income tax (provision) benefit

1 unchanged sentence

Deferred tax assets:

Stock-based compensation

Start-up costs

Inventory reserves

Uniform capitalization of inventory costs

Allowance for doubtful accounts receivable

Uniform capitalization

of inventory costs

Allowance for doubtful

accounts receivable

Equipment depreciation

Deferred revenue

Debt and PIA obligations carried at fair value

Debt and PIA obligations

carried at fair value

Accrued expenses

Net operating loss carryforward

Research and development tax credit carryforward

Research and development

tax credit carryforward

State jobs credit carryforward

Charitable contributions carryforward

contributions carryforward

Total deferred tax assets

Valuation reserve

(24,595,000 )

1 unchanged sentence

Total deferred tax assets

Domestic international sales company

international sales company

Total deferred tax liabilities

Net deferred tax assets (liability)

Net deferred tax assets

valuation allowance on deferred tax assets totaled $24,595,000 and $23,740,000 as of December 31, 2020 and 2019, 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.”

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.

December 22, 2017, the U.S.

enacted the Tax Cuts and Jobs Act (the “Act”).

The Act, which is also commonly referred

to as “U.S.

tax reform,”

significantly changes U.S.

corporate income tax laws by, among other things, reducing the

corporate income tax rate to 21% starting in 2018.

Under the Act, corporations are no longer subject to the AMT, effective

for taxable years beginning after December 31, 2017.

However, where a corporation has an AMT Credit from a prior taxable year,

the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after

2017 but before 2022.

Generally, 50% of the corporation’s AMT Credit carried forward to one of these years starting in 2018

will be claimable and refundable for that year.

In tax years beginning in 2021, however, the entire remaining carryforward generally

will be refundable.

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.

Company has incurred operating losses in 2020 and 2019 and it continues to be in a three-year cumulative loss position at December 31,

2020 and 2019.

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

Therefore, it determined to increase our valuation allowance by $2,240,000 to continue to fully reserve its deferred tax

assets at December 31, 2019.

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’

December 31, 2019, the Company had available approximately $67,100,000 of Federal net operating loss carryforwards available to

offset future taxable income generated.

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 $855,000 to continue to fully reserve its deferred tax assets at December 31, 2020.

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’

December 31, 2020, the Company had available approximately $76,070,000 of Federal net operating loss carryforwards available to offset

future taxable income generated.

Such tax net operating loss carryforwards expire between 2026 and 2040.

In addition, the

Company had research and development tax credit carryforwards totaling $1,795,000 available as of December 31, 2019, which expire

between 2023 and 2037.

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 carryforwards are currently subject to an annual limitation of approximately

$1,151,000, but 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 carryforwards expire between 2023 and 2038, allowing the Company to potentially

utilize all of the limited net operating loss carry-forwards during the carryforward period.

In addition, the Company had

research and development tax credit carryforwards totaling $1,795,000 available as of December 31, 2020, which expire between 2023 and

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 carryforwards 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 carryforwards expire between 2023 and 2037, allowing the Company to potentially utilize all of the limited net

operating loss carry-forwards during the carryforward period.

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.

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.

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

The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate

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.

effective tax rate for the years ended December 31, 2020 and 2019 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, 2019 primarily because of the current year operating losses.

Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination

for 2015 and all prior tax years.

The Company determined that it was appropriate to continue the full

valuation allowance on net deferred tax assets as of December 31, 2020 primarily because of the current year operating losses.

Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2016

and all prior tax years.

OPERATING LEASE

Company entered into an operating lease with a third party in September 2012 for office and warehouse space in Lenexa, Kansas.

The terms of the lease include monthly payments ranging from $38,026 to $38,533 with a maturity date of April 2020.

has the option to renew for an additional three years beyond the original expiration date, which may be exercised at the Company’s

sole discretion.

The Company evaluated the renewal option at the lease commencement date to determine if it is reasonably certain

the exercise the option and concluded that it is not reasonably certain that any options will be exercised.

The weighted average

remaining lease term for the Company’s office and warehouse operating lease as of December 31, 2019 was four months.

May 13, 2020, the Company entered into an operating lease for new warehouse and office space which will serve as its new principal executive

office and primary business location.

The original lease agreement was amended on August 28, 2020 to correct the footage under lease

and monthly payment amounts resulting from such correction.

The lease terms, as amended include no base rent for the first nine months

and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 2026.

The Company is responsible

for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location.

The Company took

possession of the leased facilities on June 15, 2020.

The remaining lease term for the Company’s office and warehouse operating

lease as of December 31, 2020 was seventy-one months.

The Company’s previous office and warehouse space lease expired in April

2020 and the Company paid holdover rent for the time period until it moved to and commenced occupying the new space on June 15, 2020.

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 the equipment at maturity for its estimated fair market value at that point in time.

The remaining lease term for

the Company’s copier operating lease as of December 31, 2019 was 46 months.

expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease

of the lease include 48 monthly payments of $1,598 with a maturity date of October 2023.

The Company has the option to Purchase the equipment

at maturity for its estimated fair market value at that point in time.

The remaining lease term for the Company’s copier operating

lease as of December 31, 2020 was 34 months.

expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease terms.

Total lease expense under the two operating leases was approximately $349,079 for the year ended December 31, 2020.

1 unchanged sentence

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 cash outflows

from operating leases for the year ended December 31, 2019 was $400,920.

The weighted average remaining lease term and the weighted

average discount rate for operating leases at December 31, 2019 were 5.6 months and 8%, respectively.

As of commencement date,

the operating lease liabilities reflect a weighted average discount rate of 8%.

following sets forth the operating lease right of use assets and liabilities as of December 31, 2020:

3 unchanged sentences

Total operating lease obligations

components of lease expense were as follows for the year ending December 31, 2019:

general and administrative expenses

components of lease expense were as follows for the year ended December 31, 2020:

Selling, general and administrative

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

Year ending December 31:

Total undiscounted minimum future lease payments

2 unchanged sentences

COMMITMENTS AND CONTINGENCIES

The Company has several license agreements under which it has been assigned the rights to certain licensed

materials used in its products.

Certain of these agreements require the Company to pay ongoing royalties based on the number of

products shipped containing the licensed material on a quarterly basis.

Royalty expense related to these agreements aggregated

$0 and $2,083 for the years ended December 31, 2019 and 2018, respectively.

COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global

geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.

most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020.

By that time, much of our first fiscal quarter was completed.

During the year ended December 31, 2020, we observed recent decreases in

demand from certain customers, including primarily our law-enforcement and commercial customers.

the fact that our products are sold through a variety of distribution channels, we expect our sales will experience more volatility as

a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic.

that many companies, including many of our suppliers and customers, are reporting or predicting negative impacts from COVID-19 on future

operating results.

Although we observed significant declines in demand for our products from certain customers during the year ended

December 31, 2020, we believe that it remains too early for us to know the exact impact COVID-19 will have on the long-term demand for

our products.

We also cannot be certain how demand may shift over time as the impacts of the COVID-19 pandemic may go through several

phases of varying severity and duration.

light of broader macro-economic risks and already known impacts on certain industries that use our products and services, we have taken,

and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic.

We continue to monitor the impacts

of COVID-19 on our operations closely and this situation could change based on a significant number of factors that are not entirely

within our control and are discussed in this and other sections of this annual report on Form 10-K.

We do not expect there to be material

changes to our assets on our balance sheet or our ability to timely account for those assets.

Further, in connection with the preparation

of this annual report on Form 10-K and the financial statements contained herein, we reviewed the potential impacts of the COVID-19 pandemic

on goodwill and intangible assets and have determined there to be no material impact at this time.

We have also reviewed the potential

impacts on future risks to the business as it relates to collections, returns and other business-related items.

date, travel restrictions and border closures have not materially impacted our ability to obtain inventory or manufacture or deliver

products or services to customers.

However, if such restrictions become more severe, they could negatively impact those activities in

a way that would harm our business over the long term.

Travel restrictions impacting people can restrain our ability to assist our customers

and distributors as well as impact our ability to develop new distribution channels, but at present we do not expect these restrictions

on personal travel to be material to our business operations or financial results.

We have taken steps to restrain and monitor our operating

expenses and therefore we do not expect any such impacts to materially change the relationship between costs and revenues.

most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and

guidelines as well as best practices to protect the health and well-being of our employees and our ability to continue operating our

business effectively.

To date, we have been able to operate our business effectively using these measures and to maintain all internal

controls as documented and posted.

We also have not experienced challenges in maintaining business continuity and do not expect to incur

material expenditures to do so.

However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it

remains possible that challenges may arise in the future.

actions we have taken so far during the COVID-19 pandemic include, but are not limited to:

all employees who can work from home to work from home;

our IT networking capability to best assure employees can work effectively outside the office;

employees who must perform essential functions in one of our offices:

employees maintain a distance of at least six feet from other employees whenever possible;

employees work in dedicated shifts to lower the risk all employees who perform similar tasks might become infected by COVID-19;

employees stay segregated from other employees in the office with whom they require no interaction;

employees to wear masks while they are in the office whenever possible.

currently believe revenue for the year ending December 31, 2021 may decline year over year due to the conditions noted.

In April 2020,

we implemented a COVID-19 mitigation plan designed to further reduce our operating expenses during the pandemic.

Actions taken to date

include work hour and salary reductions for senior management.

These cost reductions are in addition to the significant restructuring

actions we initiated in the first quarter of 2020.

Based on our current cash position, our projected cash flow from operations and our

cost reduction and cost containment efforts to date, we believe that we will have sufficient capital and or have access to sufficient

capital through public and private equity and debt offerings to sustain operations for a period of one year following the date of this

If business interruptions resulting from the COVID-19 pandemic were to be prolonged or expanded in scope, our business, financial

condition, results of operations and cash flows would be negatively impacted.

We will continue to actively monitor this situation and

will implement actions necessary to maintain business continuity.

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.

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.

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.

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.

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.

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.

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.

Company owns U.S.

9,253,452 (the “

‘452 Patent”), which generally covers the automatic activation

and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating

the light bar on the vehicle.

‘452 Patent’

”), which generally covers the automatic activation

and coordination of multiple recording devices in response to a triggering event, such as a law enforcement officer activating the light

bar on the vehicle.

Company filed suit on January 15, 2016 in the U.S.

District Court for the District of Kansas (Case No:

2:16-cv-02032) against

Axon, alleging willful patent infringement against Axon’s body camera product line and Signal auto-activation product.

Company is seeking both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.

December 2016 and January 2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452

2:16-cv-02032) against Axon, alleging

willful patent infringement against Axon’s body camera product line and Signal auto-activation product.

The Company is seeking

both monetary damages and a permanent injunction against Axon for infringement of the ‘452 Patent.

December 2016 and January 2017, Axon filed two petitions for Inter Partes Review (“IPR”) against the ‘452 Patent.

The United States Patent and Trademark Office (“USPTO”) rejected both of Axon’s petitions.

statutorily precluded from filing any more IPR petitions against the ‘452 Patent.

Axon is now statutorily

precluded from filing any more IPR petitions against the ‘452 Patent.

District Court litigation in Kansas was temporarily stayed following the filing of the petitions for IPR.

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the Federal District Court of Kansas rejected Axon’s request to maintain the stay.

With this significant ruling,

the parties will now proceed towards trial.

Since litigation has resumed, the Court has issued a claim construction order (also

called a Markman Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope

of the claims.

Following the Markman Order, the Court set all remaining deadlines in the case.

Fact discovery closed on

October 8, 2018, and a Final Pretrial Conference took place on January 16, 2019.

The parties filed motions for summary judgment

on January 31, 2019.

June 17, 2019, the Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s patent

and dismissed the case.

With this significant ruling, the parties will

now proceed towards trial.

Since litigation has resumed, the Court has issued a claim construction order (also called a Markman Order)

where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope of the claims.

Following the Markman

Order, the Court set all remaining deadlines in the case.

Fact discovery closed on October 8, 2018, and a Final Pretrial Conference

took place on January 16, 2019.

The parties filed motions for summary judgment on January 31, 2019.

June 17, 2019, the Court granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s patent and

dismissed the case.

Importantly, the Court’s ruling did not find that Digital’s ‘452 Patent was invalid.

It also did not address any other issue, such as whether Digital’s requested damages were appropriate, and it did not impact

the Company’s ability to file additional lawsuits to hold other competitors accountable for patent infringement.

solely related to an interpretation of the claims as they relate to Axon and was unrelated to the supplemental briefing Digital

recently filed on its damages claim and the WatchGuard settlement.

Those issues are separate and the judge’s ruling on summary

judgment had nothing to do with Digital’s damages request.

The Company has filed an appeal to this ruling and has asked

the appellate court to reverse this decision.

Company filed its Opening Appeal Brief on August 26, 2019 and Axon filed its Responsive Brief on November 6, 2019 and the Company

filed its Reply Brief responding to Axon on November 27, 2019.

The United States Court of Appeals for the Federal Circuit scheduled

oral argument on the Company’s appeal of the district court’s summary judgment order on April 6, 2020.

will address the incorrect and mistaken dismissal of Digital Ally’s claims against Axon by Judge Carlos Murguia in the

District Court of Kansas litigation.

If the Court of Appeals overturns the summary judgment ruling, a new judge will be assigned

to handle the litigation with Axon due to the recent resignation of Judge Murguia.

On March 12, 2020, the panel of judges for

the United States Court of Appeals issued an order cancelling the oral arguments previously set for April 6, 2020 having determined

that they will decide the appeal based on the parties’

briefs without oral argument.

not address any other issue, such as whether Digital’s requested damages were appropriate, and it did not impact the Company’s

ability to file additional lawsuits to hold other competitors accountable for patent infringement.

This ruling solely related to an interpretation

of the claims as they relate to Axon and was unrelated to the supplemental briefing Digital recently filed on its damages claim and the

WatchGuard settlement.

Those issues are separate and the judge’s ruling on summary judgment had nothing to do with Digital’s

damages request.

The Company has filed an appeal to this ruling and has asked the appellate court to reverse this decision.

Company filed an opening appeal brief on August 26, 2019 with the U.S.

Court of Appeals for the Tenth Circuit (the “Court of Appeals”),

appealing the U.S.

District Court’s granting of Axon’s motion for summary judgment.

Axon responded by filing a responsive

brief on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019.

The Court of Appeals scheduled oral

arguments on our appeal of the U.S.

District Court’s summary judgment ruling on April 6, 2020.

This appeal was intended to address

the Company’s position that the U.S.

District Court incorrectly dismissed our claims against Axon.

If the Court of Appeals overturns

the ruling of the U.S.

District Court, the case will be remanded to the U.S District Court before a new judge.

On March 12, 2020, the

panel of judges for the Court of Appeals issued an order cancelling the oral arguments previously set for April 6, 2020, having determined

that the appeal will be decided solely based on the parties’

On April 22, 2020, a three-judge panel of the United States

Court of Appeals denied our appeal and affirmed the District Court’s previous decision to grant Axon summary judgment.

2020, we filed a petition for panel rehearing requesting that we be granted a rehearing of our appeal of the U.S.

District Court’s

summary judgment ruling.

Furthermore, we requested that we be given an opportunity to make our case through oral argument in front of

the three-judge panel of the Court of Appeals, which was also denied.

The Company has abandoned its right to any further appeals.

May 27, 2016, the Company filed suit against WatchGuard, (Case No.

2:16-cv-02349-JTM-JPO) alleging patent infringement based on

WatchGuard’s VISTA Wifi and 4RE In-Car product lines.

2:16-cv-02349-JTM-JPO) alleging patent infringement based on WatchGuard’s

VISTA Wi-Fi and 4RE In-Car product lines.

May 13, 2019, the parties resolved the dispute and executed a settlement agreement in the form of a Release and License Agreement.

The litigation has been dismissed as a result of this settlement.

litigation has been dismissed as a result of this settlement.

Release and License Agreement encompasses the following key terms:

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functionality.

Digital Ally also granted WatchGuard a license to the ‘292 Patent and the ‘452 Patent (and related

patents, now existing and yet-to-issue) through December 31, 2023.

The parties agreed to negotiate in good faith to attempt

to resolve any alleged infringement that occurs after the license period expires.

Digital Ally also granted WatchGuard a license to the ‘292 Patent and the ‘452 Patent (and related patents,

now existing and yet-to-issue) through December 31, 2023.

The parties agreed to negotiate in good faith to attempt to resolve any

alleged infringement that occurs after the license period expires.

parties further agreed to release each other from all claims or liabilities pre-existing the settlement.

part of the settlement, the parties agreed that WatchGuard made no admission that it infringed any of Digital Ally’s

receipt of the $6,000,000 the parties filed a joint motion to dismiss the lawsuit which the Judge granted.

January 22, 2019 the PGA Tour, Inc.

(the “PGA”) filed suit against the Company in the Federal District Court for the

District of Kansas (Case No.

2:19-cv-0033-CM-KGG) alleging breach of contract and breach of implied covenant of good faith and

fair dealing relative to the Web.com Tour Title Sponsor Agreement (the “Agreement”).

The contract was executed on

April 16, 2015 by and between the parties.

Under the Agreement, Digital Ally would be a title sponsor of and receive certain naming

and other rights and benefits associated with the Web.com Tour for 2015 through 2019 in exchange for Digital Ally’s payment

to Tour of annual sponsorship fees.

The suit was resolved and the case has been dismissed by Plaintiff with prejudice on April

part of the settlement, the parties agreed that WatchGuard made no admission that it infringed any of Digital Ally’s patents.

receipt of the $6,000,000 the parties filed a joint motion to dismiss the lawsuit with the court, which was granted.

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.

made matching contributions totaling $108,688 and $112,622 for the years ended December 31, 2019 and 2018, respectively.

participant is 100% vested at all times in employee and employer matching contributions.

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 $110,491 and $108,688 for the years ended December 31, 2020 and 2019, respectively.

Each participant is 100% vested at all times

in employee and employer matching contributions.

and Distributor Agreements.

The Company entered into an agreement that required it to make monthly payments that will

be applied to future commissions and/or consulting fees to be earned by the provider.

The agreement is with a limited liability

company (“LLC”) that is minority owned by a relative of the Company’s chief financial officer.

Under the agreement,

dated January 15, 2016 and as amended on February 13, 2017, the LLC provides consulting services for developing a new distribution

channel outside of law enforcement for its body-worn camera and related cloud storage products to customers in the United States.

The Company advanced amounts to the LLC against commissions ranging from $5,000 to $6,000 per month plus necessary and reasonable

expenses for the period through June 30, 2017, which can be automatically extended based on the LLC achieving minimum sales quotas.

The agreement was renewed in January 2017 for a period of three years, subject to yearly minimum sales thresholds that would allow

the Company to terminate the contract if such minimums are not met.

As of December 31, 2019, the Company had advanced a total

of $274,731 pursuant to this agreement and established an allowance reserve of $224,731 for a net advance of $50,000.

sales threshold was not met, and the Company discontinued all advances, although the contract has not been formally terminated.

The Company entered into an agreement that required it to make monthly payments that will be applied

to future commissions and/or consulting fees to be earned by the provider.

The agreement is with a limited liability company (“LLC”)

that is minority owned by a relative of the Company’s chief financial officer.

Under the agreement, dated January 15, 2016 and

as amended on February 13, 2017, the LLC provides consulting services for developing a new distribution channel outside of law enforcement

for its body-worn camera and related cloud storage products to customers in the United States.

The Company advanced amounts to the LLC

against commissions ranging from $5,000 to $6,000 per month plus necessary and reasonable expenses for the period through June 30, 2017,

which can be automatically extended based on the LLC achieving minimum sales quotas.

The agreement was renewed in January 2017 for a

period of three years, subject to yearly minimum sales thresholds that would allow the Company to terminate the contract if such minimums

As of December 31, 2020, the Company had advanced a total of $274,731 pursuant to this agreement which has been fully reserved

for a net advance of $-0-.

The minimum sales threshold was not met, and the Company discontinued all advances, although the contract

has not been formally terminated.

However, the exclusivity provisions of the agreement have been terminated.

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to future commissions and/or consulting fees to be earned by the provider.

Under the agreement, the individual provides consulting

services for developing new distribution channels both inside and outside of law enforcement for its in-car and body-worn camera

systems and related cloud storage products to customers within and outside the United States.

The Company was required to advance

amounts to the individual as an advance against commissions of $7,000 per month plus necessary and reasonable expenses for the

period through August 31, 2018, which was extended to December 31, 2018 by mutual agreement of the parties at $6,000 per month.

The parties have mutually agreed to further extend the arrangement on a monthly basis at $5,000 per month.

As of December 31,

Under the agreement, the individual provides consulting services

for developing new distribution channels both inside and outside of law enforcement for its in-car and body-worn camera systems and related

cloud storage products to customers within and outside the United States.

The Company was required to advance amounts to the individual

as an advance against commissions of $7,000 per month plus necessary and reasonable expenses for the period through August 31, 2018,

which was extended to December 31, 2018 by mutual agreement of the parties at $6,000 per month.

The parties have mutually agreed to further

extend the arrangement on a monthly basis at $5,000 per month.

The Company had advanced a total of $53,332 pursuant to this agreement,

until September of 2020 when the agreement was mutually terminated, thus as of December 31, 2020 the Company had advanced $-0- pursuant

to this agreement.

STOCK-BASED COMPENSATION

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for the years ended December 31, 2020 and 2019, respectively.

of December 31, 2019, the Company had adopted seven 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”) and (vii) the 2018 Stock Option and Restricted Stock Plan (the “2018

Plan”).

The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan and 2018 Plan are referred to as

the “Plans.”

Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total

of 4,175,000 shares of common stock.

The 2005 Plan terminated during 2015 with 19,678 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, 2019 total 8,063.

The 2006 Plan terminated during 2016 with 24,662 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, 2019 total 42,812.

The 2007 Plan terminated during 2017 with 88,401 shares not awarded or underlying options,

which shares are now unavailable for issuance.

Stock options granted under the 2007 Plan that remain unexercised and outstanding

as of December 31, 2019 total 6,250.

The 2008 Plan terminated during 2018 with 8,249 shares not awarded or underlying options,

which shares are now unavailable for issuance.

Stock options granted under the 2008 Plan that remain unexercised and outstanding

as of December 31, 2019 total 32,250.

of December 31, 2020, the Company had adopted nine separate stock option and restricted stock plans:

(i) the 2005 Stock Option and Restricted

Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the

2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the

“2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option

and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”),

(viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”) and (ix) the 2020 Stock Option and Restricted Stock

Plan (the “2020 Plan”)..

The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan and 2020

Plan are referred to as the “Plans.”

Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total of

5,675,000 shares of common stock.

The 2005 Plan terminated during 2015 with 19,678 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,

2020 total 7,563.

The 2006 Plan terminated during 2016 with 25,849 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, 2020 total 39,750.

The 2007 Plan terminated during 2017 with 89,651 shares not awarded or underlying options, which shares are now unavailable for issuance.

Stock options granted under the 2007 Plan that remain unexercised and outstanding as of December 31, 2020 total 5,000.

The 2008 Plan

terminated during 2018 with 9,249 shares not awarded or underlying options, which shares are now unavailable for issuance.

Stock options

granted under the 2008 Plan that remain unexercised and outstanding as of December 31, 2020 total 31,250.

Board of Directors adopted the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”) on September 30, 2020 and the

Company’s stockholders approved the 2020 Plan at the Annual Meeting held on September 9, 2020.

The 2020 Plan authorizes us to issue

1,500,000 shares of Common Stock upon exercise of options and grant of restricted stock awards.

A total of 438,341 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’

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.

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 629,186 shares remained available for awards under the various

Plans as of December 31, 2019.

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 1,064,346 shares remained available for awards under the various Plans as of December 31, 2020.

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

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Exercise Price

at January 1, 2019

at December 31, 2019

Outstanding at January 1, 2020

Outstanding at December 31, 2020

Exercisable at December 31, 2020

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, 2019 and 2018 was $436,217 and $284,384, respectively.

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, 2019 and 2018:.

The total estimated grant

date fair value stock options issued during the year ended December 31, 2020 and 2019 was $415,742 and $436,217, respectively.

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, 2020 and 2019:

Volatility –

3 unchanged sentences

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, 2019 and 2018.

December 31, 2019 and 2018, the aggregate intrinsic value of options outstanding was approximately $-0- and $76,800, respectively,

and the aggregate intrinsic value of options exercisable was approximately $-0- and $76,800, respectively.

No options were exercised

in the years ended December 31, 2019 and 2018.

of December 31, 2019, the unrecognized portion of stock compensation expense on all existing stock options was $181,757 and will

be recognized over the next five months.

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, 2020 and 2019.

December 31, 2020 and 2019, the aggregate intrinsic value of options outstanding was approximately $86,150 and $-0-, respectively, and

the aggregate intrinsic value of options exercisable was approximately $58,025 and $-0-, respectively.

of December 31, 2020, the unrecognized portion of stock compensation expense on all existing stock options was $183,415 and will be recognized

over the next five months.

following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable

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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.

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.

summary of all restricted stock activity under the equity compensation plans for the years ended December 31, 2019 and 2018 is

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.

summary of all restricted stock activity under the equity compensation plans for the years ended December 31, 2020 and 2019 is as follows:

Nonvested balance, January 1, 2019

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Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant.

As of December 31, 2019, there were $379,623 of total unrecognized compensation costs related to all remaining non-vested restricted

stock grants, which will be amortized over the next 12 months in accordance with their respective vesting scale.

December 31, 2020, there were $130,072 of total unrecognized compensation costs related to all remaining non-vested restricted stock

grants, which will be amortized over the next 12 months in accordance with their respective vesting scale.

nonvested balance of restricted stock vests as follows:

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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 4,824,573 shares of common stock at $1.40 to $16.50 per share as of December 31, 2019.

warrants expire from July 15, 2020 through December 23, 2024 and allow for cashless exercise.

common stock purchase warrants issued in August 2014 contained anti-dilution provisions that triggered a reset as a result of

the April 2018 financing transaction.

The reset provisions resulted in the 12,200 warrants held at an exercise price of $7.32

per share increased by 159,538 warrants resulting in a final reset to 172,038 warrants at an exercise price of $0.52 per share.

All warrants subject to the reset provision have now been exercised.

following table summarizes information about shares issuable under warrants outstanding during the years ended December 31, 2019

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 3,388,364 shares of common stock at $2.60 to $13.43 per share as of December 31, 2020.

The warrants expire from January

22, 2021 through July 31, 2023 and allow for cashless exercise.

following table summarizes information about shares issuable under warrants outstanding during the years ended December 31, 2020 and

exercise price

Vested Balance, January 1, 2019

Warrant reset

Vested Balance, December 31, 2019

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Vested Balance, December 31, 2020

total intrinsic value of all outstanding warrants aggregated $-0- as of December 31, 2019 and the weighted average remaining term

is 33.2 months.

total intrinsic value of all outstanding warrants aggregated $-0- as of December 31, 2020 and the weighted average remaining term is

following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable

warrants to purchase common shares as of December 31, 2020:

Outstanding and exercisable warrants

Exercise price

Number of warrants

Weighted average

and exercisable warrants

contractual life

15 - STOCKHOLDERS’

Public Offering - On September 26, 2018, the Company entered into an underwriting agreement with Roth Capital Partners,

LLC, as the representative of the underwriters and sole book-running manager, pursuant to which the Company agreed to sell to

the underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 2,400,000 shares

of the Company’s common stock, par value $0.001 per share at a public price of $3.05 per share.

The Company also granted

the Underwriters a forty-five (45)-day option to purchase up to an additional 360,000 shares of common stock to cover over-allotments,

Aegis Capital Corp.

was a co-manager for the Offering.

The Offering was registered and the common stock was issued pursuant

to the Company’s effective shelf registration statement on Form S-3 (File No.

333-225227), which was initially filed with

the Securities and Exchange Commission on May 25, 2018 and was declared effective on June 6, 2018.

September 28, 2018, the underwriter exercised its over-allotment option to acquire an additional 200,000 shares at $3.05 per share.

The partial exercise of the over-allotment option resulted in additional gross proceeds of $610,000.

The net proceeds to the Company

from the Offering totaled approximately $7,324,900 including the partial exercise of the over-allotment option, after deducting

underwriting discounts and commissions and estimated expenses payable by the Company.

the underwriting agreement the Company agreed not to contract to issue or announce the issuance or proposed issuance of any Common

Stock or Common Stock equivalents for sixty (60) days following the closing of the Offering, subject to certain exclusions as

set forth therein.

The Company’s executive officers and directors have entered into sixty (60)-day Lock-Up Agreements with

the Representative pursuant to which they have agreed not to sell, transfer, assign or otherwise dispose of the shares of the

Company’s common stock owned by them, subject to certain exclusions as set forth therein.

of the 2018 Stock Option Plan and Restricted Stock Plan - On July 5, 2018 at the Company’s annual meeting, the Company’s

stockholders approved the 2018 Digital Ally, Inc.

Stock Option and Restricted Stock Plan and reserving 1,000,000 shares for issuance

under such Plan.

to Articles of Incorporation

Company held its annual meeting of the shareholders on September 9, 2020.

At such meeting a proposed amendment to the Company’s

Articles of Incorporation to increase the number of authorized shares of capital stock that the Company may issue from 50,000,000 to

100,000,000, of which all 100,000,000 shares shall be classified as Common Stock, was approved.

Public Offering

March 3, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters

and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public

offering (the “Offering”) an aggregate of 2,521,740 shares of the Company’s common stock at a public price of $1.15

The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional 378,261 shares of common

stock to cover over-allotments, if any.

The Offering was registered and the common stock was issued pursuant to the Company’s effective

shelf registration statement on Form S-3 (File No.

333-225227), which was initially filed with the SEC on May 25, 2018 and was declared

effective on June 6, 2018.

underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,

indemnification obligations of the Company and the Underwriters.

The Underwriters received discounts and commissions of seven percent

(7%) of the gross cash proceeds received by the Company from the sale of the common stock in the Offering.

In addition, the Company agreed

to pay the Underwriters (a) a non-accountable expense reimbursement of 1% of the gross proceeds received and (b) “road show”

expenses, diligence fees and the fees and expenses of the Underwriters’

legal counsel not to exceed $50,000.

The net proceeds to

the Company from the Offering totaled $2,502,136, after deducting underwriting discounts and commissions and estimated expenses payable

by the Company.

June 2, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters

and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public

offering an aggregate of 3,090,909 shares of the Company’s common stock, at a public price of $1.65 per share (the “June

2 nd Offering”).

The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional

463,636 shares of common stock to cover over-allotments, if any (the “June 2 nd Option Shares”).

The June 2 nd

Offering was registered and the common stock was issued pursuant to the Company’s shelf registration statement on Form S-3

333-225227), which was initially filed with the SEC on May 25, 2018 and was declared effective on June 6, 2018.

June 8, 2020, the Underwriters fully exercised their over-allotment option to acquire the June 2 nd Option Shares at $1.65

per share, and the offering of the June 2 nd Option Shares closed on June 10, 2020.

The exercise of such over-allotment option

resulted in additional gross proceeds, before deducting underwriting discounts and commissions and other estimated offering expenses,

of $765,000, which t he Company intends to use for general corporate purposes, including

for compliance with certain Nasdaq continued listing requirements and continued investments in the Company’s commercialization

underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,

indemnification obligations of the Company and the Underwriters.

The Underwriters received discounts and commissions of seven percent

(7%) of the gross cash proceeds received by the Company from the sale of the common shares in the June 2 nd Offering.

the Company agreed to pay the Underwriters “road show”

expenses, diligence fees and the fees and expenses of the Underwriters’

legal counsel not to exceed $30,000.

The net proceeds to the Company from the June 2 nd Offering totaled $5,350,413, including

the exercise of the underwriter’s overallotment option and after deducting underwriting discounts and commissions and estimated

expenses payable by the Company.

June 8, 2020, the Company entered into an underwriting agreement with Aegis Capital Corp., as the representative of the underwriters

and sole book-running manager, pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public

offering an aggregate of 2,325,581 shares of common stock at a public price of $2.15 per share (the “June 8 th Offering”).

The Company also granted the underwriters a forty-five (45)-day option to purchase up to an additional 213,953 shares of common stock

to cover over-allotments, if any (the “June 8 th Option Shares”).The June 8 th Offering was registered

and the common stock was issued pursuant to the Company’s shelf registration statement on Form S-3 (File No.

333-225227), which

was initially filed with the SEC on May 25, 2018 and was declared effective on June 6, 2018.

June 10, 2020, the Underwriters fully exercised their over-allotment option to acquire the June 8 th Option Shares at $2.15

per share, and the offering of the June 8 th Option Shares closed on June 10, 2020.

The exercise of such over-allotment option

resulted in additional gross proceeds, before deducting underwriting discounts and commissions and other estimated Offering expenses,

of $460,000, which t he Company intends to use for general corporate purposes, including

for compliance with certain Nasdaq continued listing requirements and continued investments in the Company’s commercialization

underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions to closing,

indemnification obligations of the Company and the Underwriters.

The Underwriters received discounts and commissions of seven percent

(7%) of the gross cash proceeds received by the Company from the sale of the common shares in the June 8 th Offering.

the Company agreed to pay the Underwriters “road show”

expenses, diligence fees and the fees and expenses of the Underwriters’

legal counsel not to exceed $30,000.

The net proceeds to the Company from the June 8 th Offering totaled $4,976,692, including

the exercise of the underwriter’s overallotment option and after deducting underwriting discounts and commissions and estimated

expenses payable by the Company.

Issuances of Restricted Common Stock .

January 3, 2020, the board of directors approved the grant of 530,050 shares of restricted common stock to officers and employees of

Such shares will generally vest one-half on January 2, 2021 and one half on January 2, 2022, provided that each grantee

remains an officer or employee on such dates.

April 17, 2020 the Compensation Committee of the Board of Directors of the Company determined that the cash portion of the annual base

salaries of the Company’s President and Chief Executive Officer, and the Company’s Chief Financial Officer, Treasurer and

Secretary, would be reduced to annual rates of $150,000 each for the balance of 2020 commencing May 1, 2020.

Committee also decided that the reduction of the base annual salaries of Company’s President and Chief Executive Officer, and the

Company’s Chief Financial Officer, Treasurer and Secretary, for 2020, which totaled $69,231 and $55,384, respectively, as of May

1, 2020 was paid through the issuance of shares of restricted stock under the 2018 Stock Option and Restricted Stock Plan with the Company

paying the applicable federal and state taxes on such amounts.

Accordingly, the Company issued the Company’s President and Chief

Executive Officer, and the Company’s Chief Financial Officer, Treasurer and Secretary 75,250 shares and 60,200 shares, respectively,

effective April 17, 2020 based on a closing price of $0.92 per share on such date.

In addition, on September 9, 2020 a total of 178,091

shares of restricted stock were issued to five employees in consideration for their agreement to voluntary reduce their cash compensation

by a total of $165,625 with the Company paying the applicable federal and state taxes on such amounts.

July 1, 2020, the Company entered into a commission agreement with an individual who provides services for our Shield and ThermoVU product

Pursuant to such agreement, we issued a total of 10,000 shares of common stock valued at $30,700 based on the closing market price

which has been expensed during the year ended December 31, 2020.

Registration Statement on Form S-3

July 2, 2020, the SEC declared the Company’s shelf registration statement on Form S-3 (the “Shelf Registration Statement”)

The Shelf Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination

of our common stock, debt securities, debt securities convertible into common stock or other securities in any combination thereof, rights

to purchase shares of common stock or other securities in any combination thereof, warrants to purchase shares of common stock or other

securities in any combination thereof or units consisting of common stock or other securities in any combination thereof having an aggregate

initial offering price not exceeding $125,000,000.

The Company has utilized the shelf for its two recent offerings as described in “

SUBSEQUENT EVENTS”.

RELATED PARTY TRANSACTIONS

Rebel Holding, Inc.

Secured Promissory Notes

October 1, 2020, the Company advanced $250,000 to American Rebel Holdings, Inc.

(AREB) under a secured promissory note.

The CEO, President

and Chairman of AREB is the brother of the Company’s CEO, President and Chairman.

Such note bears interest at 8% and is secured

by all the tangible and intangible assets of the Company that are not currently secured by other indebtedness.

The Company also received

warrants to purchase 1,250,000 shares of AREB common stock at an exercise price of $0.10 per share with a five-year term .

note had an original maturity date of January 2, 2021;

however, additional provisions within the note provided for an extension of the

maturity date for fourteen months due to AREB’s failure to raise $300,000 in new debt or equity financing prior to the original

maturity date.

Upon this extension, the AREB was obligated to make equal monthly payments of principal and interest over the extended

period of the note.

The required monthly payments have not been made by AREB, therefore this note is currently in default status.

October 21, 2020, the Company advanced $250,000 to American Rebel Holdings, Inc.

(AREB) under a second secured promissory note.

Such note bears interest at 8% and is secured by inventory manufactured and revenue/accounts receivable derived from a specific

purchase order.

The Company also received warrants to purchase 1,250,000 shares of AREB common stock at an exercise price of $0.10

per share with a five-year term .

This note has a maturity date of April 21, 2021, subject to full repayment upon AREB closing

on debt or equity financings of at least $600,000, and the receipt of revenue from the sale of inventory sold under the specific

purchase order serving as collateral.

The required monthly payments have not been made by AREB, therefore

this note is currently in default status.

On March 1, 2021, the Company advanced an additional $117,600 to AREB on terms

similar to the previously issued notes.

The parties have been

negotiating the terms of a Forbearance Agreement regarding the following:

(a) the secured promissory note dated October 1, 2020;

(b) the secured promissory note dated October 21, 2020;

and (c) an advance made by the Company on March 1, 2021.

The parties are

attempting to arrange for a series of payments that will liquidate the outstanding balances of the two delinquent notes and the

advance by no later than June 30, 2021.

Based on the terms being negotiated, if AREB timely and fully complies with all of its

obligations under the Forbearance Agreement, the Company would agree that AREB’s obligations to the Company in connection

with the defaults would be satisfied.

However, there is no assurance that the parties will agree to the terms contained in the

Forbearance Agreement, and whether AREB will be able to comply with such terms.

Promissory Notes Payable –

Related party

February and April 2020, the Company borrowed a total of $319,000 from the Company’s Chairman, CEO & President under an unsecured

promissory note bearing interest at 6% through its May 28, 2020 maturity date.

The proceeds from the note were used for general corporate

The principal balance and related accrued interest were paid in full in cash during the year ended December 31, 2020.

interest accrued and paid on this note was $5,236.

NET LOSS PER SHARE

1 unchanged sentence

and 2019 are as follows:

Year ended December 31,

Numerator for basic and diluted income per share –

ended December 31,

for basic and diluted income per share –

$ (2,625,881 )

1 unchanged sentence

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

Denominator for diluted loss per share –

weighted average shares

Dilutive effect of shares

issuable upon conversion of convertible debt and the exercise of stock options and warrants outstanding

Denominator for diluted loss per share

adjusted weighted average shares outstanding

5 unchanged sentences

SUBSEQUENT EVENTS

Issuance of Restricted Common Stock .- On January 3, 2020, the board of directors approved the grant of

530,050 restricted common shares to officers and employees of the Company.

Such shares will generally vest one-half on January

2, 2021 and one half on January 2, 2022, provided that each grantee remains an officer or employee on such dates.

Secured Convertible Notes .- Subsequent to December 31, 2019, the holders of the 2019 Convertible Notes exercised their

right to convert principal balances aggregating $1,259,074 into equity.

In addition, the Company exercised their right to prepay

in cash the remaining outstanding principal balance aggregating $574,341.

Their remain no outstanding 2019 Convertible notes

as a result of these conversions and prepayments.

public offering - On March 3, 2020, the Company consummated an underwritten public offering of 2,521,740 shares of common

stock (the Offering”).

The Offering was conducted pursuant to an underwriting agreement, dated February 27, between the

Company and Aegis Capital Corp.

public offering - On January 14, 2021, the Company consummated an underwritten public offering (the “Offering”)

of (i) 2,800,000 shares of common stock (”Shares”), (ii) pre-funded warrants to purchase up to 7,200,000 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 10,000,000 shares of Common Stock (the “Warrant Shares”),

which are exercisable for a period of five years after issuance at an initial exercise price $3.25 per share, subject to certain

adjustments, as provided in the Warrants.

The Offering was conducted pursuant to an underwriting agreement, dated January

12, between the Company and Kingswood Capital Markets, division of Benchmark Investments, Inc.

(the “Underwriters”),

The common stock in the Offering was sold at a public offering

price of $1.15 per share.

The Company has granted the Underwriters a 45-day option to purchase up to an additional 378,261 additional

shares of common stock at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if

common stock in the Offering was issued pursuant to the Company’s effective shelf registration statement on Form S-3 (File

The underwriting agreement contained customary representations, warranties and agreements by the Company, customary

conditions to closing, indemnification obligations of the Company and the Underwriters.

Underwriters received discounts and commissions of seven percent (7%) of the gross cash proceeds received by the Company from

the sale of the common shares in the Offering.

In addition, the Company agreed to pay the Underwriters (a) a non-accountable

expense reimbursement of 1% of the gross proceeds received and (b) “road show”

expenses, diligence fees and the fees

and expenses of the Underwriters’

legal counsel not to exceed $50,000.

the underwriting agreement, the Company and its officers and directors executed lock-up agreements whereby, (a) the Company has

agreed not to engage in the following for a period of 45 days from the date of the pricing of the Offering, (1) offer, sell or

otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company, or (2) file or caused to

be filed any registration statement with the SEC relating to the offering of any shares of the Company’s capital stock or

any securities convertible into or exercisable or exchangeable for shares of the Company’s capital stock, and (b) the Company’s

executive officers and directors, as of the pricing date of the Offering, have agreed, subject to certain exceptions, not to offer,

issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any securities of the Company

without the prior written consent of the Underwriters, for a period of 45 days from the date of the offering.

gross proceeds to the Company from the offering, before deducting underwriting discounts and commissions and other estimated offering

expenses, and assuming the Underwriters do not exercise their option to purchase the option shares, are approximately $2.9 million.

The net proceeds to the Company from the offering, a fter deducting underwriting discounts

and commissions and the non-accountable expense reimbursement, but before deducting other

expenses in connection with the offering, and assuming the Underwriters do not exercise their option to purchase the option

Shares , are approximately $2.67 million.

The Company intends to use the net proceeds

from this offering to fund the repayment of debt and for general corporate purposes.

Financing:- The Company entered two debt instruments subsequent to December 31, 2019 as follows:

February 2020, the Company borrowed a total of $289,000 from the Company’s Chairman, CEO & President under an unsecured

promissory note bearing interest at 6% through its May 28, 2020 maturity date.

The proceeds from the note were used for general

corporate purposes.

January 17, 2020, the Company borrowed a total of $100,000 from an individual under an unsecured promissory note bearing interest

at 8% through its April 17, 2020 maturity date.

In connection with the loan, the Company issued the individual a warrant for

the purchase of 35,750 shares of common stock at $1.40 per share for a period of five years from the date of the note.

proceeds from the note were used for general corporate purposes.

Listing - Our Common Stock is currently listed on The Nasdaq Capital Market

(“Nasdaq”).

In order to maintain that 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.

our Common Stock is delisted from Nasdaq and is not eligible for quotation on another

market or exchange, trading of our Common Stock could be conducted in the over-the-counter market or on an electronic bulletin

board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board.

In such event, it could become more

difficult to dispose of, or obtain accurate price quotations for, our Common Stock, and there would likely also be a reduction

in our coverage by securities analysts and the news media.

Also, it may be difficult for us to raise additional capital if we

are not listed on Nasdaq or a major exchange.

July 11, 2019, Nasdaq notified us that, for the previous 30 consecutive business days, the minimum Market Value of Listed Securities

(the “MVLS”) for our Common Stock was below the $35 million minimum MVLS requirement for continued listing on Nasdaq

under Nasdaq Listing Rule 5550(b)(2) (the “MVLS Rule”).

In accordance with Nasdaq Listing Rule 5810(c)(3)(C),

we had 180 calendar days, or until January 7, 2020, to regain compliance with the MVLS Rule.

To regain compliance with the MVLS

Rule, the minimum MVLS for our Common Stock must have been at least $35 million for a minimum of ten consecutive business days

at any time during this 180-day period.

If we failed to regain compliance with such rule by January 7, 2020, we were subject to

being be delisted from Nasdaq .

If we were delisted from The

Nasdaq Capital Market , our Common Stock may lose liquidity, increase volatility, and lose market maker support.

January 8, 2020, we received a determination letter from the staff of Nasdaq stating that we had not regained compliance with

the MVLS Standard, since our Common Stock was below the $35 million minimum MVLS requirement for continued listing on Nasdaq under

the MLVS Rule and had not been at least $35 million for a minimum of ten consecutive business days at any time during the 180-day

grace period granted to us.

Pursuant to the letter, unless we requested a hearing to appeal this determination by January 15,

2020, our Common Stock would be delisted from Nasdaq and trading of our Common Stock would have been suspended at the opening

of business on January 17, 2020.

January 13, 2020, we requested a hearing before the Nasdaq Hearings Panel to appeal the Letter and the Staff of Nasdaq notified

us that a hearing was scheduled for February 20, 2020.

We were asked to provide the Panel with a plan to regain compliance with

the minimum MLVS requirement under the MLVS Rule, which needed to include a discussion of the events that we believe will enable

us to timely regain compliance with the minimum MLVS requirement.

On January 21, 2020, we submitted such a compliance plan.

On March 6, 2020, we received

notice from the NASDAQ hearing panel that the Company has been granted an extension until June 30, 2020 to regain compliance with

Rule 5550(b), which requires us to have at least i) $2.5 million in shareholder equity;

or ii) $35 million in market value of

listed securities, or iii) net income from continuing operations of at least $500,000 in the most recently completed fiscal year

or in two of the last three fiscal years.

Our goal is to meet the $2.5 million minimum shareholder equity requirement for continued

listing on NASDAQ.

There can be no assurance that we will regain compliance with the NASDAQ’s Listing Rule

regarding our $2.5 million minimum shareholder equity requirement on or prior to the June 30, 2020 required date.

even if we regain compliance on or prior to such date, we must thereafter continue to maintain compliance the

continued listing rule.

COVID –

- The accompanying consolidated financial statements as well as the

Notes to the Consolidated Financial Statements, unless otherwise indicated, principally reflect the status of our business and

the results of our operations as of December 31, 2019.

Since that date, economies throughout the world have been severely disrupted

by the effects of the quarantines, business closures and the reluctance of individuals to leave their homes as a result of the

outbreak of the coronavirus (COVID-19).

Although we remain open as an “essential business,”

our supply chain has been

disrupted and our customers and in particular our commercial customers have been significantly impacted which has in turn reduced

our operations and activities.

In addition, the capital markets have been disrupted and our efforts to raise necessary capital

will likely be adversely impacted by the outbreak of the virus and we cannot forecast with any certainty when the disruptions caused

by it will cease to impact our business and the results of our operations.

In reading the our consolidated financial statements,

including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional

uncertainties caused by the outbreak of COVID - 19.

acted as the exclusive placement agent in connection with the Offering pursuant to a placement

agency agreement .

The common stock in the Offering was sold at a public offering price of $3.095 per share.

common stock in the Offering was issued pursuant to the Company’s effective shelf registration statement on Form S-3 (File No.

The underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions

to closing, indemnification obligations of the Company and the Underwriters.

The Underwriters received

discounts and commissions of six percent (6%) of the gross cash proceeds received by the Company from the sale of the common shares in

the Offering and certain expenses.

the underwriting agreement, the Company and its officers and directors executed lock-up agreements whereby, (a) the Company has agreed

not to engage in the following for a period of 90 days from the date of the pricing of the Offering, (i)

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option,

right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company

or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company;

(ii) file or cause to be

filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities

convertible into or exercisable or exchangeable for shares of capital stock of the Company;

(iii) complete any offering of debt securities

of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic

consequences of ownership of capital stock of the Company.

pursuant to the terms of the Purchase Agreement the Company has granted to the Investors, for a period of 12 months after the closing

of the Offering, the right to participate in subsequent offerings by the Company of Common Stock and Common Stock equivalents in an amount

up to 50% of the amount of each such subsequent offering, on the same terms, conditions and price provided for in such subsequent offering.

Company received approximately $29,013,000 in net proceeds from the Offering after deducting the discounts, commissions,

and other estimated offering expenses payable by the Company.

As of March 31, 2021, all pre-funded warrants have been fully

The Company plans to use the net proceeds from the Offering for working capital, product development, order fulfillment

and for general corporate purposes.

public offering - On February 1, 2021, the Company consummated an underwritten public offering (the “Offering”) of

(i) 3,250,000 shares of common stock (”Shares”), (ii) pre-funded warrants to purchase up to 11,050,000 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 14,300,000 shares of Common Stock (the “Warrant Shares”), which are exercisable for a period of five

years after issuance at an initial exercise price $3.25 per share, subject to certain adjustments, as provided in the Warrants.

The Offering was conducted pursuant to an underwriting agreement, dated January 28, between the Company and Kingswood Capital Markets,

division of Benchmark Investments, Inc.

(the “Underwriters”), acted as the exclusive

placement agent in connection with the Offering pursuant to a placement agency agreement .

The common stock in the Offering was

sold at a public offering price of $2.799 per share.

common stock in the Offering was issued pursuant to the Company’s effective shelf registration statement on Form S-3 (File No.

The underwriting agreement contained customary representations, warranties and agreements by the Company, customary conditions

to closing, indemnification obligations of the Company and the Underwriters.

The Underwriters received

discounts and commissions of six percent (6%) of the gross cash proceeds received by the Company from the sale of the common shares in

the Offering and certain expenses.

the underwriting agreement, the Company and its officers and directors executed lock-up agreements whereby, (a) the Company has agreed

not to engage in the following for a period of 90 days from the date of the pricing of the Offering, (i)

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option,

right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company

or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company;

(ii) file or cause to be

filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities

convertible into or exercisable or exchangeable for shares of capital stock of the Company;

(iii) complete any offering of debt securities

of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic

consequences of ownership of capital stock of the Company.

pursuant to the terms of the Purchase Agreement the Company has granted to the Investors, for a period of 12 months after the closing

of the Offering, the right to participate in subsequent offerings by the Company of Common Stock and Common Stock equivalents in an amount

up to 50% of the amount of each such subsequent offering, on the same terms, conditions and price provided for in such subsequent offering.

Company received approximately $37,587,600 in net proceeds from the Offering after deducting the discounts, commissions,

and other estimated offering expenses payable by the Company.

As of March 31, 2021, all pre-funded warrants have been fully

The Company plans to use the net proceeds from the Offering for working capital, product development, order fulfillment

and for general corporate purposes.

Rebel Holding, Inc.

Secured Promissory Notes - On October 1, 2020, the Company advanced $250,000 to American Rebel

Holdings, Inc.

(AREB) under a secured promissory note and on October 21, 2020, the Company advanced an additional $250,000 to

American Rebel Holdings, Inc.

(AREB) under a second secured promissory note.

Both notes are currently in default.

1, 2021, the Company advanced an additional $117,600 to AREB on terms similar to the previously issued notes.

RELATED PARTY TRANSACTIONS”

for further information.

The parties have been

negotiating the terms of a Forbearance Agreement regarding the following:

(a) the secured promissory note dated October 1,

(b) the secured promissory note dated October 21, 2020;

and (c) an advance made by the Company on March 1, 2021.

are attempting to arrange for a series of payments that will liquidate the outstanding balances of the two delinquent notes

and the advance by no later than June 30, 2021.

Based on the terms being negotiated, if AREB timely and fully complies

with all of its obligations under the Forbearance Agreement, the Company would agree that AREB’s obligations

to the Company in connection with the defaults would be satisfied.

However, there is no assurance that the parties will

agree to the terms contained in the Forbearance Agreement, and whether AREB will be able to comply with such terms.

of Building - On February 24, 2021 the Company entered into a contract to purchase a 71,361 square foot building located in Lenexa

Kansas which is intended to serve as the Company’s office and warehouse needs.

The building contains approximately 30,000 square

foot of office space and the remainder warehouse space.

The total purchase price is approximately $5.3 million and is expected to close

on or around May 1, 2021.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures