KUSTOM ENTERTAINMENT, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation. This quarterly report on Form 10-Q (the “Report”) of Digital Ally, Inc. (the “Company”, “we”, “us”, or “our”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including during fiscal 2020 and 2019; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to deliver our new product offerings, such as the Shield™ disinfectant/sanitizers products and ThermoVU™ temperature screening systems, whether such new products perform as planned or advertised and whether they will help increase our revenues, particularly as the COVID-19 pandemic begins to subside; (7) whether we will be able to increase the sales, domestically and internationally, for our products in the future; (8) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (9) our ability to produce our products in a cost-effective manner; (10) competition from larger, more established companies with far greater economic and human resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities as customers; (13) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (14) characterization of our market by new products and rapid technological change; (15) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVU products; (16) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (17) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (18) our dependence on key personnel; (19) our reliance on third-party distributors and sales representatives for part of our marketing capability; (20) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (21) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (22) our ability to generate more recurring cloud and service revenues; (23) risks related to our license arrangements; (24) the fluctuation of our operation results from quarter to quarter; (25) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (26) the issuance or sale of substantial amounts of our common stock, or the perception that such sales may occur in the future, which may have a depressive effect on the market price of our securities; (27) potential dilution from the issuance of common stock underlying outstanding options and warrants; (28) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (29) the volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; and (30) our ability to integrate and realize the anticipated benefits from acquisitions. 38 Current Trends and Recent Developments for the Company Segment Overview Video Solutions Operating Segment – Within our video solutions operating segment we supply technology-based products utilizing our portable digital video and audio recording capabilities for the law enforcement and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio, computer, mechanical, and multi-media technologies to create positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video systems for law enforcement and commercial markets; the FirstVu body-worn camera line, consisting of the FirstVu Pro, FirstVu II, and the FirstVu HD; our patented and revolutionary VuLink product which integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and commercial markets; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu® which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria. We began offering our Shield™ disinfectants and cleansers to our law enforcement and commercial customers late in the second quarter of 2020. Our video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and the sale of Shield disinfectant and personal protective products. This segment generates revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the term of the subscription, typically 3 or 5 years. To judge the health of our video solutions segment, we review the current active subscriptions and deferred service revenues, along with the quantity and gross margins generated by our video solutions hardware sales. Revenue Cycle Management Operating Segment - We have recently entered the revenue cycle management business late in the second quarter of 2021 with the formation of our wholly owned subsidiary, Digital Ally Healthcare, Inc. and its majority-owned subsidiary Nobility Healthcare. Nobility Healthcare completed its first acquisition on June 30, 2021, when it acquired a private medical billing company, and a second acquisition on August 31, 2021 upon the completion of its acquisition of another private medical billing company, along with two more acquisitions completed during the three months ended March 31, 2022, in which we assist in providing working capital and back-office services to healthcare organizations throughout the country. Our assistance consists of insurance and benefit verification, medical treatment documentation and coding, and collections. Through our expertise and experience in this field, we maximize our customers’ service revenues collected, leafing to substantial improvements in their operating margins and cash flows. Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform the obligations of our revenue cycle management services. Our revenue cycle management services are services, performed and charged monthly, generally based on a contractual percentage of total customer collections, for which we recognize our net service fees. To judge the health of our revenue cycle management segment, we review the collection success rate and collection timing. In addition, we review the associated costs incurred to assist our customers, and any changes in operating margins and cash flows. Ticketing Operating Segment - We have also recently entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter provides ticket sales, partnerships, and mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events through its platform, for a wide range of events, including concerts, sporting events, theatres, and performing arts, throughout the country. Our ticketing operating segment consists of ticketing services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold. Ticketing direct expenses include the cost of tickets purchased for resale by the Company and held as inventory, credit card fees, ticketing platform expenses, website maintenance fees, along with other administrative costs. To judge the health of our ticketing operating segment, we review the gross transaction value, which represents the total value related to a ticket sale and includes the face value of the ticket as well as the service charge. In addition, we review the number of visits to our websites, cost of customer acquisition, the purchase conversion rate, the overall number of customers in our database, and the number and percentage of tickets sold via the website and mobile app. 39 Results of Operations Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2022, and 2021: Three Months Ended March 31, 2022 2021 Net Revenues: Video Solutions $ 2,010,049 $ 2,535,829 Revenue Cycle Management 1,903,957 — Ticketing 6,380,775 — Total Net Revenues $ 10,294,781 $ 2,535,829 Gross Profit: Video Solutions $ 268,431 $ 811,882 Revenue Cycle Management 697,169 — Ticketing 974,019 — Total Gross Profit $ 1,939,619 $ 811,882 Operating Income (loss): Video Solutions $ (1,658,144 ) $ (682,920 ) Revenue Cycle Management (128,518 ) — Ticketing (1,445,847 ) — Corporate (3,570,829 ) (2,182,773 ) Total Operating Income (Loss) $ (6,803,338 ) $ (2,865,693 ) Depreciation and Amortization: Video Solutions $ 174,066 $ 55,422 Revenue Cycle Management 146 — Ticketing 319,183 — Total Depreciation and Amortization $ 493,395 $ 55,422 March 31, 2022 December 31, 2021 Assets (net of eliminations): Video Solutions $ 32,196,051 $ 25,983,348 Revenue Cycle Management 1,357,829 934,095 Ticketing 5,894,339 12,260,780 Corporate 39,577,799 43,810,974 Total Identifiable Assets $ 79,026,018 $ 82,989,197 Segment net revenues reported above represent only sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income (loss), which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets. Consolidated Results of Operations We experienced operating losses for the first quarter of 2022 and all quarters during 2021. The following is a summary of our recent operating results on a quarterly basis: For the Three Months Ended: March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Total revenue $ 10,294,781 $ 11,744,112 $ 4,639,822 $ 2,493,671 $ 2,535,829 Gross profit 1,939,619 2,190,523 1,400,570 1,260,800 811,882 Gross profit margin % 18.8 % 18.7 % 30.2 % 50.6 % 32.0 % Total selling, general and administrative expenses 8,742,957 7,869,883 4,999,543 3,877,684 3,677,575 Operating income (loss) (6,803,338 ) (5,679,360 ) (3,598,973 ) (2,616,884 ) (2,865,693 ) Operating income (loss) % (66.1 )% (48.4 )% (77.6 )% (104.9 )% (113.0 )% Net income (loss) $ (6,698,242 ) $ 1,122,791 $ 8,068,799 $ (5,382,487 ) $ 21,721,858 40 Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; (7) the impact of COVID-19 on the economy and our businesses; and (8) the completion of corporate acquisitions. We reported a net loss of $6,698,242 on revenues of $10,294,781 for first quarter 2022. Off-Balance Sheet Arrangements We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses other than the following: We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 9, “Operating Leases,” to our condensed consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services. For the Three Months Ended March 31, 2022 and 2021 Results of Operations Summarized immediately below and discussed in more detail in the subsequent subsections is an analysis of our operating results for the three months ended March 31, 2022 and 2021, represented as a percentage of total revenues for each such quarter: Three Months Ended March 31, 2022 2021 Revenue 100 % 100 % Cost of revenue 81 % 68 % Gross profit 19 % 32 % Selling, general and administrative expenses: Research and development expense 5 % 18 % Selling, advertising and promotional expense 27 % 24 % General and administrative expense 53 % 104 % Total selling, general and administrative expenses 85 % 145 % Operating loss (66 )% (113 )% Change in fair value of short-term investments (1 )% — % Change in fair value of contingent consideration promissory notes (1 )% — % Change in fair value of derivative liabilities 1 % 968 % Other income and interest income (expense), net 1 % 2 % Income (loss) before income tax benefit (65 )% 857 % Income tax (provision) — % — % Net income/(loss) (65 )% 857 % Net loss attributable to noncontrolling interests of consolidated subsidiary 1 % — % Net income (loss) attributable to common stockholders (64 )% 857 % Net income/(loss) per share information: Basic $ (0.13 ) $ 0.49 Diluted $ (0.13 ) $ 0.49 41 Revenues Revenues by Type and by Operating Segment Our operating segments generate two types of revenues: Product revenues primarily includes video operating segment hardware sales of in-car and body-worn cameras, along with sales of our ThermoVu TM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale of tickets by our ticketing operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our ticketing segment until their sale. Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video solutions segment. Our ticketing operating segments’ secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services provided to medical providers throughout the country. Our video operating segment sells our products and services to customers in the following manner: ● Sales to domestic customers are made directly to the end customer (typically a law enforcement agency or a commercial customer) through our sales force, comprised of our employees. Revenue is recorded when the product is shipped to the end customer. ● Sales to international customers are made through independent distributors who purchase products from us at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as its compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement. ● Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer. Our revenue cycle management operating segment sells its services to customers in the following manner: ● Our revenue cycle management operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying service revenue is recognized upon execution of services. Service revenues are generally determined as a percentage of the amount of medical billings collected by the customer. 42 Our ticketing operating segment sells our products and services to customers in the following manner: ● Our ticketing operating segment generates product revenues from the sale of tickets directly to consumers for a particular event that the ticketing operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter are driven largely in part by the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform. We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape. The Omicron Variant of COVID-19 had an impact on all of our operating segment revenue streams for the three months ended March 31, 2022. In particular, it had a negative impact generally on our video solutions operating segment legacy products and, specifically, our commercial event recorder hardware (DVM-250 Plus) and in-car hardware for law enforcement (DVM-800) during the quarter. Ticketing operating segment revenues also continues to be negatively impacted due to the cancellation of live events and public caution surrounding the COVID-19 pandemic. Our revenue cycle management operating segment was also affected due to the higher level of healthcare service utilization due to the Omicron Variant while certain elective and routine healthcare services were reduced due to COVID-19 pandemic restrictions. Product revenues for the three months ended March 31, 2022 and 2021 were $2,410,060 and $1,912,577 respectively, an increase of $497,483 (26%), due to the following factors: ● Revenues generated by the new ticketing operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The new ticketing operating segment generated $1,073,830 in product revenues for the three months ended March 31, 2022, compared to $-0- for the three months ended March 31, 2021. This product revenue relates to the resale of tickets purchased for live events, including sporting events, concerts, and theatre, then sold through various platforms to customers. ● The Company’s video segment operating segment generated revenues totaling $1,336,230 during the three months ended March 31, 2022 compared to $1,912,577 for the three months ended March 31, 2021 due to slowing sales of our ThermoVu TM product lines related to our COVID-19 response. The Company launched two product lines in direct response to the increased safety precautions that organizations and individuals are taking due to the COVID-19 pandemic. ThermoVu™ was launched as a non-contact temperature-screening instrument that measures temperature through the wrist and controls entry to facilities when temperature measurements exceed pre-determined parameters. ThermoVu™ has optional features such as facial recognition to improve facility security by restricting access based on temperature and/or facial recognition reasons. ThermoVu™ provides an instant pass/fail audible tone with its temperature display and controls access to facilities based on such results. ThermoVu TM has been applied in schools, dental office, hospitals, office buildings, and other public venues. The Company also launched its Shield™ disinfectant/sanitizer product lines to fulfill demand by current customers and others for a disinfectant and sanitizer that is less harsh than many of the traditional products now widely distributed. The Shield™ Cleanser product line contains a cleanser with no harsh chemicals or fumes. The Company is beginning to experience pressure on these product lines as the COVID-19 pandemic begins to subside. ● In general, our video solutions operating segment has experienced pressure on its product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined over the prior period due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. We introduced our new body-worn cameras, the FirstVu Pro and FirstVu II, in the fourth quarter of 2021, as we have begun to see increased traction with these products in the first quarter of 2022. The Company hopes the interest throughout the marketplace continues to grow for these new products as the market is able to review and test these new products. ● Our video solutions operating segment management has been focusing on migrating customers, and in particular commercial customers, from a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has continued to gain traction, resulting in decreased product revenues and increasing our service revenues. We expect this program to continue to hold traction, resulting in recurring revenues over a span of three to five years. 43 Service and other revenues for the three months ended March 31, 2022 and 2021 were $7,884,721 and $623,252, respectively, an increase of $7,261,469 (1,165%), due to the following factors: ● Cloud revenues generated by the video solutions operating segment were $270,925 and $241,653 for the three months ended March 31, 2022 and 2021, respectively, an increase of $29,272 (12%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of our cloud-based EVO-HD in-car system and our next generation body-worn camera products, which contributed to our increased cloud revenues in the three months ended March 31, 2022. We expect this trend to continue throughout 2022 as the migration from local storage to cloud storage continues in our customer base. ● Video solutions operating segment revenues from extended warranty services were $199,491 and $254,692 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $55,201 (22%). We have many customers that have purchased extended warranty packages, primarily in our DVM-800 premium service program. However, the continued affects from the COVID-19 pandemic has adversely affected our sales of DVM-800 hardware systems resulting in a decrease in their sales in the three months ended March 31, 2022 compared to the same period in 2021. ● Our new ticketing operating segment generated service revenues totaling $5,306,945 and $-0- for the three months ended March 31, 2022 and 2021, respectively, an increase of $5,306,945 (100%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021, thus resulting in the new revenue stream for the Company. TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. We expect our ticketing operating segment to continue to present a strong revenue outlook moving forward. ● Our new revenue cycle management operating segment generated service revenues totaling $1,903,957 and $-0- for the three months ended March 31, 2022 and 2021, respectively, an increase of $1,903,957 (100%). Our revenue cycle management operating segment has completed four acquisitions since formation in June of 2021, thus resulting in the new service revenue stream added in the three months ended March 31, 2022. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. We expect our revenue cycle management segment to continue to present a strong revenue outlook moving forward. Total revenues for the three months ended March 31, 2022 and 2021 were $10,294,781 and $2,535,829, respectively, an increase of $7,758,952 (306%), due to the reasons noted above. 44 Cost of Product Revenue Overall cost of product revenue sold for the three months ended March 31, 2022, and 2021 was $2,822,051 and $1,561,310, respectively, an increase of $1,260,741 (81%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended March 31, 2022, and 2021 were 117.1% and 81.6%, respectively. Cost of products sold by operating segment is as follows: Three Months Ended March 31, 2022 2021 Cost of Product Revenues: Video Solutions $ 1,477,715 $ 1,561,310 Revenue Cycle Management — — Ticketing 1,344,336 — Total Cost of Product Revenues $ 2,822,051 $ 1,561,310 The decrease in cost of goods sold for our video solutions segment products is directly correlated with the decrease in product sales for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. In addition, the Video Solutions Segment recorded valuation allowances for its older product lines and a portion of its Shield products during the first quarter of 2022. Cost of product sold as a percentage of product revenues for the video solutions segment increased to 110.6% for the three months ended March 31, 2022 as compared to 81.6% for the three months ended March 31, 2021. The increase in ticketing operating segment cost of product sold is due to the acquisition of TicketSmarter in the third quarter of 2021, resulting in an increase to cost of product revenue of $1,344,336 for the three months ended March 31, 2022, compared to $-0- for the three months ended March 31, 2021. Cost of product sold as a percentage of product revenues for the ticketing solutions was 125.2% for the three months ended March 31, 2022. The Ticketing Segment recorded an allowance for unsold and under-market tickets during the first quarter 2022 due to event cancellations and restrictions imposed on the size and type of gatherings related to the Omicron Variant. In addition, we provide a reserve related to Major League Baseball reducing their spring training schedule and delaying their regular season due to the player strike in the first quarter of 2022. We recorded $3,896,460 and $3,915,089 in reserves for obsolete and excess inventories at March 31, 2022 and December 31, 2021, respectively. Total raw materials and component parts were $3,839,796 and $3,062,046 at March 31, 2022 and December 31, 2021, respectively, an increase of $777,750 (25%). Finished goods balances were $9,462,527 and $10,512,577 at March 31, 2022 and December 31, 2021, respectively, a decrease of $1,050,050 (10%) which was attributable to a decrease in finished goods from our newly acquired ticketing segment. The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory. We believe the reserves are appropriate given our inventory levels as of March 31, 2022. Cost of Service Revenue Overall cost of service revenue sold for the three months ended March 31, 2022, and 2021 was $5,553,111 and $162,637, respectively, an increase of $5,370,474 (3,302%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended March 31, 2022, and 2021 were 70.2% and 26.1%, respectively. Cost of service revenues by operating shipment is as follows: Three Months Ended March 31, 2022 2021 Cost of Service Revenues: Video Solutions $ 263,903 $ 162,637 Revenue Cycle Management 1,206,787 — Ticketing 4,062,421 — Total Cost of Service Revenues $ 5,533,111 $ 162,637 The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 39.2% for the three months ended March 31, 2022 as compared to 26.1% for the three months ended March 31, 2021. The increase in revenue cycle management operating segment cost of service revenue is due to the four acquisitions of medical billing companies completed since June 2021. Cost of service revenues as a percentage of product revenues for the revenue cycle management operating segment was 36.7% for the first three months of 2022. 45 The increase in ticketing operating segment cost of service revenues is the due to the 2021 acquisition of TicketSmarter, resulting in an increase to cost of service revenue of $4,062,421 for the three months ended March 31, 2022, compared to $-0- for the three months ended March 31, 2021. Cost of service revenues as a percentage of service revenues for the ticketing was 76.5% for the three months ended March 31, 2022. Gross Profit Overall gross profit for the three months ended March 31, 2022 and 2021 was $1,939,619 and $811,882, respectively, an increase of $1,127,737 (138.9%). Gross profit by operating segment was as follows: Gross Profit: Video Solutions $ 268,431 $ 811,882 Revenue Cycle Management 697,169 — Ticketing 974,019 — Total Gross Profit $ 1,939,619 $ 811,882 The overall increase is attributable to the large overall increase in revenues for the three months ended March 31, 2022 and an increase in the overall cost of sales as a percentage of overall revenues to 81.1% for the three months ended March 31, 2022 from 68.0% for the three months ended March 31, 2021. Our goal is to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and ticketing operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, FirstVu HD, ThermoVu TM , Shield TM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace and subject to a normalizing economy in the wake of the COVID-19 pandemic. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices. Selling, General and Administrative Expenses Selling, general and administrative expenses were $8,742,957 and $3,677,575 for the three months ended March 31, 2022 and 2021, respectively, an increase of $5,065,382 (137.7%). The increase was primarily attributable to the recent acquisitions completed in the third quarter of 2021. Our selling, general and administrative expenses as a percentage of sales decreased to 85% for the three months ended March 31, 2022 compared to 145% in the same period in 2021. The significant components of selling, general and administrative expenses are as follows: Three months ended March 31, 2022 2021 Research and development expense $ 498,000 $ 448,965 Selling, advertising and promotional expense 2,779,404 596,755 General and administrative expense 5,465,553 2,631,855 Total $ 8,742,957 $ 3,677,575 Research and development expense. We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $498,000 and $448,965 for the three months ended March 31, 2022 and 2021, respectively, an increase of $49,035 (10.9%). Most of our engineers are dedicated to research and development activities for new products, primarily the new generation of body-worn cameras, EVO-HD and non-mirror based DVM-250 that can be located in multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings based on our new body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources. 46 Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $2,779,404 and $596,755 for the three months ended March 31, 2022 and 2021, respectively, an increase of $2,182,649 (365.8%). Promotional and advertising expenses represent the primary component of these costs and totaled $2,389,063 during the three months ended March 31, 2022, compared to $197,203 during the three months ended March 31, 2021, an increase of $2,191,860 (1,111.5%). The increase is primarily attributable to the 2022 sponsorship of NASCAR and IndyCar. Additionally, TicketSmarter is very active in sponsorship and advertising, as it continues to build its brand and gain recognition. TicketSmarter accounted for $1,458,267 of the total promotional and advertising expense for the three months ended March 31, 2022. General and administrative expense . General and administrative expenses totaled $5,465,553 and $2,631,855 for the three months ended March 31, 2022 and 2021, respectively, an increase of $2,833,698 (107.7%). The increase in general and administrative expenses in the three months ended March 31, 2022 compared to the same period in 2021 is primarily attributable to an increase in administrative salaries, as payroll continues to increase with the new acquisition completed by the Company. General and administrative expense also increased due to a substantial increase in depreciation and amortization, rent expenses, and legal and professional expenses for the three months ended March 31, 2022 compared to the same period in 2021. Operating Loss For the reasons stated above, our operating loss was $6,803,338 and $2,865,693 for the three months ended March 31, 2022 and 2021, respectively, an increase of $3,937,645 (137.4%). Operating loss as a percentage of revenues improved to 66% in the three months ended March 31, 2022 from 113% in the same period in 2021. Interest Income Interest income increased to $71,362 for the three months ended March 31, 2022, from $41,686 in the same period of 2021, which reflects our improved cash and cash equivalent levels in the first quarter of 2022 compared to the first quarter of 2021. The Company held significant cash and cash equivalents throughout the first quarter of 2022, allowing a full three months of interest income. Compared to the completed two registered direct offerings in the first quarter of 2021 which yielded net proceeds of approximately $66.4 million which balances earned interest income for the latter part of the first quarter of 2021. 47 Interest Expense We incurred interest expense of $17,009 and $1,428 during the three months ended March 31, 2022 and 2021, respectively. The increase is attributable to the contingent earn-out notes associated with the four Nobility Healthcare acquisitions, currently at a total balance of $1,762,064 for the four notes, with interest rates of 3.00% per annum. Change in Fair Value of Short-Term Investments We recognized a loss on change in fair value of short-term investments totaling $84,818 and $4,964 during the three months ended March 31, 2022 and 2021, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. The Company completed two registered direct offerings in the first quarter of 2021, which yielded net proceeds of approximately $66.4 million, a portion of which was invested in short-term securities with original maturities of 90 days or less. Change in Fair Value of Contingent Consideration Promissory Notes During 2021, the Company issued a contingent consideration promissory note in connection with the two acquisitions made by our revenue cycle management segment in the amount of $350,000 and $650,000. Management’s estimate of the fair value of the $350,000 contingent promissory note at March 31, 2022 decreased by $51,464 compared to its estimated fair value at December 31, 2021. Management’s estimate of the fair value of the $650,000 contingent promissory note at March 31, 2022 increased by $107,514 compared to its estimated fair value at December 31, 2021. Therefore, the Company recorded a net loss of $56,050 in the Consolidated Statements of Operations for the three months ended March 31, 2022. Change in Fair Value of Derivative Liabilities During the first quarter of 2021, the Company issued detachable warrants to purchase a total of 42,500,000 shares of Common Stock in association with the two registered direct offerings previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities from December 31, 2021, to March 31, 2022, totaled $148,171 which was recognized as a gain in the first quarter of 2022. The Company determined the fair value of such warrants as of December 31, 2021, and as of March 31, 2022, to be $14,846,932 and $14,698,761, respectively. Income/(Loss) before Income Tax Benefit As a result of the above results of operations, we reported an income/(loss) before income tax benefit of ($6,698,242) and $21,721,858 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $28,420,100 (130.8%). Income Tax Benefit We did not record an income tax expense related to our income for the three months ended March 31, 2022 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of March 31, 2022. We had approximately $81.4 million of net operating loss carryforwards and $1,8 million of research and development tax credit carryforwards as of March 31, 2022 available to offset future net taxable income. 48 Net Income/(Loss) As a result of the above results of operations, we reported net income/(loss) of ($6,698,242) and $21,721,858 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $28,420,100 (130.8%). Net Loss Attributable to Noncontrolling Interests of Consolidated Subsidiary The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income/loss of Nobility Healthcare which is reflected in the statement of income (loss) as “net income (loss) attributable to noncontrolling interests of consolidated subsidiary”. We reported net loss attributable to noncontrolling interests of consolidated subsidiary of $98,094 and $-0- for the three months ended March 31, 2022 and 2021, respectively. Net Income/(Loss) Attributable to Common Stockholders As a result of the above, we reported a net income/(loss) attributable to common stockholders of ($6,600,148) and $21,721,858 for the years three months March 31, 2022 and 2021, respectively, a deterioration of $28,322,006 (130.4%). Basic and Diluted Income/(Loss) per Share The basic and diluted income/(loss) per share was ($0.13) and $0.49 for the three months ended March 31, 2022 and 2021, respectively. Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended March 31, 2022 and 2021, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted income (loss) per share. Liquidity and Capital Resources Overall: Management’s Liquidity Plan. The Company has historically raised capital in the form of equity and debt instruments from private and public sources to supplement its needs for funds to support its business operational and strategic plans. 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 had raised net proceeds of approximately $66.4 million in registered direct offerings of common stock, pre-funded warrants and warrants during 2021. Furthermore, the Company’s only remaining interest-bearing debt at March 31, 2022 is $150,000 remaining due on the promissory notes under the SBA’s PPP and EIDL programs, along with the four acquired private medical billing companies’ contingent consideration promissory notes, as more fully described in Note 3, “Debt Obligations” . We believe that the net proceeds from the registered direct offerings will be sufficient to fund our operations during the remainder of 2022 and management believes that it now has adequate liquidity for the foreseeable future from the recently completed registered direct offerings in 2021. Such offerings were completed through utilization of the Company’s shelf-registration statement on Form S-3 (File No. 333-239419), which was initially filed with the U.S. Securities and Exchange Commission (the “SEC) on June 25, 2020 and was declared effective on July 2, 2020 (the “Shelf Registration Statement”). Shelf Registration Statement on Form S-3 - The Shelf Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of our shares of 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. 49 Management believes that it has adequate funding to support its business operations for the foreseeable future as a result of the funds raised through these offerings. Cash, cash equivalents: As of March 31, 2022, we had cash and cash equivalents with an aggregate balance of $20,561,116, a decrease from a balance of $32,007,792 at December 31, 2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $11,446,676 net decrease in cash during the three months ended March 31, 2022: ● Operating activities : $6,055,672 of net cash used in operating activities. Net cash used in operating activities was $6,055,672 and $3,206,844 for the three months ended March 31, 2022 and 2021, respectively, an increase of $2,848,828. The deterioration is attributable to the net loss incurred for the first quarter of 2022, the non-cash gain attributable to the change in value of the warrant derivative liability, the usage of cash to increase accounts receivable, prepaid expenses, and other operating assets during the three months ended March 31, 2022 compared to the same period in 2021. ● Investing activities : $3,195,346 of net cash used in investing activities. Cash used in investing activities was $3,195,346 and $99,274 for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, we made capital expenditures for: (i) building improvements of the newly purchased office and warehouse building, and transportation assets; (ii) patent applications on our proprietary technology utilized in our new products and included in intangible assets; and (iii) the closing of a business and asset acquisition. ● Financing activities : $2,195,658 of net cash used in financing activities. Cash used in financing activities was $2,195,658 and cash provided by financing activities was $66,570,600 for the three months ended March 31, 2022 and 2021, respectively. During the first three months of 2022 the Company repurchased its common stock on the open market pursuant to the stock repurchase plan, as well as principal payments on contingent consideration promissory notes. During 2021, we raised substantial funds through the completion of two registered direct offerings of our common stock. Commitments: We had $20,561,116 of cash and cash equivalents and net positive working capital $19,483,613 as of March 31, 2022. Accounts receivable and other receivables balances represented $5,602,094 of our net working capital at March 31, 2022. We believe we will be able to collect our outstanding receivables on a timely basis and reduce the overall level during the balance of 2022, which would provide positive cash flow to support our operations during 2022. Inventory represents $9,405,920 of our net working capital at March 31, 2022, and finished goods represented $9,462,527 of total inventory at March 31, 2022. We are actively managing the level of inventory and our goal is to reduce such level during the balance of 2022 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2022. Capital Expenditures: We had the following material commitments for capital expenditures at March 31, 2022: Stock Repurchase Program - On December 6, 2021, the Board of Directors of the Company authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock under the specified terms of a share repurchase program (the “Program”). Subsequent to March 31, 2022, the Company repurchased 1,280,387 shares of its common stock for $1,415,382, in accordance with the Program. The Program does not obligate the Company to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. 50 Lease commitments. The following sets forth the operating lease right of use assets and liabilities as of March 31, 2022: The following sets forth the operating lease right of use assets and liabilities as of March 31, 2022: Assets: Operating lease right of use assets $ 1,051,139 Liabilities: Operating lease obligations-current portion $ 402,313 Operating lease obligations-less current portion 717,021 Total operating lease obligations $ 1,119,334 The components of lease expense were as follows for the three months ended March 31, 2022: Selling, general and administrative expenses $ 155,072 Following are the minimum lease payments for each year and in total: Year ending December 31: 2022 (April 1, to December 31, 2022) $ 374,088 2023 305,627 2024 245,761 2025 196,462 Thereafter 175,113 Total undiscounted minimum future lease payments 1,297,051 Imputed interest (177,717 ) Total operating lease liability $ 1,119,334 Debt obligations – Outstanding debt obligations comprises the following: March 31, 2022 December 31, 2021 Economic injury disaster loan (EIDL) $ 150,000 $ 150,000 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 234,027 317,212 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 673,037 650,000 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 750,000 — Contingent consideration promissory note – Nobility Healthcare Division Acquisition 105,000 — Debt obligations 1,912,064 1,117,212 Less: current maturities of debt obligations 662,717 389,934 Debt obligations, long-term $ 1,249,347 $ 727,278 Debt obligations mature as follows as of March 31, 2022: March 31, 2022 2022 (April 1, 2022 to December 31, 2022) $ 475,652 2023 748,305 2024 546,856 2025 3,412 2026 3,542 2027 and thereafter 134,297 Total $ 1,912,064 51 Critical Accounting Estimates Our significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies ,” to our consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies and estimates are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions: ● Revenue Recognition / Allowance for Doubtful Accounts; ● Allowance for Excess and Obsolete Inventory; ● Goodwill and other intangible assets; ● Warranty Reserves; ● Fair value of warrant derivative liabilities; ● Stock-based Compensation Expense; ● Fair value of warrants; ● Fair value of assets and liabilities acquired in business combinations; and ● Accounting for Income Taxes. 52 Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all five of the following conditions are met: (i) Identify the contract with the customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when a performance obligation is satisfied. We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract when the customer order is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i) products, (ii) professional services, and (iii) extended warranties. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on the relative standalone selling price (“SSP”). Revenue for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with customers. Revenue for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to end service fees. These service fees are reported as revenue monthly upon completion of our performance obligation to provide the agreed upon services. Revenue for our ticketing segment is recorded on a gross or net basis based on management’s assessment of whether we are acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer. We sell our tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. We act as the principal in these transactions as we own the ticket at the time of sale, therefore we control the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket. 53 We also act as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As we do not control the ticket prior to the transfer, we act as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment is due at the time of sale. We review all significant, unusual, or nonstandard shipments of product or delivery of services as a routine part of our accounting and financial reporting process to determine compliance with these requirements. Extended warranties are offered on selected products, and when a customer purchases an extended warranty, the associated proceeds are treated as contract liability and recognized over the term of the extended warranty. For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible, with less than $258,000 charged off as uncollectible on cumulative revenues of $248.0 million since we commenced deliveries during 2006. For our ticketing segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition, we will track historical bad debts and continue to assess appropriate reserves. For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves. Allowance for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost. Inventories consisted of the following at March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Raw material and component parts– video solutions segment $ 3,839,796 $ 3,062,046 Work-in-process– video solutions segment 56 — Finished goods – video solutions segment 7,990,526 8,410,307 Finished goods – ticketing segment 1,472,002 2,102,272 Subtotal 13,302,380 13,574,625 Reserve for excess and obsolete inventory– video solutions segment (3,334,829 ) (3,353,458 ) Reserve for excess and obsolete inventory – ticketing segment (561,631 ) (561,631 ) Total inventories $ 9,405,920 $ 9,659,536 54 We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk of inventory obsolescence due to changing technology and customer requirements. As reflected above, our inventory reserves represented 29.3% of the gross inventory balance at March 31, 2022, compared to 28.8% of the gross inventory balance at December 31, 2021. We had $3,896,460 and $3,915,089 in reserves for obsolete and excess inventories at March 31, 2022 and December 31, 2021, respectively. Total raw materials and component parts were $3,839,796 and $3,062,046 at March 31, 2022 and December 31, 2021, respectively, an increase of $777,750 (25%). Finished goods balances were $9,462,528 and $10,512,579 at March 31, 2022 and December 31, 2021, respectively, a decrease of $1,050,051 (10%). The decrease in finished goods was primarily attributable to a reduction in ticketing inventory of $630,270 at March 31, 2022 compared to December 31, 2021. The slight decrease in the inventory reserve is primarily due to the reduction in finished goods that had a reserve placed on them prior to sale. The remaining reserve for inventory obsolescence is generally provided for the level of component parts of the older versions of our printed circuit boards and the phase out of our DVM-750, DVM-500 Plus and LaserAlly legacy products. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels at March 31, 2022. If actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established. Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets. Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets. Determining an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset’s useful life. The Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring charges or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value. 55 When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test. Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data. Our most recent annual impairment test of goodwill was a qualitative analysis conducted as of December 31, 2021 that indicated no impairment. Subsequent to completing our 2021 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 — Nature of Business and Summary of Significant Accounting Policies and Note 10 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements provide additional information regarding the Company’s goodwill and other intangible assets. Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were decreased to $10,582 as of March 31, 2022 compared to $13,742 as of December 31, 2021 as we begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. Warrant derivative liabilities. On January 14, 2021 and February 1, 2021, the Company issued warrants to purchase a total of 42,550,000 shares of Common Stock. The warrant terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Furthermore, the Company revalues the fair value of warrant derivative liability as of the date the warrant is exercised with the resulting warrant derivative liability transitioned to equity. The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of March 31, 2022: Issuance date assumptions March 31, 2022 assumptions Volatility - range 106.6 – 166.6 % 104.1 % Risk-free rate 0.08 – 0.49 % 2.42 % Dividend 0 % 0 % Remaining contractual term 0.01 – 5 years 3.8 – 4.5 years Exercise price $ 2.80 - 3.25 $ 3.25 Common stock issuable under the warrants 42,550,000 24,300,000 56 Stock-based Compensation Expense . We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were 25,000 stock options granted during the three months ended March 31, 2022. If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect our estimates of fair values of our share-based compensation. Certain share-based payment awards, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. In addition, we account for forfeitures as they occur. Accounting for Income Taxes. Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit. As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. As of March 31, 2022, we have fully reserved all of our deferred tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be decreased by $7,615,000 to a balance of $16,980,000 to fully reserve our deferred tax assets at December 31, 2021. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of March 31, 2022, because of the overall net operating loss carryforwards available. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity. As required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We have no recorded liability as of March 31, 2022 representing uncertain tax positions. We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized. Inflation and Seasonality Inflation has not materially affected us during the past fiscal year. We do not believe that our Video Solutions and Revenue Cycle Management segments business is seasonal in nature, however; the Ticketing Segment is expected to generate higher revenues during the second half of the calendar year than in the first half. 57 Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.