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 “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, and the substantial doubt about our ability to continue as a going concern; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (7) our ability to produce our products in a cost-effective manner; (8) competition from larger, more established companies with far greater economic and human resources; (9) our ability to attract and retain quality employees; (10) risks related to dealing with governmental entities as customers; (11) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (12) characterization of our market by new products and rapid technological change; (13) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVU products; (14) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (15) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (16) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (17) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (18) our ability to generate more recurring cloud and service revenues; (19) risks related to our license arrangements; (20) the fluctuation of our operation results from quarter to quarter; (21) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (22) the issuance or sale of substantial amounts of our common stock, or the perception that such sales may occur in the future, which may have a depressive effect on the market price of our securities; (23) potential dilution from the issuance of common stock underlying outstanding options and warrants; (24) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (25) the volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; (26) our ability to integrate and realize the anticipated benefits from acquisitions; (27) our ability to maintain the listing of our common stock on the Nasdaq Capital Market. 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. Our video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and the sale of Shield disinfectant and personal protective products. This segment generates revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the term of the subscription, typically 3 or 5 years. Revenue Cycle Management Operating Segment – We 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 first quarter of 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 aim to maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins and cash flows. Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform the obligations of our revenue cycle management services. Our revenue cycle management services are services, performed and charged monthly, generally based on a contractual percentage of total customer collections, for which we recognize our net service fees. Entertainment Operating Segment - We 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 entertainment operating segment consists of entertainment services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold. Entertainment direct expenses include the cost of tickets purchased for resale by the Company and held as inventory, credit card fees, ticketing platform expenses, website maintenance fees, along with other administrative costs. 39 Results of Operations Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2023, and 2022: Three Months Ended March 31, 2023 2022 Net Revenues: Video Solutions $ 1,899,364 $ 2,010,049 Revenue Cycle Management 1,781,590 1,903,957 Entertainment 4,016,236 6,380,775 Total Net Revenues $ 7,697,190 $ 10,294,781 Gross Profit: Video Solutions $ 534,195 $ 268,431 Revenue Cycle Management 775,934 697,169 Entertainment 234,663 974,019 Total Gross Profit $ 1,544,792 $ 1,939,619 Operating Income (loss): Video Solutions $ (1,963,186 ) $ (1,658,144 ) Revenue Cycle Management 103,765 (128,518 ) Entertainment (1,233,006 ) (1,445,847 ) Corporate (3,080,379 ) (3,570,829 ) Total Operating Income (Loss) $ (6,172,806 ) $ (6,803,338 ) Depreciation and Amortization: Video Solutions $ 198,122 $ 174,066 Revenue Cycle Management 25,507 146 Entertainment 319,481 319,183 Total Depreciation and Amortization $ 543,110 $ 493,395 March 31, 2023 December 31, 2022 Assets (net of eliminations): Video Solutions $ 30,802,197 $ 28,509,706 Revenue Cycle Management 2,720,079 2,201,570 Entertainment 8,741,754 11,190,491 Corporate 13,179,214 14,766,295 Total Identifiable Assets $ 55,443,244 $ 56,668,062 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. 40 Consolidated Results of Operations We experienced operating losses for the first quarter of 2023 and all quarters during 2022. The following is a summary of our recent operating results on a quarterly basis: For the Three Months Ended: March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Total revenue $ 7,697,190 $ 8,879,504 $ 8,484,153 $ 9,351,457 $ 10,294,781 Gross profit 1,544,792 (1,932,256 ) 595,500 1,719,078 1,939,619 Gross profit margin % 20.1 % (21.8 )% 7.0 % 18.4 % 18.8 % Total selling, general and administrative expenses 7,717,598 7,769,389 7,162,523 8,380,330 8,742,957 Operating income (loss) (6,172,806 ) (9,701,645 ) (6,567,023 ) (6,661,252 ) (6,803,338 ) Operating income (loss) % (80.2 )% (109.3 )% (77.4 )% (71.2 )% (66.1 )% Net income (loss) $ (5,979,579 ) $ (9,574,258 ) $ (1,919,071 ) $ (682,187 ) $ (6,698,242 ) 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 $5,979,579 on revenues of $7,697,190 for first quarter of 2023. 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. 41 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, 2023 and 2022, represented as a percentage of total revenues for each such quarter: Three Months Ended March 31, 2023 2022 Revenue 100 % 100 % Cost of revenue 80 % 81 % Gross profit 20 % 19 % Selling, general and administrative expenses: Research and development expense 12 % 5 % Selling, advertising and promotional expense 24 % 27 % General and administrative expense 64 % 53 % Total selling, general and administrative expenses 100 % 85 % Operating loss (80 )% (66 )% Change in fair value of short-term investments — % (1 )% Change in fair value of contingent consideration promissory notes 2 % (1 )% Change in fair value of derivative liabilities — % 1 % Other income and interest income (expense), net — % 1 % Income (loss) before income tax benefit (78 )% (65 )% Income tax (provision) — % — % Net income/(loss) (78 )% (65 )% Net income (loss) attributable to noncontrolling interests of consolidated subsidiary (2 )% 1 % Net income (loss) attributable to common stockholders (80 )% (64 )% Net income/(loss) per share information: Basic $ (2.22 ) $ (2.59 ) Diluted $ (2.22 ) $ (2.59 ) 42 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 entertainment operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our entertainment segment until their sale. Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video solutions segment. Our entertainment operating 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 compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement. ● Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer. Our revenue cycle management operating segment sells its services to customers in the following manner: ● Our revenue cycle management operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying service revenue is recognized upon execution of services. Service revenues are generally determined as a percentage of the dollar amount of medical billings collected by the customer. Our entertainment operating segment sells our products and services to customers in the following manner: ● Our entertainment operating segment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter, are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform. We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape. 43 Product revenues by operating segment is as follows: Three Months Ended March 31, 2023 2022 Product Revenues: Video Solutions $ 1,193,021 $ 1,336,230 Revenue Cycle Management — — Entertainment 1,260,789 1,073,830 Total Product Revenues $ 2,453,810 $ 2,410,060 Product revenues for the three months ended March 31, 2023 and 2022 were $2,453,810 and $2,410,060 respectively, an increase of $43,750 (2%), due to the following factors: ● Revenues generated by the new entertainment operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The new entertainment operating segment generated $1,260,789 in product revenues for the three months ended March 31, 2023, compared to $1,073,830 for the three months ended March 31, 2022. 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 $1,193,021 during the three months ended March 31, 2023 compared to $1,336,230 for the three months ended March 31, 2022. In general, our video solutions operating segment has experienced pressure on its product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined compared to the same period in 2022 due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. ● Our video solutions operating segment management has continued to focus on migrating commercial customers, from a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and a portion of our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has gained some traction, resulting in decreased product revenues and increasing our service revenues. We expect this program to continue to hold traction, resulting in recurring revenues over a span of three to five years. Service and other revenues by operating segment is as follows: Three Months Ended March 31, 2023 2022 Service and Other Revenues: Video Solutions $ 706,343 $ 673,819 Revenue Cycle Management 1,781,590 1,903,957 Entertainment 2,755,447 5,306,945 Total Service and Other Revenues $ 5,243,380 $ 7,884,721 44 Service and other revenues for the three months ended March 31, 2023 and 2022 were $5,243,380 and $7,884,721, respectively, a decrease of $2,641,341 (33%), due to the following factors: ● Cloud revenues generated by the video solutions operating segment were $422,823 and $270,925 for the three months ended March 31, 2023 and 2022, respectively, an increase of $151,898 (56%). 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, 2023. We expect this trend to continue throughout 2023 as the migration from local storage to cloud storage continues in our customer base. ● Video solutions operating segment revenues from extended warranty services were $211,847 and $199,491 for the three months ended March 31, 2023 and 2022, respectively, an increase of $12,356 (6%). This correlates with the increase in sales of DVM-800 hardware systems resulting in an increase in their associated extended warranty. ● Our entertainment operating segment generated service revenues totaling $2,755,447 and $5,306,945 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $2,551,498 (48%). 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 entertainment operating segment to continue to present a strong revenue outlook moving forward. ● Our revenue cycle management operating segment generated service revenues totaling $1,781,590 and $1,903,957 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $122,367 (6%). 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, 2023 and 2022 were $7,697,190 and $10,294,781, respectively, a decrease of $2,597,591 (25%), due to the reasons noted above. Cost of Product Revenue Overall cost of product revenue sold for the three months ended March 31, 2023, and 2022 was $2,315,180 and $2,822,051, respectively, a decrease of $520,951 (18%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended March 31, 2023, and 2022 were 94% and 117%, respectively. Cost of products sold by operating segment is as follows: Three Months Ended March 31, 2023 2022 Cost of Product Revenues: Video Solutions $ 1,037,594 $ 1,477,715 Revenue Cycle Management — — Entertainment 1,263,506 1,344,336 Total Cost of Product Revenues $ 2,301,100 $ 2,822,051 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, 2023 compared to the three months ended March 31, 2022. 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 2023. Cost of product sold as a percentage of product revenues for the video solutions segment decreased to 87% for the three months ended March 31, 2023 as compared to 111% for the three months ended March 31, 2022. 45 The decrease in entertainment operating segment cost of product sold directly correlates to the decrease in product revenues for the three months ended March 31, 2023 compared to March 31, 2022, resulting in cost of product revenue of $1,263,506 for the three months ended March 31, 2022, compared to $1,344,336 for the three months ended March 31, 2022. Cost of product sold as a percentage of product revenues for the entertainment segment was 100% for the three months ended March 31, 2023 as compared to 125% for the three months ended March 31, 2022. We recorded $5,409,107 and $5,489,541 in reserves for obsolete and excess inventories at March 31, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-progress were $3,934,946 and $4,512,329 at March 31, 2023 and December 31, 2022, respectively, a decrease of $577,383 (13%). Finished goods balances were $7,395,240 and $7,816,618 at March 31, 2023 and December 31, 2022, respectively, a decrease of $421,378 (5%) which was attributable to a decrease in finished goods from our entertainment segment. The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory, offset by the increase in reserve at the entertainment segment. We believe the reserves are appropriate given our inventory levels as of March 31, 2023. Cost of Service Revenue Overall cost of service revenue sold for the three months ended March 31, 2023, and 2022 was $3,851,298 and $5,533,111, respectively, a decrease of $1,681,813 (30%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended March 31, 2023, and 2022 were 73% and 70%, respectively. Cost of service revenues by operating shipment is as follows: Three Months Ended March 31, 2023 2022 Cost of Service Revenues: Video Solutions $ 327,575 $ 263,903 Revenue Cycle Management 1,005,656 1,206,787 Entertainment 2,518,067 4,062,421 Total Cost of Service Revenues $ 3,851,298 $ 5,533,111 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, 2023 compared to the three months ended March 31, 2022. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 46% for the three months ended March 31, 2023 as compared to 39% for the three months ended March 31, 2022. Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 56% for the three months ended March 31, 2023 as compared to 63% for the three months ended March 31, 2022. The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Cost of service revenues as a percentage of service revenues for the entertainment segment was 91% for the three months ended March 31, 2023 as compared to 77% for the three months ended March 31, 2022. 46 Gross Profit Overall gross profit for the three months ended March 31, 2022 and 2021 was $1,544,792 and $1,939,619, respectively, a decrease of $394,827 (20%). Gross profit by operating segment was as follows: Three Months Ended March 31, 2023 2022 Gross Profit: Video Solutions $ 534,195 $ 268,431 Revenue Cycle Management 775,934 697,169 Entertainment 234,663 974,019 Total Gross Profit $ 1,544,792 $ 1,939,619 The overall decrease is attributable to the decrease in revenues for the three months ended March 31, 2023 and a decrease in the overall cost of sales as a percentage of overall revenues to 80% for the three months ended March 31, 2023 from 81% for the three months ended March 31, 2022. Our goal is to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, Shield TM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices. Selling, General and Administrative Expenses Selling, general and administrative expenses were $7,717,598 and $8,742,957 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $1,025,359 (12%). The decrease was primarily attributable to the reduction in new sponsorships being entered into by the Company. Our selling, general and administrative expenses as a percentage of sales increased to 100% for the three months ended March 31, 2023 compared to 85% in the same period in 2022. The significant components of selling, general and administrative expenses are as follows: Three months ended March 31, 2023 2022 Research and development expense $ 934,939 $ 498,000 Selling, advertising and promotional expense 1,847,489 2,779,404 General and administrative expense 4,935,170 5,465,553 Total $ 7,717,598 $ 8,742,957 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 $934,939 and $498,000 for the three months ended March 31, 2023 and 2022, respectively, an increase of $436,939 (88%). 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 EVO Fleet 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. 47 Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $1,847,489 and $2,779,404 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $931,915 (34%). Promotional and advertising expenses represent the primary component of these costs and totaled $1,462,541 during the three months ended March 31, 2023, compared to $2,389,063 during the three months ended March 31, 2022, a decrease of $926,522 (39%). The decrease is primarily attributable to the reduction in new sponsorships being entered into by the Company. Additionally, TicketSmarter remains active in sponsorship and advertising, as it continues to build its brand and gain recognition. General and administrative expense . General and administrative expenses totaled $4,935,170 and $5,465,553 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $530,383 (10%). The decrease in general and administrative expenses in the three months ended March 31, 2023 compared to the same period in 2022 is primarily attributable to a decrease in administrative salaries, as payroll begins to adjust from the new acquisitions completed by the Company. General and administrative expenses also decreased due to a decline in rent expenses, and legal and professional expenses for the three months ended March 31, 2023 compared to the same period in 2022. Operating Loss For the reasons stated above, our operating loss was $6,172,806 and $6,803,338 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $630,532 (9%). Operating loss as a percentage of revenues increased to 80% in the three months ended March 31, 2023 from 66% in the same period in 2022. Interest Income Interest income decreased to $15,477 for the three months ended March 31, 2023, from $71,362 in the same period of 2022, which reflects our change in cash and cash equivalent levels in the first quarter of 2023 compared to the first quarter of 2022. The Company held significant cash and cash equivalents throughout the first quarter of 2022, allowing a full three months of interest income due to the two completed registered direct offerings in the first quarter of 2021 which yielded net proceeds of approximately $66.4 million. Interest Expense We incurred interest expenses of $5,664 and $17,009 during the three months ended March 31, 2023 and 2022, respectively. The decrease is attributable to a reduction in the contingent earn-out notes associated with the four Nobility Healthcare acquisitions, currently at a total balance of $499,029 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 $-0- and $84,818 during the three months ended March 31, 2023 and 2022, respectively. Such short-term investments were included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. Change in Fair Value of Contingent Consideration Promissory Notes The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $158,021 compared to a loss of $56,050 during the three months ended March 31, 2023 and 2022, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment. 48 Change in Fair Value of Derivative Liabilities During the first quarter of 2021, the Company issued detachable warrants to purchase a total of 2,127,500 shares of Common Stock in association with the two registered direct offerings previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. There was no change in fair value of the warrant derivative liabilities from December 31, 2022 to March 31, 2023, and 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, 2022, and as of March 31, 2023, to be $-0- and $-0-, respectively. Loss before Income Tax Benefit As a result of the above results of operations, we reported a loss before income tax benefit of $5,979,579 and $6,698,242 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $718,663 (11%). Income Tax Benefit We did not record an income tax expense related to our income for the three months ended March 31, 2023 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, 2023. We had approximately $113.3 million of net operating loss carryforwards and $1.8 million of research and development tax credit carryforwards as of March 31, 2023 available to offset future net taxable income. Net Loss As a result of the above results of operations, we reported a net loss of $5,979,579 and $6,698,242 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $718,663 (11%). Net Income/(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 income/(loss) attributable to noncontrolling interests of consolidated subsidiary of $126,239 and ($98,094) for the three months ended March 31, 2023 and 2022, respectively. Net Loss Attributable to Common Stockholders As a result of the above, we reported a net loss attributable to common stockholders of $6,105,818 and $6,600,148 for the years three months March 31, 2023 and 2022, respectively, a decrease of $494,330 (7%). Basic and Diluted Loss per Share The basic and diluted loss per share was $2.22 and $2.59 for the three months ended March 31, 2023 and 2022, respectively. Basic loss per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended March 31, 2023 and 2022, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted loss per share. 49 Liquidity and Capital Resources Overall: Management’s Liquidity Plan. We have experienced net losses and cash outflows from operating activities since inception. Based upon our current operating forecast, we anticipate that we will need to restore positive operating cash flows and/or raise additional capital in the short-term to fund operations, meet our customary payment obligations and otherwise execute our business plan over the next 12 months. We are continuously in discussions to raise additional capital, which may include a variety of equity and debt instruments; however, there can be no assurance that our capital raising initiatives will be successful. Our recurring losses and level of cash used in operations, along with uncertainties concerning our ability to raise additional capital, raise substantial doubt about our ability to continue as a going concern. Cash, cash equivalents: As of March 31, 2023, we had cash and cash equivalents with an aggregate balance of $2,859,723, a decrease from a balance of $3,532,199 at December 31, 2022. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $672,476 net decrease in cash during the three months ended March 31, 2023: ● Operating activities : $1,216,876 of net cash used in operating activities. Net cash used in operating activities was $1,216,876 and $6,055,672 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $4,838,796. The improvement is attributable to the non-cash gain attributable to the change in value of the warrant derivative liability no longer being applicable to 2023, as well as the decline in the usage of cash to increase accounts receivable, prepaid expenses, and other operating assets during the three months ended March 31, 2023 compared to the same period in 2022. ● Investing activities : $70,645 of net cash used in investing activities. Cash used in investing activities was $70,645 and $3,195,346 for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, we made capital expenditures for: (i) building improvements of the newly purchased office and warehouse building; and (ii) patent applications on our proprietary technology utilized in our new products and included in intangible assets. ● Financing activities : $615,045 of net cash provided by financing activities. Cash provided by (used in) financing activities was $615,045 and ($2,195,658) for the three months ended March 31, 2023 and 2022, respectively. During the first three months of 2023, we most notably made principal payments on contingent consideration promissory notes, received a Commercial Extension of Credit for our Entertainment Segment and made principal payments on that extension of credit. 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. Commitments: We had $2,859,723 of cash and cash equivalents and net positive working capital $3,937,426 as of March 31, 2023. Accounts receivable and other receivables balances represented $4,791,301 of our net working capital at March 31, 2023. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2023, which would help to provide positive cash flow to support our operations during 2023. Inventory represents $5,921,079 of our net working capital at March 31, 2023. We are actively managing the level of inventory and our goal is to reduce such level during the balance of 2023 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2023. 50 Capital Expenditures: We had the following material commitments for capital expenditures at March 31, 2023: Lease commitments. The following sets forth the operating lease right of use assets and liabilities as of March 31, 2023: The following sets forth the operating lease right of use assets and liabilities as of March 31, 2023: Assets: Operating lease right of use assets $ 1,189,053 Liabilities: Operating lease obligations-current portion $ 287,520 Operating lease obligations-less current portion 969,728 Total operating lease obligations $ 1,257,248 The components of lease expense were as follows for the three months ended March 31, 2023: Selling, general and administrative expenses $ 142,402 Following are the minimum lease payments for each year and in total: Year ending December 31: 2023 (April 1, to December 31, 2023) $ 291,559 2024 336,992 2025 290,417 2026 271,868 Thereafter 334,651 Total undiscounted minimum future lease payments 1,525,487 Imputed interest (268,239 ) Total operating lease liability $ 1,257,248 Debt obligations – Outstanding debt obligations comprises the following: March 31, 2023 December 31, 2022 Economic injury disaster loan (EIDL) $ 150,000 $ 150,000 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 324,129 388,955 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 147,047 176,456 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 6,926 208,083 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 20,928 4,346 Commercial Extension of Credit – Entertainment Segment 708,857 — Debt obligations 1,357,887 927,840 Less: current maturities of debt obligations 1,102,943 485,373 Debt obligations, long-term $ 254,944 $ 442,467 51 Debt obligations mature as follows as of March 31, 2023: March 31, 2023 2023 (April 1, 2023 to December 31, 2023) $ 1,005,718 2024 207,673 2025 3,412 2026 3,542 2027 3,677 2028 and thereafter 133,865 Total $ 1,357,887 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. ● Redeemable Preferred Stock. Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all five of the following conditions are met: (i) 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. 52 We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract when the customer order is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i) products, (ii) professional services, and (iii) extended warranties. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on the relative standalone selling price (“SSP”). Revenue for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with customers. Revenue for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to-end service fees. These service fees are reported as revenue monthly upon completion of our performance obligation to provide the agreed upon services. Revenue for our entertainment segment is recorded on a gross or net basis based on management’s assessment of whether we are acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer. We sell our tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. We act as the principal in these transactions as we own the ticket at the time of sale, therefore we control the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket. We also act as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from entertainment operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As we do not control the ticket prior to the transfer, we act as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment is due at the time of sale. 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. 53 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 entertainment segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition, we will track historical bad debts and continue to assess appropriate reserves. For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves. Allowance for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost. Inventories consisted of the following at March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 Raw material and component parts– video solutions segment $ 3,923,281 $ 4,509,165 Work-in-process– video solutions segment 11,665 3,164 Finished goods – video solutions segment 6,558,625 6,846,091 Finished goods – entertainment segment 836,615 970,527 Subtotal 11,330,186 12,328,947 Reserve for excess and obsolete inventory– video solutions segment (5,089,903 ) (5,230,261 ) Reserve for excess and obsolete inventory – entertainment segment (319,204 ) (259,280 ) Total inventories $ 5,921,079 $ 6,839,406 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 48% of the gross inventory balance at March 31, 2023, compared to 45% of the gross inventory balance at December 31, 2022. We had $5,409,107 and $5,489,541 in reserves for obsolete and excess inventories at March 31, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-process were $3,934,946 and $4,512,329 at March 31, 2023 and December 31, 2022, respectively, a decrease of $577,383 (13%). Finished goods balances were $7,395,240 and $7,816,618 at March 31, 2023 and December 31, 2022, respectively, a decrease of $421,378 (5%). The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of March 31, 2023. 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. 54 Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets. Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets. Determining an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset’s useful life. The Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring changes or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value. When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test. Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data. Our most recent annual impairment test of goodwill was a qualitative analysis conducted as of December 31, 2022 that indicated no impairment. Subsequent to completing our 2022 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 — Nature of Business and Summary of Significant Accounting Policies and Note 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. 55 Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were increased to $19,261 as of March 31, 2023 compared to $15,694 as of December 31, 2022 due to newer products gaining a long history of claims to consider, which was slightly offset as we begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. Stock-based Compensation Expense . We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were no stock options granted during the three months ended March 31, 2023. 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, 2023, we have fully reserved all of our deferred tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased by $17,220,000 to a balance of $34,200,000 to fully reserve our deferred tax assets at December 31, 2022. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of March 31, 2023, 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, 2023 representing uncertain tax positions. 56 We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized. Inflation and Seasonality Inflation has not materially affected us during the past fiscal year. We do not believe that our Video Solutions and Revenue Cycle Management segments business is seasonal in nature, however; the Entertainment Segment is expected to generate higher revenues during the second half of the calendar year than in the first half. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.