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, 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. 40 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 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 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. 41 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. Business Combination In June 2023, the Company, entered into the Merger Agreement with Clover Leaf, Merger Sub, Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf in accordance with the terms and conditions of the Merger Agreement, and Kustom Entertainment. Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement, Merger Sub will merge with and into Kustom, with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Clover Leaf. Upon the Closing which is subject to the approval of Clover Leaf’s shareholders and the satisfaction or waiver of certain other customary closing conditions, the common stock of the combined company is expected to be listed on the Nasdaq under a mutually agreed new ticker symbol that reflects the name “Kustom Entertainment”. Loan Agreement and Mortgage On October 26, 2023, the Company entered into the Loan Agreement by and between the Company, Digital Ally Healthcare, and Kompass. In connection with the Loan Agreement, on October 26, 2023, the Company entered into the Mortgage by and between the Company, as grantor, and Kompass, as grantee, and issued the Revolving Note to Kompass. The gross proceeds to the Company are $4,880,000 before repaying those certain Senior Secured Convertible Notes issued on April 5, 2023 in the aggregate amount of $3,162,500 and paying customary fees and expenses. Pursuant to the Loan Agreement, Kompass agreed to make the Revolving Loans available to the Borrower as the Borrower may from time to time request until, but not including, October 26, 2025, and in such amounts as the Borrower may from time to time request, provided, however, that the aggregate principal balance of the Revolving Loans outstanding at any time shall not exceed the lesser of $4,880,000.00 or an amount equal to eighty percent of the value of the Mortgaged Property. Under the Loan Agreement, the Revolving Loans made by Kompass may be repaid and, subject to customary terms and conditions, borrowed again up to, but not including October 26, 2025, unless the Revolving Loans are otherwise accelerated, terminated or extended as provided in the Loan Agreement. The Revolving Loans shall be used by the Borrower for the purpose of working capital and to retire existing debt. Under the Loan Agreement, the borrower is required to provide written notice to Kompass prior to creating, assuming or incurring any debt or becoming liable, whether as endorser, guarantor, surety or otherwise, for any debt or obligation of any other party. While obligations remain outstanding under the Loan Agreement, the Borrower is required to maintain a minimum balance of $97,600 in a reserve account. Under the Loan Agreement, the Borrower is prohibited from creating, assuming, incurring or suffering or permitting to exist any lien of any kind or character upon the collateral, which consists of the Mortgaged Property and the Company’s interest in the Capital Reserve Account. The Loan Agreement contains customary covenants, representations and warranties by the Borrower. Pursuant to the Loan Agreement, the Company issued the Revolving Note to Kompass whereby the Company and Digital Ally Healthcare jointly and severally promise to pay to the order of Kompass the lesser of (i) $4,880,000.00, or (ii) the aggregate principal amount of all Revolving Loans outstanding under and pursuant to the Loan Agreement at the maturity or maturities and in the amount or amounts stated on the records of Kompass, together with interest (computed on the actual number of days elapsed on the basis of a 360 day year) at a floating per annum rate equal to the greater of (i) the Prime Rate plus four percent or (ii) eight percent, on the aggregate principal amount of all Revolving Loans outstanding from time to time as provided in the Loan Agreement. The Company entered into the Mortgage to secure its obligations under the Loan Agreement. The property mortgaged under the Mortgage consists of the Mortgaged Property. The Mortgage contains customary covenants, representations and warranties by the Company. 42 Results of Operations Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of September 30, 2023, and September 30, 2022: For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Net Revenues: Video Solutions $ 1,797,348 $ 2,092,927 $ 5,596,300 $ 6,152,733 Revenue Cycle Management 1,636,543 2,015,112 5,142,904 6,039,807 Entertainment 2,903,808 4,376,114 11,575,315 15,937,852 Total Net Revenues $ 6,337,699 $ 8,484,153 $ 22,314,519 $ 28,130,392 Gross Profit: Video Solutions $ 426,795 $ 515,615 $ 1,740,397 $ 1,543,057 Revenue Cycle Management 625,114 866,277 2,203,220 2,520,709 Entertainment 174,240 (786,392 ) 1,564,361 190,432 Total Gross Profit $ 1,226,149 $ 595,500 $ 5,507,978 $ 4,254,198 Operating Income (loss): Video Solutions $ (1,311,143 ) $ (1,481,048 ) $ (4,639,316 ) $ (4,327,049 ) Revenue Cycle Management 43,202 117,844 299,010 236,628 Entertainment (1,256,681 ) (2,149,412 ) (2,818,617 ) (5,915,953 ) Corporate (2,623,421 ) (3,054,407 ) (9,102,631 ) (10,025,236 ) Total Operating Income (Loss) $ (5,148,043 ) $ (6,567,023 ) $ (16,261,554 ) $ (20,031,610 ) Depreciation and Amortization: Video Solutions $ 219,955 $ 213,446 $ 629,677 $ 584,266 Revenue Cycle Management 26,328 102,211 69,066 102,575 Entertainment 319,302 320,004 957,884 959,366 Total Depreciation and Amortization $ 565,585 $ 635,661 $ 1,656,627 $ 1,646,207 September 30, 2023 December 31, 2022 Assets (net of eliminations): Video Solutions $ 28,387,191 $ 28,509,706 Revenue Cycle Management 2,286,733 2,201,570 Entertainment 7,106,806 11,190,491 Corporate 13,575,344 14,766,295 Total Identifiable Assets $ 51,356,074 $ 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. Consolidated Results of Operations We experienced operating losses for the first three quarters of 2023 and last half of 2022. The following is a summary of our recent operating results on a quarterly basis: For the three months ended: September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 Total revenue $ 6,337,699 $ 8,279,632 $ 7,697,190 $ 8,879,504 $ 8,484,153 Gross profit 1,226,149 2,737,040 1,544,792 (1,932,256 ) 595,500 Gross profit margin % 19.3 % 33.1 % 20.1 % (21.8 )% 7.0 % Total selling, general and administrative expenses 6,374,192 7,677,744 7,717,598 7,769,389 7,162,523 Operating loss (5,148,043 ) (4,940,704 ) (6,172,806 ) (9,701,645 ) (6,567,023 ) Operating loss % (81.2 )% (59.7 )% (80.2 )% (109.3 )% (77.4 )% Net loss $ (3,679,043 ) $ (8,320,549 ) $ (5,979,579 ) $ (9,574,258 ) $ (1,919,071 ) 43 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 $3,679,043 on revenues of $6,337,699 for third 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. For the Three Months Ended September 30, 2023 and 2022 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 September 30, 2023 and 2022, represented as a percentage of total revenues for each such quarter: For the three months ended September 30, 2023 2022 Revenue 100 % 100 % Cost of revenue 81 % 93 % Gross profit 19 % 7 % Selling, general and administrative expenses: Research and development expense 9 % 7 % Selling, advertising and promotional expense 30 % 22 % General and administrative expense 61 % 56 % Total selling, general and administrative expenses 101 % 84 % Operating loss (81 )% (77 )% Interest expense (15 )% — % Change in fair value of contingent consideration promissory notes — % (2 )% Change in fair value of warrant derivative liabilities 29 % 14 % Gain on extinguishment of liabilities 8 % 43 % Income (loss) before income tax benefit (58 )% (23 )% Income tax (provision) — % — % Net income/(loss) (58 )% (23 )% Net income (loss) attributable to noncontrolling interests of consolidated subsidiary — % — % Net income (loss) attributable to common stockholders (59 )% (22 )% Net income/(loss) per share information: Basic $ (1.32 ) $ (0.76 ) Diluted $ (1.32 ) $ (0.76 ) 44 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. Product revenues by operating segment is as follows: For the three months ended September 30, 2023 2022 Product Revenues: Video Solutions $ 977,193 $ 1,348,565 Revenue Cycle Management — — Entertainment 1,118,044 1,713,808 Total Product Revenues $ 2,095,237 $ 3,062,373 Product revenues for the three months ended September 30, 2023 and 2022 were $2,095,237 and $3,062,373 respectively, a decrease of $967,136 (32%), 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 $1,118,044 in product revenues for the three months ended September 30, 2023, compared to $1,713,808 for the three months ended September 30, 2022, a decrease of $595,764 (35%). 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 $977,193 during the three months ended September 30, 2023 compared to $1,348,565 for the three months ended September 30, 2022, a decrease of $371,372 (28%). 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. 45 ● 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: For the three months ended September 30, 2023 2022 Service and Other Revenues: Video Solutions $ 820,155 $ 744,362 Revenue Cycle Management 1,636,543 2,015,112 Entertainment 1,785,764 2,662,306 Total Service and Other Revenues $ 4,242,462 $ 5,421,780 Service and other revenues for the three months ended September 30, 2023 and 2022 were $4,242,462 and $5,421,780, respectively, a decrease of $1,179,318 (22%), due to the following factors: ● Cloud revenues generated by the video solutions operating segment were $526,401 and $412,819 for the three months ended September 30, 2023 and 2022, respectively, an increase of $113,582 (28%). 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 September 30, 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 $226,056 and $201,118 for the three months ended September 30, 2023 and 2022, respectively, an increase of $24,938 (12%). 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 $1,785,764 and $2,662,306 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $876,542 (33%). 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 fluctuate as we look to right-size this segment and work towards profitability. ● Our revenue cycle management operating segment generated service revenues totaling $1,636,543 and $2,015,112 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $378,569 (19%). 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 September 30, 2022. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. The slight decrease in revenue is due to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue. 46 Total revenues for the three months ended September 30, 2023 and 2022 were $6,337,699 and $8,484,153, respectively, a decrease of $2,146,454 (25%), due to the reasons noted above. Cost of Product Revenue Overall cost of product revenue sold for the three months ended September 30, 2023, and 2022 was $2,587,750 and $3,262,457, respectively, a decrease of $674,707 (21%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended September 30, 2023, and 2022 were 124% and 107%, respectively. Cost of products sold by operating segment is as follows: For the three months ended September 30, 2023 2022 Cost of Product Revenues: Video Solutions $ 957,987 $ 1,261,295 Revenue Cycle Management — — Entertainment 1,629,763 2,001,162 Total Cost of Product Revenues $ 2,587,750 $ 3,262,457 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 September 30, 2023 compared to the three months ended September 30, 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 worsened to 98% for the three months ended September 30, 2023 as compared to 94% for the three months ended September 30, 2022. The decrease in entertainment operating segment cost of product sold directly correlates to the decrease in product revenues for the three months ended September 30, 2023 compared to September 30, 2022, resulting in cost of product revenue of $1,629,763 for the three months ended September 30, 2023, compared to $2,001,162 for the three months ended September 30, 2022. Cost of product sold as a percentage of product revenues for the entertainment segment was 146% for the three months ended September 30, 2023 as compared to 117% for the three months ended September 30, 2022. We recorded $4,570,970 and $5,489,541 in reserves for obsolete and excess inventories at September 30, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-progress were $3,722,014 and $4,512,329 at September 30, 2023 and December 31, 2022, respectively, a decrease of $790,315 (18%). Finished goods balances were $6,043,735 and $7,816,618 at September 30, 2023 and December 31, 2022, respectively, a decrease of $1,772,883 (23%) which was attributable to a decrease in finished goods from our entertainment segment. The decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory, as well as a decrease in reserve at the entertainment segment. We believe the reserves are appropriate given our inventory levels as of September 30, 2023. Cost of Service Revenue Overall cost of service revenue sold for the three months ended September 30, 2023, and 2022 was $2,523,800 and $4,626,196, respectively, a decrease of $2,102,396 (45%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended September 30, 2023, and 2022 were 59% and 85%, respectively. Cost of service revenues by operating shipment is as follows: For the three months ended September 30, 2023 2022 Cost of Service Revenues: Video Solutions $ 382,430 $ 316,017 Revenue Cycle Management 1,011,429 1,148,835 Entertainment 1,129,941 3,161,344 Total Cost of Service Revenues $ 2,523,800 $ 4,626,196 47 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 September 30, 2023 compared to the three months ended September 30, 2022. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 47% for the three months ended September 30, 2023 as compared to 42% for the three months ended September 30, 2022. Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 62% for the three months ended September 30, 2023 as compared to 57% for the three months ended September 30, 2022. The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Cost of service revenues as a percentage of service revenues for the entertainment segment was 63% for the three months ended September 30, 2023 as compared to 119% for the three months ended September 30, 2022. Gross Profit Overall gross profit for the three months ended September 30, 2023 and 2022 was $1,226,149 and $595,500, respectively, an increase of $630,649 (106%). Gross profit by operating segment was as follows: For the three months ended September 30, 2023 2022 Gross Profit: Video Solutions $ 426,795 $ 515,615 Revenue Cycle Management 174,240 866,277 Entertainment 625,114 (786,392 ) Total Gross Profit $ 1,226,149 $ 595,500 The overall increase is attributable to the large increase in gross profit for the entertainment segment for the three months ended September 30, 2023 along with a decrease in the overall cost of sales as a percentage of overall revenues to 81% for the three months ended September 30, 2023 from 93% for the three months ended September 30, 2022. Our goal is to continue 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 efficiently 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 $6,374,192 and $7,162,523 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $788,331 (11%). 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 101% for the three months ended September 30, 2023 compared to 84% in the same period in 2022. The significant components of selling, general and administrative expenses are as follows: For the three months ended September 30, 2023 2022 Research and development expense $ 564,146 $ 616,174 Selling, advertising and promotional expense 1,932,982 1,832,916 General and administrative expense 3,877,064 4,713,433 Total $ 6,374,192 $ 7,162,523 48 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 $564,146 and $616,174 for the three months ended September 30, 2023 and 2022, respectively. 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. Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $1,932,982 and $1,832,916 for the three months ended September 30, 2023 and 2022, respectively, an increase of $100,066 (6%). The increase is primarily attributable to TicketSmarter remaining active in sponsorship and advertising, as it continues to build its brand and gain recognition. General and administrative expense . General and administrative expenses totaled $3,877,064 and $4,713,433 for the three months ended September 30, 2023 and 2022, respectively. The decrease in general and administrative expenses in the three months ended September 30, 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 September 30, 2023 compared to the same period in 2022. Operating Loss For the reasons stated above, our operating loss was $5,148,043 and $6,567,023 for the three months ended September 30, 2023 and 2022, respectively, an improvement of $1,418,980 (22%). Operating loss as a percentage of revenues increased to 81% in the three months ended September 30, 2023 from 77% in the same period in 2022. Interest Income Interest income decreased to $12,986 for the three months ended September 30, 2023, from $13,333 in the same period of 2022, which reflects our change in cash and cash equivalent levels in the third quarter of 2023 compared to the third quarter of 2022. Interest Expense We incurred interest expenses of $959,898 and $14,255 during the three months ended September 30, 2023 and 2022, respectively. The increase is attributable to the convertible note issued in the second quarter, along with interest incurred on the contingent earn-out notes associated with the four Nobility Healthcare acquisitions. 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 $19,888 and ($138,877) during the three months ended September 30, 2023 and 2022, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment. 49 Change in Fair Value of Derivative Liabilities During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes 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 June 30, 2023, to September 30, 2023, totaled $1,863,326 which was recognized as a gain in the third quarter of 2023. Gain on Extinguishment of Liabilities Gain on extinguishment of liabilities increased to $507,304 for the three months ended September 30, 2023, from $-0- during the three months ended September 30, 2022, which reflects income related to the entertainment segment’s ability to negotiate down payables and contract liabilities during the third quarter of 2023. This gain relates to the TicketSmarter Related Party Note payable for the entertainment segment, as a trust, the beneficiaries of which are TicketSmarter’s Chief Executive Officer and his spouse, contributed cash in the amount of $2,325,000 to TicketSmarter. Those funds were then utilized to resolve numerous outstanding payables at a discounted rate, the discount received is recognized as a gain on extinguishment of liabilities on the statement of operations. Additionally, these negotiations relieved TicketSmarter of numerous future obligations following fiscal year 2023, which will result in much more significant saving over the next several years. Other income (loss) Other income (loss) increased to $25,394 for the three months ended September 30, 2023, from ($1,892) during the three months ended September 30, 2022, which reflects income related to a warehouse lease within the corporate headquarters. Loss before Income Tax Benefit As a result of the above results of operations, we reported a loss before income tax benefit of $3,679,043, and $1,919,071 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $1,759,972 (92%). Income Tax Benefit We did not record an income tax expense related to our income for the three months ended September 30, 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 September 30, 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 September 30, 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 $3,679,043 and $1,919,071 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $1,759,792 (92%). 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 of Nobility Healthcare which is reflected in the statement of income as “net income attributable to noncontrolling interests of consolidated subsidiary”. We reported net income (loss) attributable to noncontrolling interests of consolidated subsidiary of $29,630 and ($16,596) for the three months ended September 30, 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 $3,708,673 and $1,902,475 for the years three months September 30, 2023 and 2022, respectively, a decrease of $1,806,198 (95%). 50 Basic and Diluted Loss per Share The basic and diluted loss per share was $1.32 and $0.76 for the three months ended September 30, 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 September 30, 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. For the Nine months Ended September 30, 2023 and 2022 Results of Operations Summarized immediately below and discussed in more detail in the subsequent subsections is an analysis of our operating results for the nine months ended September 30, 2023 and 2022, represented as a percentage of total revenues for each such quarter: For the nine months ended September 30, 2023 2022 Revenue 100 % 100 % Cost of revenue 75 % 85 % Gross profit 25 % 15 % Selling, general and administrative expenses: Research and development expense 9 % 6 % Selling, advertising and promotional expense 26 % 26 % General and administrative expense 62 % 54 % Total selling, general and administrative expenses 97 % 86 % Operating loss (73 )% (71 )% Interest income — % — % Interest expense (11 )% — % Loss on accrual for legal settlement (8 )% — % Change in fair value of contingent consideration promissory notes 1 % 1 % Change in fair value of derivative liabilities 8 % 24 % Gain on extinguishment of liabilities 2 % 13 % Income (loss) before income tax benefit (81 )% (33 )% Income tax (provision) — % — % Net income/(loss) (81 )% (33 )% Net loss attributable to noncontrolling interests of consolidated subsidiary (1 )% (1 )% Net income (loss) attributable to common stockholders (82 )% (34 )% Net income/(loss) per share information: Basic $ (6.55 ) $ (3.83 ) Diluted $ (6.55 ) $ (3.83 ) 51 Product revenues by operating segment is as follows: For the nine months ended September 30, 2023 2022 Product Revenues: Video Solutions $ 3,318,815 $ 4,089,037 Revenue Cycle Management — — Entertainment 4,307,891 3,593,577 Total Product Revenues $ 7,626,706 $ 7,682,614 Product revenues for the nine months ended September 30, 2023 and 2022 were $7,626,706 and $7,682,614 respectively, a decrease of $55,908 (1%), 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 $4,307,891 in product revenues for the nine months ended September 30, 2023, compared to $3,593,577 for the nine months ended September 30, 2022. This product revenue relates to the first Kustom 440 music festival, as well as 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 $3,318,815 during the nine months ended September 30, 2023 compared to $4,089,037 for the nine months ended September 30, 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 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 increased service revenues. We expect this program to continue to gain momentum, resulting in recurring revenues over a span of three to five years. Service and other revenues by operating segment is as follows: For the nine months ended September 30, 2023 2022 Service and Other Revenues: Video Solutions $ 2,277,485 $ 2,063,696 Revenue Cycle Management 5,142,904 6,039,807 Entertainment 7,267,424 12,344,275 Total Service and Other Revenues $ 14,687,813 $ 20,447,778 52 Service and other revenues for the nine months ended September 30, 2023 and 2022 were $14,687,813 and $20,447,778, respectively, a decrease of $5,759,965 (28%), due to the following factors: ● Cloud revenues generated by the video solutions operating segment were $1,421,174 and $1,012,129 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $409,045 (40%). 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 nine months ended September 30, 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 $659,130 and $601,460 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $57,670 (10%). This correlates with the increase in sales of DVM-800 hardware systems resulting in an increase in their associated extended warranty. ● Our new entertainment operating segment generated service revenues totaling $7,267,424 and $12,344,275 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $5,076,851 (41%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021, thus resulting in a 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 fluctuate as we look right-size this segment and work towards profitability. ● Our new revenue cycle management operating segment generated service revenues totaling $5,142,904 and $6,039,807 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $896,903 (15%). 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 nine months ended September 30, 2023. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. The slight decrease in revenue is due to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue. Total revenues for the nine months ended September 30, 2023 and 2022 were $22,314,519 and $28,130,392, respectively, a decrease of $5,815,873 (21%), due to the reasons noted above. Cost of Product Revenue Overall cost of product revenue sold for the nine months ended September 30, 2023, and 2022 was $7,108,366 and $8,154,984, respectively, a decrease of $1,046,618 (13%). Overall cost of goods sold for products as a percentage of product revenues for the nine months ended September 30, 2023, and 2022 were 93% and 106%, respectively. Cost of products sold by operating segment is as follows: For the nine months ended September 30, 2023 2022 Cost of Product Revenues: Video Solutions $ 3,658,490 $ 3,768,413 Revenue Cycle Management — — Entertainment 3,449,876 4,386,571 Total Cost of Product Revenues $ 7,108,366 $ 8,154,984 The decrease in cost of goods sold for our video solutions segment products is directly correlated with the decrease in product sales for the nine months ended September 30, 2023 compared to the nine months ended September 30, 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 nine months of 2023, directly increasing cost of goods sold for the period. Cost of product sold as a percentage of product revenues for the video solutions segment improved to 103% for the nine months ended September 30, 2023 as compared to 105% for the nine months ended September 30, 2022. 53 The increase in entertainment operating segment cost of product sold directly correlates to the increase in product revenues for the nine months ended September 30, 2023 compared to September 30, 2022, resulting in cost of product revenue of $3,449,876 for the nine months ended September 30, 2023, compared to $4,386,571 for the nine months ended September 30, 2022. Cost of product sold as a percentage of product revenues for the entertainment segment was 85% for the three months ended September 30, 2023 as compared to 107% for the nine months ended September 30, 2022. We recorded $4,570,970 and $5,489,541 in reserves for obsolete and excess inventories at September 30, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-progress were $3,722,014 and $4,512,329 at September 30, 2023 and December 31, 2022, respectively, a decrease of $790,315 (18%). Finished goods balances were $6,043,735 and $7,816,618 at September 30, 2023 and December 31, 2022, respectively, a decrease of $1,772,883 (23%) 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 September 30, 2023. Cost of Service Revenue Overall cost of service revenue sold for the nine months ended September 30, 2023, and 2022 was $7,174,375 and $11,095,015, respectively, a decrease of $3,920,640 (35%). Overall cost of goods sold for services as a percentage of service revenues for the nine months ended September 30, 2023, and 2022 were 69% and 74%, respectively. Cost of service revenues by operating segment is as follows: For the nine months ended September 30, 2023 2022 Cost of Service Revenues: Video Solutions $ 1,024,798 $ 841,263 Revenue Cycle Management 2,939,682 3,519,098 Entertainment 5,733,695 11,360,849 Total Cost of Service Revenues $ 9,698,175 $ 15,721,210 The decrease in cost of service revenues for our video solutions segment is commensurate with the decrease in service revenues in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 45% for the nine months ended September 30, 2023 as compared to 41% for the nine months ended September 30, 2022. The decrease in revenue cycle management operating segment cost of service revenue is commensurate with the decrease in service revenues in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Cost of service revenues as a percentage of service revenues for the revenue cycle management operating segment was 57% for the nine months ended September 30, 2023 as compared to 58% for the nine months ended September 30, 2022. The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Cost of service revenues as a percentage of service revenues for the entertainment operating segment was 79% for the nine months ended September 30, 2023 as compared to 92% for the nine months ended September 30, 2022. 54 Gross Profit Overall gross profit for the nine months ended September 30, 2023 and 2022 was $5,507,978 and $4,254,198, respectively, an increase of $1,253,780 (29%). Gross profit by operating segment was as follows: For the nine months ended September 30, 2023 2022 Gross Profit: Video Solutions $ 1,658,584 $ 1,543,057 Revenue Cycle Management 2,203,222 2,520,709 Entertainment 1,646,172 190,432 Total Gross Profit $ 5,507,978 $ 4,254,198 The overall increase is attributable to the large overall increase in revenues for the nine months ended September 30, 2023 and an increase in the overall cost of sales as a percentage of overall revenues to 75% for the nine months ended September 30, 2023 from 85% for the nine months ended September 30, 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, ShieldTM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices. Selling, General and Administrative Expenses Selling, general and administrative expenses were $21,769,532 and $24,285,808 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $2,516,276 (10%). 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 97% for the nine months ended September 30, 2023 compared to 86% in the same period in 2022. The significant components of selling, general and administrative expenses are as follows: For the nine months ended September 30, 2023 2022 Research and development expense $ 2,039,361 $ 1,654,395 Selling, advertising and promotional expense 5,885,097 7,375,364 General and administrative expense 13,845,074 15,256,049 Total $ 21,769,532 $ 24,285,808 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 $2,039,361 and $1,654,395 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $384,966 (23%). 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. Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled $5,885,097 and $7,375,364 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $1,490,267 (20%). 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. 55 General and administrative expense . General and administrative expenses totaled $13,845,074 and $15,256,049 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $1,410,975 (9%). The decrease in general and administrative expenses in the nine months ended September 30, 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 September 30, 2023 compared to the same period in 2022. Operating Loss For the reasons stated above, our operating loss was $16,261,554 and $20,031,610 for the nine months ended September 30, 2023 and 2022, respectively, an improvement of $3,770,056 (19%). Operating loss as a percentage of revenues changed to 73% in the nine months ended September 30, 2023 from 71% in the same period in 2022. Interest Income Interest income decreased to $84,071 for the nine months ended September 30, 2023, from $116,928 in the same period of 2022, which reflects our change in cash and cash equivalent levels throughout 2023 compared to 2022. Interest Expense We incurred interest expenses of $2,480,947 and $39,766 during the nine months ended September 30, 2023 and 2022, respectively. The increase is attributable to the convertible note entered into in the second quarter of 2023, and the contingent earn-out notes associated with the four Nobility Healthcare acquisitions, with interest rates of 3.00% per annum. Loss on Accrual for Legal Settlement The Company recognized a loss on accrual for legal settlement of $1,792,308 and $-0- during the nine months ended September 30, 2023 and 2022, respectively. This is in connection with the ongoing lawsuit with Culp McCauley, Inc. Loss on conversion of convertible debt The Company recognized a loss on conversion of convertible debt of $93,386 and $-0- during the nine months ended September 30, 2023 and 2022, respectively. This is in connection with the convertible note issued during the nine months ended September 30, 2023 and the conversion from debt to equity during the period. Change in Fair Value of Contingent Consideration Promissory Notes During the nine months ended September 30, 2023, The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $177,909 and $347,169 during the nine months ended September 30, 2023 and 2022, respectively. This is in connection with the four acquisitions made by our revenue cycle management segment. 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 nine months ended September 30, 2023 and 2022, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. 56 Change in Fair Value of Derivative Liabilities During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes 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, 2022, to September 30, 2023, totaled $1,803,560 which was recognized as a gain in the nine months ended September 30, 2023. Gain on Extinguishment of Liabilities Gain on extinguishment of liabilities increased to $507,304 for the nine months ended September 30, 2023, from $-0- during the nine months ended September 30, 2022, which reflects income related to the entertainment segment’s ability to negotiate down payables and contract liabilities during the period. This gain relates to the TicketSmarter Related Party Note payable for the entertainment segment, as a trust, the beneficiaries of which are TicketSmarter’s Chief Executive Officer and his spouse, contributed cash in the amount of $2,325,000 to TicketSmarter. Those funds were then utilized to resolve numerous outstanding payables at a discounted rate, the discount received is recognized as a gain on extinguishment of liabilities on the statement of operations. Additionally, these negotiations relieved TicketSmarter of numerous future obligations following fiscal year 2023, which will result in much more significant saving over the next several years. Gain on Extinguishment of Warrant Derivative Liabilities The Company recognized a gain on the change in fair value of contingent consideration promissory notes of $-0- and $3,624,794 during the nine months ended September 30, 2023 and 2022, respectively. This is in connection with the Warrant Exchange Agreement executed by the Company on August 23, 2022. Other income Other income increased to $76,180 for the nine months ended September 30, 2023, from $41,167 during the nine months ended September 30, 2022, which reflects income related to a warehouse lease within the corporate headquarters. Loss before Income Tax Benefit As a result of the above results of operations, we reported a loss before income tax benefit of $17,979,171 and $9,299,498 for the nine months ended September 30, 2023 and 2022, respectively, a decline of $8,679,673 (93%). Income Tax Benefit We did not record an income tax expense related to our income for the nine months ended September 30, 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 September 30, 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 September 30, 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 $17,979,171 and $9,299,498 for the nine months ended September 30, 2023 and 2022, respectively, a decline of $8,679,673 (93%). Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income of Nobility Healthcare which is reflected in the statement of income as “net income attributable to noncontrolling interests of consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $228,624 and $268,636 for the nine months ended September 30, 2023 and 2022, respectively. 57 Net Loss Attributable to Common Stockholders As a result of the above, we reported a net loss attributable to common stockholders of $18,207,795 and $9,568,134 for the nine months September 30, 2023 and 2022, respectively, a deterioration of $8,639,661 (90%). Basic and Diluted Loss per Share The basic and diluted loss per share was $6.55 and $3.83 for the nine months ended September 30, 2023 and 2022, respectively. Basic loss per share is based upon the weighted average number of common shares outstanding during the period. For the nine months ended September 30, 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. 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 September 30, 2023, we had cash and cash equivalents with an aggregate balance of $2,207,831, 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 $1,324,368 net decrease in cash during the nine months ended September 30, 2023: ● Operating activities : $5,842,158 of net cash used in operating activities. Net cash used in operating activities was $5,842,158 and $17,797,992 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $11,955,834. The improvement is attributable a significant decrease in the non-cash gain attributable to the change in value of the warrant derivative liability in 2023 compared to 2022, as well as the decline in the usage of cash to increase inventories, prepaid expenses, and other operating assets during the nine months ended September 30, 2023 compared to the same period in 2022. ● Investing activities : $197,241 of net cash used in investing activities. Cash used in investing activities was $197,241 and $3,488,972 for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 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 : $4,715,031 of net cash provided by financing activities. Cash provided by (used in) financing activities was $4,715,031 and ($4,425,437) for the nine months ended September 30, 2023 and 2022, respectively. During the first nine months of 2023, we completed a convertible note agreement, a related party note payable, 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 nine 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. 58 Commitments: We had $2,207,831 of cash and cash equivalents and net negative working capital of ($4,779,820) as of September 30, 2023. Accounts receivable and other receivables balances represented $4,640,542 of our net working capital at September 30, 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 $5,194,779 of our net working capital at September 30, 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. Capital Expenditures: We had the following material commitments for capital expenditures at September 30, 2023: Lease commitments. Total lease expense under the six operating leases was approximately $105,439 and $402,556, during the three and nine months ended September 30, 2023, respectively. The following sets forth the operating lease right of use assets and liabilities as of September 30, 2023: Assets: Operating lease right of use assets, net $ 1,034,518 Liabilities: Operating lease obligations-current portion $ 264,958 Operating lease obligations-less current portion 837,755 Total operating lease obligations $ 1,102,713 The components of lease expense were as follows for the nine months ended September 30, 2023: Selling, general and administrative expenses $ 402,556 Following are the minimum lease payments for each year and in total: Year ending December 31: 2023 (October 1, to December 31, 2023) $ 88,188 2024 336,992 2025 290,417 2026 271,868 Thereafter 334,651 Total undiscounted minimum future lease payments 1,322,116 Imputed interest (219,403 ) Total operating lease liability $ 1,102,713 59 Debt obligations – Outstanding debt obligations comprises the following: September 30, 2023 December 31, 2022 Economic injury disaster loan (EIDL) $ 150,000 $ 150,000 Convertible note payable, net of unamortized debt discount of $1,014,091 1,860,909 — Contingent consideration promissory note – Nobility Healthcare Division Acquisition 194,477 388,955 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 87,348 176,456 Contingent consideration promissory note – Nobility Healthcare Division Acquisition — 208,083 Contingent consideration promissory note – Nobility Healthcare Division Acquisition — 4,346 Commercial Extension of Credit – Entertainment Segment 68,135 — Debt obligations 2,360,869 927,840 Less: current maturities of debt obligations 2,213,148 485,373 Debt obligations, long-term $ 147,721 $ 442,467 Debt obligations mature as follows as of September 30, 2023: September 30, 2023 2023 (October 1, 2023 to December 31, 2023) $ 164,295 2024 3,066,170 2025 3,412 2026 3,542 2027 and thereafter 137,541 Total $ 3,374,960 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; ● Accounting for Income Taxes; and 60 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 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. 61 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 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 September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Raw material and component parts– video solutions segment $ 3,680,820 $ 4,509,165 Work-in-process– video solutions segment 41,194 3,164 Finished goods – video solutions segment 5,676,031 6,846,091 Finished goods – entertainment segment 367,704 970,527 Subtotal 9,765,749 12,328,947 Reserve for excess and obsolete inventory– video solutions segment (4,466,748 ) (5,230,261 ) Reserve for excess and obsolete inventory – entertainment segment (104,222 ) (259,280 ) Total inventories $ 5,194,779 $ 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 47% of the gross inventory balance at September 30, 2023, compared to 45% of the gross inventory balance at December 31, 2022. We had $4,570,970 and $5,489,541 in reserves for obsolete and excess inventories at September 30, 2023 and December 31, 2022, respectively. Total raw materials, component parts, and work-in-process were $3,722,014 and $4,512,329 at September 30, 2023 and December 31, 2022, respectively, a decrease of $790,315 (18%). Finished goods balances were $6,043,735 and $7,816,618 at September 30, 2023 and December 31, 2022, respectively, a decrease of $1,772,883 (23%). The decrease in the inventory reserve is primarily due to the reduction in finished goods within the entertainment segment 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 September 30, 2023. 62 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 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. 63 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. 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 $16,543 as of September 30, 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. Warrant derivative liabilities. On April 5, 2023, the Company issued warrants to purchase a total of 1,125,000 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 September 30, 2023: Issuance date assumptions September 30, 2023 assumptions Volatility - range 106.0 % 105.7 % Risk-free rate 3.36 % 4.60 % Dividend 0 % 0 % Remaining contractual term 5.0 years 4.5 years Exercise price $ 5.50 - 7.50 $ 5.50 - 7.50 Common stock issuable under the warrants 1,125,000 1,125,000 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 or nine months ended September 30, 2023. 64 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 September 30, 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 September 30, 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 September 30, 2023 representing uncertain tax positions. We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized. Inflation and Seasonality Inflation has not materially affected us during the past fiscal year. We do not believe that our Video Solutions and Revenue Cycle Management segments business is seasonal in nature, however; the Entertainment Segment is expected to generate higher revenues during the second half of the calendar year than in the first half. 65 Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.