KUSTOM ENTERTAINMENT, INC. 10-Q

Item 1 – Financial Statements. DIGITAL ALLY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2024 AND DECEMBER 31, 2023 March 31, 2024 (Unaudited) December 31, 2023 Assets Current assets: Cash and cash equivalents $ 927,861 $ 680,549 Accounts receivable – trade, net of $ 234,727 allowance – March 31, 2024 and $ 200,668 – December 31, 2023 1,207,752 1,584,662 Other receivables, net of $ 25,000 allowance – March 31, 2024 and $ 5,000 – December 31, 2023 3,213,740 3,107,634 Inventories, net 3,148,689 3,845,281 Prepaid expenses 6,575,013 6,366,368 Total current assets 15,073,055 15,584,494 Property, plant, and equipment, net 6,207,795 7,283,702 Goodwill and other intangible assets, net 16,625,032 16,510,422 Operating lease right of use assets, net 925,128 1,053,159 Other assets 6,333,185 6,597,032 Total assets $ 45,164,195 $ 47,028,809 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 11,212,697 $ 10,732,089 Accrued expenses 3,137,144 3,269,330 Current portion of operating lease obligations 225,960 279,538 Contract liabilities – current portion 3,299,714 2,937,168 Notes payable – related party – current portion 2,700,000 2,700,000 Debt obligations – current portion 2,403,029 1,260,513 Warrant derivative liabilities 1,718,629 1,369,738 Income taxes payable — 61 Total current liabilities 24,697,173 22,548,437 Long-term liabilities: Debt obligations – long term 4,875,831 4,853,237 Operating lease obligation – long term 749,718 827,836 Contract liabilities – long term 7,285,206 7,340,459 Lease Deposit 10,445 10,445 Total liabilities 37,618,373 35,580,414 Commitments and contingencies - - Stockholders’ Equity: Common stock, $ 0.001 par value per share; 200,000,000 shares authorized; shares issued: 2,879,826 shares issued – March 31, 2024 and 2,800,754 shares issued – December 31, 2023 2,880 2,801 Additional paid in capital 128,481,699 128,441,083 Noncontrolling interest in consolidated subsidiary 661,044 673,292 Accumulated deficit ( 121,599,801 ) ( 117,668,781 ) Total stockholders’ equity 7,545,822 11,448,395 Total liabilities and stockholders’ equity $ 45,164,195 $ 47,028,809 See Notes to the Unaudited Condensed Consolidated Financial Statements. 3 DIGITAL ALLY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (Unaudited) Three months ended March 31, 2024 Three months ended March 31, 2023 Revenue: Product $ 1,565,846 $ 2,453,810 Service and other 3,963,505 5,243,380 Total revenue 5,529,351 7,697,190 Cost of revenue: Product 1,567,393 2,301,100 Service and other 2,438,259 3,851,298 Total cost of revenue 4,005,652 6,152,398 Gross profit 1,523,699 1,544,792 Selling, general and administrative expenses: Research and development expense 487,466 934,939 Selling, advertising and promotional expense 761,118 1,847,489 General and administrative expense 3,914,149 4,935,170 Total selling, general and administrative expenses 5,162,733 7,717,598 Operating loss ( 3,639,034 ) ( 6,172,806 ) Other income (expense): Interest income 19,356 15,477 Interest expense ( 648,567 ) ( 5,664 ) Other income 27,602 25,393 Change in fair value of warrant derivative liabilities ( 348,891 ) — Change in fair value of contingent consideration promissory notes and earn-out agreements — 158,021 Gain on extinguishment of liabilities 682,345 — Gain on sale of intangibles 5,582 — Loss on sale of property, plant and equipment ( 41,661 ) — Total other income ( 304,234 ) 193,227 Income (loss) before income tax benefit ( 3,943,268 ) ( 5,979,579 ) Income tax benefit — — Net loss ( 3,943,268 ) ( 5,979,579 ) Net (income) loss attributable to noncontrolling interests of consolidated subsidiary 12,248 ( 126,239 ) Net loss attributable to common stockholders $ ( 3,931,020 ) $ ( 6,105,818 ) Net loss per share information: Basic $ ( 1.37 ) $ ( 2.22 ) Diluted $ ( 1.37 ) $ ( 2.22 ) Weighted average shares outstanding: Basic 2,861,229 2,751,662 Diluted 2,861,229 2,751,662 See Notes to the Unaudited Condensed Consolidated Financial Statements. 4 DIGITAL ALLY, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (Unaudited) Shares Amount Capital subsidiary deficit Total Common Stock Additional Paid In Noncontrolling interest in consolidated Accumulated Shares Amount Capital subsidiary deficit Total Balance, December 31, 2022 2,720,170 $ 2,721 $ 127,869,342 448,694 $ ( 91,980,234 ) $ 36,340,523 Stock-based compensation — — 114,848 — — 114,848 Restricted common stock grant 35,000 35 ( 35 ) — — — Issuance due to rounding from reverse stock split 54 — — — — Net Income (loss) — — — 126,239 ( 6,105,818 ) ( 5,979,579 ) Balance, March 31, 2023 2,755,224 2,756 127,984,155 574,933 ( 98,086,052 ) 30,475,792 Balance, December 31, 2023 2,800,754 $ 2,801 $ 128,441,083 $ 673,292 $ ( 117,668,781 ) $ 11,448,395 Balance 2,800,754 $ 2,801 $ 128,441,083 $ 673,292 $ ( 117,668,781 ) $ 11,448,395 Stock-based compensation — — 40,695 — — 40,695 Restricted common stock grant 80,197 80 ( 80 ) — — — Restricted common stock forfeitures ( 1,125 ) ( 1 ) 1 — — — Net Income (loss) — — — ( 12,248 ) ( 3,931,020 ) ( 3,943,268 ) Balance, March 31, 2024 2,879,826 $ 2,880 $ 128,481,699 $ 661,044 $ ( 121,599,801 ) $ 7,545,822 Balance 2,879,826 $ 2,880 $ 128,481,699 $ 661,044 $ ( 121,599,801 ) $ 7,545,822 See Notes to the Unaudited Condensed Consolidated Financial Statements. 5 DIGITAL ALLY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (Unaudited) Three months ended March 31, 2024 Three months ended March 31, 2023 Cash Flows from Operating Activities: Net loss $ ( 3,943,268 ) $ ( 5,979,579 ) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation and amortization 550,991 543,110 Loss on sale of property, plant and equipment 41,661 — Gain on sale of intangible ( 5,582 ) — Stock-based compensation 40,695 114,848 Amortization of debt issuance costs 360,330 — Gain on extinguishment of liabilities ( 682,345 ) — Change in fair value of warrant derivative liabilities 348,891 — Provision for inventory obsolescence ( 56,072 ) 80,434 Provision for doubtful accounts receivable 34,059 29,025 Provision for doubtful lease receivable 20,000 5,000 Change in fair value of contingent consideration promissory note — ( 158,021 ) Change in operating assets and liabilities (net of assets and liabilities acquired): (Increase) decrease in: Accounts receivable – trade 142,606 ( 211,201 ) Other receivable ( 126,106 ) 1,479,476 Inventories 793,664 837,893 Prepaid expenses ( 154,645 ) 684,403 Operating lease right of use assets 54,137 110,115 Other assets 263,847 ( 2,445,206 ) Increase (decrease) in: Accounts payable 1,569,346 3,009,912 Accrued expenses ( 132,185 ) ( 184,976 ) Operating lease obligations ( 57,801 ) ( 110,115 ) Income taxes payable ( 61 ) — Lease deposit — 10,445 Contract liabilities 19,293 967,561 Net cash used in operating activities ( 918,545 ) ( 1,216,876 ) Cash Flows from Investing Activities: Purchases of furniture, fixtures and equipment ( 18,467 ) ( 23,657 ) Additions to intangible assets ( 61,882 ) ( 46,988 ) Cash paid for acquisition of Country Stampede ( 400,000 ) — Proceeds from sale of intangible assets 90,535 — Proceeds from sale of property, plant and equipment 550,644 — Net cash provided by (used in) investing activities 160,830 ( 70,645 ) Cash Flows from Financing Activities: Proceeds – Merchant Advances – Video Solutions Segment 700,000 — Proceeds – Merchant Advances – Entertainment Segment 915,000 — Proceeds – Commercial Extension of Credit – Entertainment Segment 275,000 1,000,000 Payments on Commercial Extension of Credit – Entertainment Segment ( 87,928 ) ( 264,166 ) Payments on Merchant Advances – Video Solutions Segment ( 702,000 ) — Principal payment on EIDL loan ( 810 ) — Principal payment on contingent consideration promissory notes ( 94,235 ) ( 120,789 ) Net cash provided by financing activities 1,005,027 615,045 Net increase (decrease) in cash, cash equivalents, and restricted cash 247,312 ( 672,476 ) Cash, cash equivalents, and restricted cash, beginning of period 778,149 3,532,199 Cash, cash equivalents, and restricted cash, end of period $ 1,025,461 $ 2,859,723 Supplemental disclosures of cash flow information: Cash payments for interest $ 158,517 $ 6,348 Supplemental disclosures of non-cash investing and financing activities: Restricted common stock grant $ 80 $ 35 Restricted common stock forfeitures $ 1 $ — Adjustments of accounts payable with the sale proceeds of property, plant and equipment $ 549,356 $ — Assets acquired in business acquisitions $ 605,000 $ — Goodwill acquired in business acquisitions $ 225,959 $ — Liabilities assumed in business acquisitions $ 288,000 $ — Amounts payable for Country Stampede acquisition $ 142,959 $ — Commercial Extension of Credit repaid through accrued revenue – Entertainment Segment $ 205,357 $ 26,977 ROU and lease liability recorded on extension (termination) of lease $ ( 73,894 ) $ 517,039 See Notes to the Unaudited Condensed Consolidated Financial Statements. 6 DIGITAL ALLY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Digital Ally, Inc. was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November 30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital Ally, Inc. (such merged entity, the “Predecessor Registrant”). On August 23, 2022 (the “ Effective Time ”), the Predecessor Registrant merged with and into its wholly owned subsidiary, DGLY Subsidiary Inc., a Nevada corporation (the “ Registrant ”), pursuant to an agreement and plan of merger, dated as of August 23, 2022 (the “ Merger Agreement ”), between the Predecessor Registrant and the Registrant, with the Registrant as the surviving corporation in the merger (such transaction, the “ Merger ”). At the Effective Time, Articles of Merger were filed with the Secretary of State of the State of Nevada, pursuant to which the Registrant was renamed “Digital Ally, Inc.” and, by operation of law, succeeded to the assets, continued the business and assumed the rights and obligations of the Predecessor Registrant immediately prior to the Merger. Under the Nevada Revised Statutes, shareholder approval was not required in connection with the Merger Agreement or the transactions contemplated thereby. At the Effective Time, pursuant to the Merger Agreement, (i) each outstanding share of Predecessor Registrant’s common stock, par value $ 0.001 per share (the “ Predecessor Common Stock ”) automatically converted into one share of common stock, par value $ 0.001 per share, of the Registrant (“ Registrant Common Stock ”), (ii) each outstanding option, right or warrant to acquire shares of Predecessor Common Stock converted into an option, right or warrant, as applicable, to acquire an equal number of shares of Registrant Common Stock under the same terms and conditions as the original options, rights or warrants, and (iii) the directors and executive officers of the Predecessor Registrant were appointed as directors and executive officers, as applicable, of the Registrant, each to serve in the same capacity and for the same term as such person served with the Predecessor Registrant immediately before the Merger. The business of the Registrant, Digital Ally, Inc. (with its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare, LLC (“Digital Ally Healthcare”), TicketSmarter, Inc. (“TicketSmarter”), Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc. (“Kustom 440”), Kustom Entertainment, Inc., and its majority-owned subsidiary Nobility Healthcare, LLC, collectively, “Digital Ally,” “Digital,” and the “Company”), is divided into three reportable operating segments: 1) the Video Solutions Segment, 2) the Revenue Cycle Management Segment and 3) the Ticketing Segment. The Video Solutions Segment is our legacy business that produces digital video imaging, storage products, disinfectant and related safety products for use in law enforcement, security and commercial applications. This segment includes both service and product revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides working capital and back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Entertainment Segment acts as an intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms. The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Such required segment information is included in Note 18. Reverse Stock Split On February 6, 2023, the Company filed a Certificate of Amendment to its Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effect a 1-for-20 reverse stock split (the “Reverse Stock Split”) of the shares of its common stock. The Reverse Stock Split was effective as of time of filing. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole number. In connection with the Reverse Stock Split, the board of directors of the Company approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of the Company’s common stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout the Company’s consolidated financial statements and other financial information in this Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of the Company’s common stock was not affected by the Reverse Stock Split. 7 Business Combination In June 2023, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp., a Delaware corporation (Nasdaq: CLOE) (“Clover Leaf”), CL Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary of 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, Inc., a Nevada corporation, a wholly owned subsidiary of the Company, with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies (“Kustom”). 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 (the “Closing”), 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”. Basis of Presentation : The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. The balance sheet at December 31, 2023 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the audited financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2023. Liquidity and Going Concern During the second quarter of 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provided U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. Under this standard, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within 12 months after the Company’s financial statements were issued (May 15, 2023). Management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s obligations due before May 15, 2024. The Company has experienced net losses and cash outflows from operating activities since inception. For the three months ended March 31, 2024, the Company had a net loss attributable to common stockholders of $ 3,931,020 , net cash used in operating activities of $ 918,545 , $ 160,830 provided by investing activities and $ 1,005,027 provided by financing activities. The Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing when needed, and obtain it on terms acceptable or favorable to the Company. The Company has implemented an enhanced quality control program to detect and correct product issues before they result in significant rework expenditures affecting its gross margins and has seen progress in that regard. The Company has also implemented a marketing and advertisement reduction plan for its entertainment segment, which will focus on reducing and alleviating current obligations from its media marketing agreements and place a hold on entering into any new agreements. The Company believes that its quality control, cost-cutting initiatives, and new product introduction will eventually restore positive operating cash flows and profitability, although it can offer no assurances in this regard. Management has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year from the date the unaudited condensed consolidated financial statements were issued. Basis of Consolidation : The accompanying financial statements include the consolidated accounts of Digital Ally, its wholly-owned subsidiaries, Digital Ally International, Inc., Shield Products, LLC, Digital Ally Healthcare, LLC, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu Jets, Inc., Kustom 440, Inc., and its majority-owned subsidiary Nobility Healthcare, LLC. All intercompany balances and transactions have been eliminated during consolidation. 8 The Company formed Digital Ally International, Inc. during August 2009 to facilitate the export sales of its products. The Company formed Shield Products, LLC in May 2020 to facilitate the sales of its Shield™ line of disinfectant/cleanser products and ThermoVu™ line of temperature monitoring equipment. The Company formed Nobility Healthcare, LLC (“Nobility Healthcare”) in June 2021 to facilitate the operations of its revenue cycle management solutions and back-office services for healthcare organizations. The Company formed TicketSmarter, Inc. upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its global ticketing operations. The Company formed Worldwide Reinsurance Ltd., which is a captive insurance company domiciled in Bermuda. It will provide primarily liability insurance coverage to the Company for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Company formed Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for consumers, and Kustom Entertainment, Inc. in 2023 to serve as the participant in the Business Combination. Fair Value of Financial Instruments : The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated notes payable approximate fair value because of the short-term nature of these items. Revenue Recognition : The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers , and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company has two different revenue streams, product and service, represented through its three segments. The Company reports all revenues on a gross basis, other than service revenues from the Company’s entertainment and revenue cycle management segments, Revenues generated by all segments are reported net of sales taxes. Video Solutions The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the customer. In situation where sales are to a distributor, the Company had concluded its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of part of its consideration for the contract, the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which it expects to be entitled. As the Company’s standard payment terms are less than one year, it has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price as specified on the purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e. when the Company’s performance obligations is satisfied), which typically occurs at shipment. Further in determining whether control has been transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer. Customers do not have a right to return the product other than for warranty reasons for which they would only receive repair services or replacement products. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for product sales when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year. 9 Service and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue and software revenue. Revenue is recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services. Revenue for extended warranty, cloud service or other software-based products is over the term of the contract warranty or service period. A time-elapsed method is used to measure progress because the Company transfers control evenly over the contractual period. Accordingly, the fixed consideration related to these revenues is generally recognized on a straight-line basis over the contract term, as long as the other revenue recognition criteria have been met. The Company’s multiple performance obligations may include future in-car or body-worn camera devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price. Revenue Cycle Management The Company reports revenue cycle management revenues on a net basis, as its primary source of revenue is its end-to-end service fees which is generally determined as a percentage of the invoice amounts collected. These service fees are reported as revenue monthly upon completion of the Company’s performance obligation to provide the agreed upon service. Entertainment The Company reports ticketing revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer. The Company sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of sale, therefore controlling the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket. The Company also acts as an intermediary between buyers and sellers through online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As the Company does not control the ticket prior to the transfer, the Company acts as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment is due at the time of sale. Other Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. During the three months ended March 31, 2024, the Company recognized revenue of $ 241,371 related to its contract liabilities. Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract and are reported separately as current liabilities and non-current liabilities in the Consolidated Balance Sheets. Such amounts consist of extended warranty contracts, prepaid cloud services and prepaid installation services and are generally recognized as the respective performance obligations are satisfied. Total contract liabilities consist of the following: SCHEDULE OF CONTRACT LIABILITIES March 31, 2024 December 31, 2023 Additions/Reclass Recognized Revenue March 31, 2024 Contract liabilities, current $ 2,937,168 $ 535,598 $ 173,052 $ 3,299,714 Contract liabilities, non-current 7,340,459 13,066 68,319 7,285,206 $ 10,277,627 $ 548,664 $ 241,371 $ 10,584,920 March 31, 2023 December 31, 2022 Additions/Reclass Recognized Revenue March 31, 2023 Contract liabilities, current $ 2,154,874 $ 562,809 $ 92,813 $ 2,624,870 Contract liabilities, non-current 5,818,082 868,211 370,646 6,315,647 $ 7,972,956 $ 1,431,020 $ 463,459 $ 8,940,517 10 Sales returns and allowances aggregated $ 93,170 and $ 117,713 as of March 31, 2024 and December 31, 2023, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting these return rates. Use of Estimates : The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair value of warrants, options, the recognition of revenue, allowance for doubtful accounts, the estimate of fair value of the lease liabilities and related right of use asset, inventory valuation reserve, fair value of assets and liabilities acquired in a business combination, incremental borrowing rate on leases, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary. Cash and cash equivalents : Cash and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less. The following table shows the Company’s cash and cash equivalents by significant investment category as of March 31, 2024 and December 31, 2023: SCHEDULE OF SHORT TERM INVESTMENTS March 31, 2024 Adjusted Cost Realized Gains Realized Losses Fair Value Demand deposits $ 769,982 $ — $ — $ 769,982 Short-term investments with original maturities of 90 days or less (Level 1) : Money market funds 157,879 — — 157,879 $ 927,861 $ — $ — $ 927,861 December 31, 2023 Adjusted Cost Realized Gains Realized Losses Fair Value Demand deposits $ 545,207 $ — $ — $ 545,207 Short-term investments with original maturities of 90 days or less (Level 1): Money market funds 135,342 — — 135,342 $ 680,549 $ — $ — $ 680,549 The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $ 250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At March 31, 2024 and December 31, 2023, the uninsured balance amounted to $ 296,799 and $ 29,700 , respectively. 11 Restricted Cash : Restricted cash of $ 97,600 and $ 97,600 was included in other assets as of March 31, 2024 and December 31, 2023, respectively. Restricted cash consists of bank deposits that collateralize our debt obligations. The following table provides a reconciliation of cash and cash equivalents in the consolidated balance sheets to cash, cash equivalents and restricted cash in the consolidated statements of cash flows: SCHEDULE OF RECONCILIATION OF CASH AND CASH EQUIVALENTS March 31, 2024 December 31, 2023 Cash and cash equivalents $ 927,861 $ 680,549 Long-term restricted cash included in other assets 97,600 97,600 Total cash, cash equivalents and restricted cash in the statements of cash flows $ 1,025,461 $ 778,149 Accounts Receivable : Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade receivables. Goodwill and Other Intangibles : Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations , using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles - Goodwill and Other , the Company assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired. Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. The Company has adopted ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and recognized an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value. 12 The Company determines the fair value of its reporting units using the market approach. Under the market approach, we estimate the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. Long-lived and Other Intangible Assets - The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets . An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the operating segment level. Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company last assessed potential impairments of its long-lived assets as of December 31, 2023 and concluded that there was no impairment. Subsequent to completing our 2023 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Intangible assets include deferred patent costs, license agreements, trademarks and trade names. Legal expenses incurred in preparation of patent application have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will be charged to expense at that time. The Company has entered into several sublicense agreements under which it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements generally require upfront payments to obtain the exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and amortizes such costs over their estimated useful life on a straight-line method. Segment Reporting The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s three operating segments are Video Solutions, Revenue Cycle Management, and Entertainment, each of which has specific personnel responsible for that business and reports to the CODM. Corporate expenses capture the Company’s corporate administrative activities and are also to be reported in the segment information. Contingent Consideration In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value through the consolidated statement of operations. 13 Non-Controlling Interests Non-controlling interests in the Company’s Consolidated Financial Statements represent the interest in subsidiaries held by our venture partner. The venture partner holds a noncontrolling interest in the Company’s consolidated subsidiary Nobility Healthcare, LLC. Since the Company consolidates the financial statements of all wholly-owned and majority owned subsidiaries, the noncontrolling owners’ share of each subsidiary’s results of operations are deducted and reported as net income or loss attributable to noncontrolling interest in the Consolidated Statements of Operations. New Accounting Standards In November 2023, the FASB issued Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures. In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures. NOTE 2. INVENTORIES Inventories consisted of the following at March 31, 2024 and December 31, 2023: SCHEDULE OF INVENTORIES March 31, 2024 December 31, 2023 Raw material and component parts– video solutions segment $ 2,938,434 $ 3,044,653 Work-in-process– video solutions segment 26,091 20,396 Finished goods – video solutions segment 4,180,699 4,623,489 Finished goods – entertainment segment 489,854 699,204 Subtotal 7,635,078 8,387,742 Reserve for excess and obsolete inventory– video solutions segment ( 4,315,132 ) ( 4,355,666 ) Reserve for excess and obsolete inventory – entertainment segment ( 171,257 ) ( 186,795 ) Total inventories $ 3,148,689 $ 3,845,281 14 Finished goods inventory includes units held by potential customers and sales agents for test and evaluation purposes. The cost of such units totaled $ 51,099 and $ 42,797 as of March 31, 2024 and December 31, 2023, respectively. NOTE 3. DEBT OBLIGATIONS Debt obligations is comprised of the following: SUMMARY OF DEBT OBLIGATIONS March 31, 2024 December 31, 2023 Economic injury disaster loan (EIDL) $ 146,971 $ 147,781 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 64,826 129,651 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 29,409 58,819 Revolving Loan Agreement 4,880,000 4,880,000 Commercial Extension of Credit- Entertainment Segment 69,643 87,928 Merchant Advances – Video Solutions Segment 1,348,000 1,350,000 Merchant Advances – Entertainment Segment 1,425,000 — Unamortized debt issuance costs ( 684,989 ) ( 540,429 ) Debt obligations 7,278,860 6,113,750 Less: current maturities of debt obligations 2,403,029 1,260,513 Debt obligations, long-term $ 4,875,831 $ 4,853,237 Debt obligations mature as follows as of March 31, 2024: SCHEDULE OF MATURITY OF DEBT OBLIGATIONS March 31, 2024 2024 $ 2,402,188 2025 4,735,589 2026 3,542 2027 3,677 2028 and thereafter 133,864 Total $ 7,278,860 2020 Small Business Administration Notes . On May 12, 2020, the Company received $ 150,000 in loan funding from the SBA under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the recently enacted CARES Act. The EIDL is evidenced by a secured promissory note, dated May 8, 2020, in the original principal amount of $ 150,000 with the SBA, the lender. Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75 % per annum. The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal and interest payments began in November 2022, after being deferred for thirty months after the date of disbursement and total $ 731 per month thereafter. Such note may be prepaid in part or in full, at any time, without penalty. The Company granted the SBA a continuing interest in and to any and all collateral, including but not limited to tangible and intangible personal property. 15 The Company made principal payments of $ 810 during the three months ended March 31, 2024 and recorded interest expense of $ 1,383 . Contingent Consideration Promissory Notes On June 30, 2021, Nobility Healthcare, a subsidiary of the Company, issued a contingent consideration promissory note (the “June Contingent Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “June Seller”) of $ 350,000 . The June Contingent Note has a three-year term and bears interest at a rate of 3.00 % per annum. Quarterly principal and interest payments are deferred for six months and is due in equal quarterly installments on the seventh business day of each quarter. The principal amount of the June Contingent Note is subject to an earn-out adjustment, being the difference between $ 975,000 (the “June Projected Revenue”) and the cash basis revenue (the “June Measurement Period Revenue”) collected by the June Seller in its normal course of business from the clients existing on June 30, 2021, during the period from October 1, 2021 through September 30, 2022 (the “June Measurement Period”) measured on a quarterly basis and annualized as of the relevant period. If the June Measurement Period Revenue is less than the June Projected Revenue, such amount will be subtracted from the principal balance of this June Contingent Note on a dollar-for-dollar basis. If the June Measurement Period Revenue is more than the June Projected Revenue, such amount will be added to the principal balance of this June Contingent Note on a dollar-for-dollar basis. In no event will the principal balance of this June Contingent Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be a reduction to zero. There are no limits to the increases to the principal balance of the June Contingent Note as a result of the earn-out adjustments. The June Contingent Note is considered to be additional purchase price; therefore, the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition with subsequent changes in fair value recorded as a gain or loss in the Consolidated Statements of Operations. Management recorded the contingent consideration promissory note at its estimated fair value of $ 350,000 at the acquisition date. Total principal payments, since inception, on this contingent consideration promissory note totaled $ 261,543 . The estimated fair value of the June Contingent Note at March 31, 2024 is $ 29,409 , representing a reduction in its estimated fair value of $ 29,409 as compared to its estimated fair value as of December 31, 2023. This reduction only relates to the principal payments made for the three months ended March 31, 2024. Therefore, the Company recorded no gain or loss in the Consolidated Statements of Operations for the three months ended March 31, 2024. On August 31, 2021, Nobility Healthcare, issued another contingent consideration promissory note (the “August Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “August Sellers”) of $ 650,000 . The August Contingent Payment Note has a three-year term and bears interest at a rate of 3.00 % per annum. Quarterly principal and interest payments are deferred for six months and is due in equal quarterly installments on the seventh business day of each quarter. The principal amount of the August Contingent Payment Note is subject to an earn-out adjustment, being the difference between the $ 3,000,000 (the “August Projected Revenue”) and the cash basis revenue (the “August Measurement Period Revenue”) collected by the August Sellers in its normal course of business from the clients existing on September 1, 2021, during the period from December 1, 2021 through November 30, 2022 (the “August Measurement Period”) measured on a quarterly basis and annualized as of the relevant period. If the August Measurement Period Revenue is less than the August Projected Revenue, such amount will be subtracted from the principal balance of this August Contingent Payment Note on a dollar-for-dollar basis. If the August Measurement Period Revenue is more than the August Projected Revenue, such amount will be added to the principal balance of this August Contingent Payment Note on a dollar-for-dollar basis. In no event will the principal balance of this August Contingent Payment Note become a negative number. The maximum downward earn-out adjustment to the principal balance will be to zero. There are no limits to the increases to the principal balance of the August Contingent Payment Note as a result of the earn-out adjustments. The August Contingent Payment Note is considered to be additional purchase price, therefore the estimated fair value of the contingent liability is recorded as a liability at the acquisition date and the fair value is considered part of the consideration paid for the acquisition. Management has recorded the contingent consideration promissory note at its estimated fair value of $ 650,000 at the acquisition date. Principal payments, since its inception, on this contingent consideration promissory note totaled $ 617,082 . The estimated fair value of the August Contingent Note at March 31, 2024 is $ 64,826 , representing a decrease in its estimated fair value of $ 64,826 as compared to is estimated fair value as of December 31, 2023. This reduction only relates to the principal payments made for the three months ended March 31, 2024. Therefore, the Company recorded no gain or loss in the Consolidated Statements of Operations for the three months ended March 31, 2024. 16 2023 Commercial Extension of Credit On February 23, 2023, the Company’s Entertainment segment entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance with the Private Label Agreement previously entered into with the Lender. The Lender agreed to extend, subject to the conditions hereof, and Borrower agreed to take, a Loan for Principal Sum of $ 1,000,000 . Lender shall retain 25 % of each remittance owed to Borrower under the terms of the Private Label Agreement. Such remittances shall include regular weekly remittances and any additional incentive payments to which the Borrower may be entitled. The 25% withholding of the Borrower’s applicable remittance shall be deemed a “Payment” under the terms of this Note, and Payments shall continue until the earlier of (i) repayment of the Principal Sum, accrued Interest, and a fee of $35,000 or (ii) expiration of the Private Label Agreement on December 31, 2023. During the three months ended March 31, 2024, the Entertainment segment Company’s Entertainment segment repaid the outstanding principal of $ 87,928 and did not renew this agreement. 2024 Commercial Extension of Credit On January 22, 2024, the Company’s Entertainment segment entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance with the Ticket Solution Agreement. The Lender, Ticket Evolution, Inc., agreed to extend, subject to the conditions hereof, and Borrower agreed to take, a Loan for Principal Sum of $ 75,000 with monthly advances of $ 100,000 . The advances made are recoupable from client service fees with no more than $ 25,000 being recouped in any one week. The total advances received for the three months ended March 31, 2024 were $ 275,000 and payments made totaled $ 205,357 . The outstanding balance as of March 31, 2024 was $ 69,643 . 17 Convertible Note On April 5, 2023, the Company entered into and consummated the initial closing (the “First Closing”) of the transactions contemplated by a Securities Purchase Agreement, dated as of April 5, 2023 (the “Purchase Agreement”), between the Company and certain investors (the “Purchasers”). At the First Closing, the Company issued and sold to the Purchasers Senior Secured Convertible Notes in the aggregate original principal amount of $ 3,000,000 (the “Notes”) and warrants (the “Warrants”). The Purchase Agreement provided for a ten percent ( 10 % ) original interest discount resulting in gross proceeds to the Company of $ 2,700,000 . No interest accrues under the Notes. The Warrants are exercisable for an aggregate 1,125,000 shares comprised of 375,000 warrants at an exercise price of $ 5.50 per share of the Company’s common stock, par value $ 0.001 (the “Common Stock”), 375,000 warrants at an exercise price of $ 6.50 per share of Common Stock, and 375,000 warrants at an exercise price of $ 7.50 per share of Common Stock. Subject to certain conditions, within 18 months from the effectiveness date and while the Notes remain outstanding, the Purchasers have the right to require the Company to consummate a second closing of up to an additional $ 3,000,000 of Notes (the “Second Notes”) and Warrants on the same terms and conditions as the First Closing, except that the Second Notes may be subordinate to a mortgage on the Company’s headquarters building (the “Bank Mortgage”). The Notes are convertible into shares of Common Stock at the election of the Purchasers at any time at a fixed conversion price of $ 5.00 (the “Conversion Price”) per share of Common Stock. The Conversion Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of Common Stock, or securities convertible, exercisable or exchangeable for, Common Stock at a price below the then-applicable Conversion Price (subject to certain exceptions). Subject to certain conditions, including certain equity conditions, the Company may redeem some or all of the then outstanding principal amount of the Note for cash in an amount equal to 110 % of the outstanding principal amount of the Notes (the “Optional Redemption Amount”). In addition, the Purchasers may, at their option, demand repayment at the Optional Redemption Amount upon five (5) business days’ written notice following (i) the closing by the Company of the Bank Mortgage, or (ii) a sale by the Company of Common Stock or Common Stock equivalents. The Notes rank senior to all outstanding and future indebtedness of the Company and its subsidiaries, and are secured by substantially all of the Company’s assets, as evidenced by (i) a security agreement entered into at the Closing, (ii) a trademark security agreement entered into at the Closing, (iii) a patent security agreement entered into at the Closing, (iv) a guaranty executed by all direct and indirect subsidiaries of the Company pursuant to which each of them has agreed to guaranty the obligations of the Company under the Notes, and (v) a mortgage on the Company’s headquarters building in favor of the Purchasers. Also at the Closing, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers. Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to prepare and file with the SEC within the 10th business day following the First Closing (the “Filing Date”) a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants, and to use its best efforts to cause such Registration Statement to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”), as promptly as possible, but in any event no later than 45 days following the Filing Date (the “Effectiveness Date”). If the Registration Statement is not filed by the Filing Date or is not declared effective by the Effectiveness Date, or under certain other circumstances described in the Registration Rights Agreement, then the Company shall be obligated to pay, as partial liquidated damages, to each Purchaser an amount in cash equal to 2 % of the original principal amount of the Notes each month until the applicable event giving rise to such payments is cured. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay interest thereon at a rate of 10 % per annum. 18 The Company recognized the full warrant derivative value, with the remaining amount being allocated to the debt obligation. As the warrant derivative value exceeded the net proceeds from the issuance, the excess amount is recognized as a loss on the date of the issue date. Thus, the Company recorded a loss of $ 576,380 as an interest expense on the date of issuance relating to the Notes. The following is the assumptions used in calculating the estimated grant-date fair value of the detachable warrants to purchase common stock granted in connection with the Notes: SCHEDULE OF WARRANT TO PURCHASE COMMON STOCK GRANTED Terms at April 5, 2023 (issuance date) Volatility - range 106.0 % Risk-free rate 3.36 % Dividend 0 % Remaining contractual term 5.0 years Exercise price $ 5.50 – 7.50 Common stock issuable under the warrants 1,125,000 On June 2, 2023, the Purchasers elected to convert $ 125,000 principal, at the fixed price of $ 5.00 per share of common stock, 25,000 shares valued at $ 119,750 . The loss on conversion of convertible note into common shares, of $ 93,386 , was recorded during the period. On October 26, 2023, the Company entered into a Revolving Loan Agreement of which a portion of the net proceeds were used to repay the principal amount of the Convertible debt. The warrants associated with the convertible debt remain outstanding. Revolving Loan Agreement On October 26, 2023, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) by and between the Company, Digital Ally Healthcare, Inc., a Nevada corporation and wholly-owned subsidiary of the Company (“Digital Ally Healthcare” and, together with the Company, the “Borrower”), and Kompass Kapital Funding, LLC, a Kansas limited liability company (“Kompass”). In connection with the Loan Agreement, on October 26, 2023, the Company entered into a Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing (the “Mortgage”) by and between the Company, as grantor, and Kompass, as grantee, and issued a Revolving Note (the “Revolving Note”) to Kompass. The gross proceeds to the Company were $ 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 revolving loans (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 or an amount equal to eighty percent of the value of the mortgaged property, which consists of the real property owned by the Company having an address of 14001 Marshall Drive, Lenexa, KS 66215 (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 (the “Capital 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. 19 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. In addition, the Company recorded debt issuance costs of $ 188,255 . During the three months ended March 31, 2024, the Company amortized $ 23,435 of debt discount under interest expense. Merchant Cash Advances – Video Solutions Segment In November 2023, the Company obtained a short-term merchant advance, which totaled $ 1,050,000 , from a single lender to fund operations. These advances included origination fees totaling $ 50,000 for net proceeds of $ 1,000,000 . The advance is, for the most part, secured by expected future sales transactions of the Company with expected payments on a weekly basis. The Company will repay an aggregate of $ 1,512,000 to the lender. The loan bears interest at 2.9 % per week. During the three months ended March 31, 2024, the Company made repayments totaling $ 702,000 and received additional proceeds of $ 700,000 . As of March 31, 2024 the outstanding balance was $ 1,348,000 which is expected to be repaid in 2024. During the three months ended March 31, 2024 the Company amortized $ 278,256 of debt discount under interest expense. Merchant Cash Advances – Entertainment Segment In March 2024, the Company obtained a short-term merchant advance, which totaled $ 1,000,000 , from a single lender to fund operations. These advances included origination and issuance fees totaling $ 85,000 for net proceeds of $ 915,000 . The advance is, for the most part, is secured by expected future sales transactions of the Company with expected payments on a weekly basis. The Company will repay an aggregate of $ 1,425,000 to the lender. The loan bears interest at 5.05 % per annum. During the three months ended March 31, 2024, the Company made no repayments. As of March 31, 2024 the outstanding balance was $ 1,425,000 which is expected to be repaid in 2024. During the three months ended March 31, 2024 the Company amortized $ 63,750 of debt discount and issuance costs under interest expense. NOTE 4. FAIR VALUE MEASUREMENT In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business. ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: ● Level 1 — Quoted prices in active markets for identical assets and liabilities ● Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) ● Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value) 20 The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023: SCHEDULE OF FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS March 31, 2024 Level 1 Level 2 Level 3 Total Liabilities: Warrant derivative liabilities $ — $ — $ 1,718,629 $ 1,718,629 Contingent consideration promissory notes and contingent consideration earn-out agreement — — 94,235 94,235 $ — $ — $ 1,812,864 $ 1,812,864 December 31, 2023 Level 1 Level 2 Level 3 Total Liabilities: Warrant derivative liabilities $ — $ — $ 1,369,738 $ 1,369,738 Contingent consideration promissory notes and contingent consideration earn-out agreement — — 188,470 188,470 $ — $ — $ 1,558,208 $ 1,558,208 The following table represents the change in Level 3 tier value measurements for the three months ended March 31, 2024: SCHEDULE OF FAIR VALUE MEASUREMENTS CHANGE IN LEVEL 3 INPUTS Contingent Consideration Promissory Notes and Earn-Out Agreement Warrant Derivative Liabilities Balance, December 31, 2023 $ 188,470 $ 1,369,738 Issuance of warrant derivative liabilities — — Change in fair value of warrant derivative liabilities — 348,891 Principal payments on contingent consideration promissory notes – Revenue Cycle Management Acquisitions ( 94,235 ) — Change in fair value of contingent consideration promissory notes - Revenue Cycle Management Acquisitions — — Balance, March 31, 2024 $ 94,235 $ 1,718,629 21 NOTE 5. ACCRUED EXPENSES Accrued expenses consisted of the following at March 31, 2024 and December 31, 2023: SCHEDULE OF ACCRUED EXPENSES March 31, 2024 December 31, 2023 Accrued warranty expense $ 20,529 $ 17,699 Accrued litigation costs 2,040,292 2,040,292 Accrued sales commissions 40,000 87,421 Accrued payroll and related fringes 161,763 367,826 Accrued sales returns and allowances 93,170 117,713 Accrued taxes 66,114 150,981 Accrued interest - related party 187,346 95,031 Customer deposits 45,380 219,462 Other 482,550 172,905 Total accrued expenses $ 3,137,144 $ 3,269,330 Accrued warranty expense was comprised of the following for the three months ended March 31, 2024: SCHEDULE OF ACCRUED WARRANTY EXPENSE Beginning balance $ 17,699 Provision for warranty expense 14,201 Charges applied to warranty reserve ( 11,371 ) Ending balance $ 20,529 NOTE 6. INCOME TAXES The effective tax rate for the three months ended March 31, 2024 and 2023 varied from the expected statutory rate due to the Company continuing to provide a 100 % valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of March 31, 2024, primarily because of the Company’s history of operating losses. The Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at March 31, 2024. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it is determined to continue to provide a 100 % valuation allowance on its net deferred tax assets. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. The Company has available to it approximately $ 140.9 million (based on its December 31, 2023 tax return) in net operating loss carryforwards to offset future taxable income as of March 31, 2024. NOTE 7. PREPAID EXPENSES Prepaid expenses were the following at March 31, 2024 and December 31, 2023: SCHEDULE OF PREPAID EXPENSE March 31, 2024 December 31, 2023 Prepaid inventory $ 5,570,087 $ 5,318,939 Prepaid advertising 485,429 612,292 Other 519,497 435,137 Total prepaid expenses $ 6,575,013 $ 6,366,368 22 NOTE 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at March 31, 2024 and December 31, 2023: SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT Estimated Useful Life March 31, 2024 December 31, 2023 Building 25 years $ 4,537,037 $ 4,537,037 Land Infinite 739,734 739,734 Office furniture, fixtures, equipment, and aircraft 3 - 20 years 826,929 2,065,092 Warehouse and production equipment 3 - 7 years 239,055 29,055 Demonstration and tradeshow equipment 3 - 7 years 87,987 87,987 Building improvements 5 - 7 years 1,328,654 1,328,654 Total cost 7,759,396 8,787,559 Less: accumulated depreciation and amortization ( 1,551,601 ) ( 1,503,857 ) Net property, plant and equipment $ 6,207,795 $ 7,283,702 Depreciation expense for the three months ended March 31, 2024 and 2023 was $ 162,712 and $ 171,631 , respectively, and is included in general and administrative expenses. During the three months ended March 31, 2024 the Company engaged a broker and sold its aircraft for $ 1,100,000 less closing costs of $ 1,500 . The carrying amount of the aircraft on the date of sale was $ 1,141,661 . As a result of the sale the Company recorded a loss of $ 41,161 in the Consolidated Statement of Operations. NOTE 9. OPERATING LEASE The Company entered into an operating lease with a third party in October 2023 for copiers used for office and warehouse purposes. The terms of the lease include 48 monthly payments of $ 1,786 with a maturity date of October 2027. The Company has the option to purchase such equipment at maturity for its estimated fair market value at that point in time. The remaining lease term for the Company’s copier operating lease as of March 31, 2024 was forty-three months. On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which served as its new principal executive office and primary business location. The original lease agreement was amended on August 28, 2020 to correct the footage under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments ranging from $ 12,398 to $ 14,741 thereafter, with a termination date of December 2026. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and warehouse operating lease as of March 31, 2024 was thirty-three months . On June 30, 2021, the Company completed the acquisition of its first medical billing company, through Nobility Healthcare. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $ 2,648 to $ 2,774 thereafter, with a termination date in July 2024. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The remaining lease term for the Company’s office operating lease as of March 31, 2024 was four months. On August 31, 2021, the Company completed the acquisition of its second acquired medical billing company, through Nobility Healthcare. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease was renewed in April 2023 with favorable terms and payments ranging from $ 7,436 to $ 8,877 thereafter, with a termination date in March 2030 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The remaining term for the Company’s office operating lease was seventy-two months as of March 31, 2024. On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $ 7,211 to $ 7,364 thereafter, with a termination date of December 2022 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company currently rents this space on a month-to-month basis with intentions to relocate upon the identification of suitable space. 23 On January 1, 2022, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $ 4,233 to $ 4,626 , with a termination date of June 2025 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on January 1, 2022. The Company terminated this lease in January 2024 and reversed the right of use asset and lease liability by $ 73,894 . Lease expense related to the office space and copier operating leases were recorded on a straight-line basis over their respective lease terms. Total lease expense under the operating leases was approximately $ 108,879 during the three months ended March 31, 2023. The weighted-average remaining lease term related to the Company’s lease liabilities as of March 31, 2023 was 4.5 years. The discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8 % . The following sets forth the operating lease right of use assets and liabilities as of March 31, 2024: SCHEDULE OF OPERATING LEASES RIGHT OF USE ASSETS AND LIABILITIES Assets: Operating lease right of use assets $ 925,128 Liabilities: Operating lease obligations-current portion $ 225,960 Operating lease obligations-less current portion 749,718 Total operating lease obligations $ 975,678 The components of lease expense were as follows for the three months ended March 31, 2024: SCHEDULE OF LEASE EXPENSE Selling, general and administrative expenses $ 108,879 Following are the minimum lease payments for each year and in total: SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS Year ending December 31: 2023 (April 1, to December 31, 2024) $ 225,247 2024 288,720 2025 293,300 2026 117,492 Thereafter 235,020 Total undiscounted minimum future lease payments 1,159,779 Imputed interest ( 184,101 ) Total operating lease liability $ 975,678 24 NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets consisted of the following at March 31, 2024 and December 31, 2023: Patents and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of the final patent or trademark is denied, then the amount deferred will be immediately charged to expense. Amortization expense for the three months ended March 31, 2024 and 2023 was $ 388,278 and $ 371,478 , respectively. Estimated amortization for intangible assets with definite lives for the next five years ending December 31 and thereafter is as follows: SCHEDULE OF INTANGIBLE ASSETS March 31, 2024 December 31, 2023 Gross value Accumulated amortization Net carrying value Gross value Accumulated amortization Net carrying value Amortized intangible assets: Licenses (video solutions segment) $ 225,545 $ 92,525 $ 133,020 $ 225,545 $ 89,887 $ 135,658 Patents and trademarks (video solutions segment) 483,521 306,702 176,819 483,521 266,403 217,118 Sponsorship agreement network (entertainment segment) 5,600,000 2,893,333 2,706,667 5,600,000 2,613,333 2,986,667 SEO content (entertainment segment) 600,000 387,500 212,500 600,000 350,000 250,000 Personal seat licenses (entertainment segment) 87,679 7,542 80,137 180,081 14,004 166,077 Software 23,653 — 23,653 - - - Website enhancements (entertainment segment) 25,630 1,878 23,752 13,500 — 13,500 Client agreements (revenue cycle management segments) 999,034 251,744 747,290 999,034 226,768 772,266 8,045,062 3,941,224 4,103,838 8,101,681 3,560,395 4,541,286 Indefinite life intangible assets: Goodwill (entertainment and revenue cycle management segments) 11,593,473 — 11,593,473 11,367,514 — 11,367,514 Trade name (entertainment segment) 900,000 — 900,000 600,000 — 600,000 Patents and trademarks pending (video solutions segment) 27,721 — 27,721 1,622 — 1,622 Total $ 20,566,256 $ 3,941,224 $ 16,625,032 $ 20,070,817 $ 3,560,395 $ 16,510,422 SCHEDULE OF ESTIMATED AMORTIZATION FOR INTANGIBLE ASSETS Year ending December 31: 2024 (April 1, to December 31, 2024) $ 1,117,290 2025 1,413,938 2026 909,400 2027 113,600 2028 and thereafter 549,610 Total $ 4,103,838 25 NOTE 11. OTHER ASSETS Other assets were the following at March 31, 2024 and December 31, 2023: SCHEDULE OF OTHER ASSETS March 31, 2024 December 31, 2023 Lease receivable $ 5,880,809 $ 6,095,050 Restricted Cash 97,600 97,600 Other 354,776 404,382 Total other assets $ 6,333,185 $ 6,597,032 NOTE 12. COMMITMENTS AND CONTINGENCIES Litigation From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time. On May 31, 2022, the Company filed a lawsuit against Culp McAuley, Inc. (“defendant”) in the United States District Court for the District of Kansas. The lawsuit arises from the defendant’s multiple breaches of its obligations to the Company. The Company seeks monetary damages and injunctive relief based on certain conduct by the defendant. On July 18, 2022, the defendant filed its Answer to the Company’s Verified Complaint and included Counterclaims alleging breach of contract and seeking monetary damages. On August 8, 2022, the Company filed its Reply and Affirmative Defenses to the Counterclaims by, among other things, denying the allegations and any and all liability. As of March 31, 2024, we are able to estimate a range of reasonably possible loss related to the Culp McCauley case, our estimate of the aggregate reasonably possible loss (in excess of any accrued amounts) was approximately $ 1.8 million. Our estimate with respect to the aggregate reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties, which may change quickly and significantly from time to time, particularly if and as we engage with applicable governmental agencies or plaintiffs in connection with a proceeding. Also, the matters underlying the reasonably possible loss will change from time to time. As a result, actual results may vary significantly from the current estimate. While the ultimate resolution is unknown, based on the information currently available, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect to our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows. 26 Notice of Failure to Satisfy a Continued Listing Rule On March 14, 2024, the Nasdaq Listing Qualifications staff notified Digital Ally, Inc. (the “Company”), that due to resignation of Mr. Michael J. Caulfield from the Company’s board of directors (the “Board”) effective on January 31, 2024, the Company no longer complies with the audit committee and compensation committee requirements as set forth in Listing Rule 5605 of The Nasdaq Stock Market LLC (“Nasdaq”), including the requirements that there are at least three independent directors on the Company’s audit committee and at least two independent directors on the Company’s compensation committee. The notification has no immediate effect on the Company’s listing on the Nasdaq Capital Market. In accordance with Nasdaq Listing Rules, the Company is provided a cure period until the earlier of the Company’s next annual shareholders’ meeting (or July 29, 2024 if the next shareholders’ meeting will be held before July 29, 2024) or January 31, 2025 (the “Cure Period”). If the Company does not regain compliance by within the Cure Period, Nasdaq will provide written notice that the Company’s common stock, par value $ 0.001 per share, will be subject to delisting from the Nasdaq Capital Market, at which time, the Company may appeal the delisting determination to a Hearings Panel. The management of the Company has resolved to take commercially reasonable steps to fill the vacancy on the Board with a new director who qualifies as independent under the Nasdaq Listing Rules as soon as is practical and anticipates regaining compliance during the Cure Period. However, there can be no assurance that the Company will be able to satisfy Nasdaq Listing Rule 5605 or will otherwise be in compliance with other Nasdaq listing criteria. NOTE 13. STOCK-BASED COMPENSATION The Company recorded pre-tax compensation expense related to the grant of stock options and restricted stock issued of $ 40,695 and $ 114,848 for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the Company had adopted ten separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”), (viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”), (ix) the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”), and (x) the 2022 Stock Option and Restricted Stock Plan (the “2022 Plan”). The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan, 2020 Plan and 2022 Plan are referred to as the “Plans.” These Plans permit the grant of stock options or restricted stock to its employees, non-employee directors and others for up to a total of 333,750 shares of common stock. The 2005 Plan terminated during 2015 with 1,078 shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2005 Plan that remain unexercised and outstanding as of March 31, 2024 total 284 . The 2006 Plan terminated during 2016 with 2,739 shares not awarded or underlying options, which shares are now unavailable for issuance. Stock options granted under the 2006 Plan that remain unexercised and outstanding as of March 31, 2024 total 531 . The 2007 Plan terminated during 2017 with 4,733 shares not awarded or underlying options, which shares are now unavailable for issuance. There are no stock options granted under the 2007 Plan that remain unexercised and outstanding as of March 31, 2024. The 2008 Plan terminated during 2018 with 2,025 shares not awarded or underlying options, which shares are now unavailable for issuance. There are no stock options granted under the 2008 Plan that remain unexercised and outstanding as of March 31, 2024. Stock option grants. The Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have been granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of common stock that are issuable under its Plans with the SEC. A total of 137,042 shares remained available for awards under the various Plans as of March 31, 2024. 27 The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. A summary of all stock option activity under the Plans for the three months ended March 31, 2024 is as follows: SUMMARY OF STOCK OPTIONS OUTSTANDING Options Number of Shares Weighted Average Exercise Price Outstanding at December 31, 2023 53,600 $ 45.55 Granted — — Exercised — — Forfeited — — Outstanding at March 31, 2024 53,600 $ 45.55 Exercisable at March 31, 2024 53,600 $ 45.55 The Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with an intrinsic value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant to cashless exercises during the three months ended March 31, 2024 and 2023. The aggregate intrinsic value of options outstanding was $- 0 - and $- 0 -, at March 31, 2024 and December 31, 2023, respectively. The aggregate intrinsic value of options exercisable was $- 0 - and $- 0 -, at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, the unrecognized portion of stock compensation expense on all existing stock options was $- 0 -. The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable options under the Company’s option plans as of March 31, 2024: SCHEDULE OF SHARES AUTHORIZED UNDER STOCK OPTION PLANS BY EXERCISE PRICE RANGE Outstanding options Exercisable options Exercise price range Number of options Weighted average remaining contractual life Number of options Weighted average remaining contractual life $ 0.01 to $ 49.99 37,000 6.4 years 37,000 6.4 years $ 50.00 to $ 69.99 15,100 4.2 years 15,100 4.2 years $ 70.00 to $ 89.99 1,500 2.1 years 1,500 2.1 years 53,600 5.6 years 53,600 5.6 years Restricted stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to five years corresponding to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may be forfeited upon the termination of service to or employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends. 28 A summary of all restricted stock activity under the Plans for the three months ended March 31, 2024 is as follows: SUMMARY OF RESTRICTED STOCK ACTIVITY Number of Restricted shares Weighted average grant date fair value Nonvested balance, December 31, 2023 53,875 $ 11.27 Granted 80,197 2.12 Vested ( 30,750 ) 10.06 Forfeited ( 1,125 ) 22.20 Nonvested balance, March 31, 2024 102,197 $ 4.34 The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of March 31, 2024, there were $ 245,233 of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next forty-eight months in accordance with their respective vesting scale. The nonvested balance of restricted stock vests as follows: SCHEDULE OF NON-VESTED BALANCE OF RESTRICTED STOCK Years ended Number of shares 2024 (April 1, 2024 through December 31, 2024) 1,500 2025 73,349 2026 18,349 2027 5,000 2028 4,000 NOTE 14. COMMON STOCK PURCHASE WARRANTS 2023 Purchase Warrants 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. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. Furthermore, the Company re-values the fair value of warrant derivative liability as of the date the warrant is exercised with the resulting warrant derivative liability transitioned to change in fair value of warrant derivative liabilities through the consolidated statement of operations. The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of March 31, 2024: SCHEDULE OF WARRANT MODIFICATION Issuance date assumptions March 31, 2024 assumptions Volatility - range 106.0 % $ 108.5 % Risk-free rate 3.36 % 4.21 % Dividend 0 % 0 % Remaining contractual term 5.0 years 4.0 years Exercise price 5.50 – 7.50 5.50 – 7.50 Common stock issuable under the warrants 1,125,000 1,125,000 29 The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2024 and 2023: SUMMARY OF WARRANT ACTIVITY Warrants Weighted average exercise price Vested Balance, December 31, 2023 1,125,000 $ 6.50 Granted — — Exercised — — Forfeited/cancelled — — Vested Balance, March 31, 2024 1,125,000 $ 6.50 The total intrinsic value of all outstanding warrants aggregated $- 0 - as of March 31, 2024 and 2023, and the weighted average remaining term was 48.2 months as of March 31, 2024, respectively. The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase shares of common stock as of March 31, 2024: SUMMARY OF RANGE OF EXERCISE PRICES AND WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE OF WARRANTS Outstanding and exercisable warrants Exercise price Number of warrants Weighted average remaining contractual life $ 5.50 375,000 4.0 years $ 6.50 375,000 4.0 years $ 7.50 375,000 4.0 years 1,125,000 4.0 years NOTE 15. STOCKHOLDERS’ EQUITY 2023 Issuance of Restricted Common Stock On January 10, 2023, the board of directors approved the grant of 22,500 shares of common stock to officers of the Company. Such shares will generally vest over a period of one to five years on their respective anniversary dates in January through January 2028, provided that each grantee remains an officer or employee on such dates . Additionally, the board of directors approved the grant of 12,500 restricted common shares to certain new employees of the Company. Such shares will generally vest over a period of one to two years on their respective anniversary dates in January through January 2025, provided that each grantee remains an employee of the company on such dates. 2024 Issuance of Restricted Common Stock In January 2024, the board of directors approved the grant of 55,000 shares of common stock to officers of the Company. Such shares will generally vest over a period of one to five years on their respective anniversary dates in January through January 2028, provided that each grantee remains an officer or employee on such dates . Additionally, the board of directors approved the grant of 25,197 restricted common shares to certain new employees of the Company. Such shares will generally vest over a period of one to two years on their respective anniversary dates in January through January 2026, provided that each grantee remains an employee of the company on such dates. Cancellation of Restricted Stock During the three months ended March 31, 2024, the Company cancelled 1,125 shares due to termination of employee. Reverse Stock Split On February 6, 2023, we filed a Certificate of Amendment to the Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada to effect a 1-for-20 reverse stock split (the “Reverse Stock Split”) of the shares of our common stock. The Reverse Stock Split was effective as of time of filing. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares of our Common Stock that would have otherwise resulted from the Reverse Stock Split were rounded up to the nearest whole number. In connection with the Reverse Stock Split, our board approved appropriate and proportional adjustments to all outstanding securities or other rights convertible or exercisable into shares of our Common Stock, including, without limitation, all preferred stock, warrants, options, and other equity compensation rights. All historical share and per-share amounts reflected throughout our consolidated financial statements and other financial information in this Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented. The par value per share of our common stock was not affected by the Reverse Stock Split. 30 Noncontrolling Interests The Company owns a 51 % equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49 % of the income/loss of Nobility Healthcare which is reflected in the statement of (income) loss as “net (income) loss attributable to noncontrolling interests of consolidated subsidiary”. We reported net (income) loss attributable to noncontrolling interests of consolidated subsidiary of $ 12,248 and ($ 126,239 ) for the three months ended March 31, 2024 and 2023, respectively. NOTE 16. NET LOSS PER SHARE The calculation of the weighted average number of shares outstanding and loss per share outstanding for the three months ended March 31, 2024 and 2023 are as follows: SCHEDULE OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING AND LOSS PER SHARE OUTSTANDING 2024 2023 Three months ended March 31, 2024 2023 Numerator for basic and diluted loss per share – Net loss attributable to common stockholders $ ( 3,931,020 ) $ ( 6,105,818 ) Denominator for basic loss per share – weighted average shares outstanding 2,861,229 2,751,662 Dilutive effect of shares issuable upon conversion of convertible debt and the exercise of stock options and warrants outstanding — — Denominator for diluted loss per share – adjusted weighted average shares outstanding 2,861,229 2,751,662 Net loss per share: Basic $ ( 1.37 ) $ ( 2.22 ) Diluted $ ( 1.37 ) $ ( 2.22 ) Basic income (loss) per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended March 31, 2024 and 2023, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive and, therefore, not included in the computation of diluted income (loss) per share. 31 NOTE 17. COUNTRY STAMPEDE ACQUISITION On March 1, 2024, Kustom 440, entered into an Asset Purchase Agreement (the “Acquisition Agreement”) with JC Entertainment, LLC, a Kansas limited liability company (“JC Entertainment”). Pursuant to the Acquisition Agreement, Kustom 440 acquired certain assets associated with a music entertainment event (“Country Stampede”), including all intellectual property arising out of and relating to Country Stampede (“Country Stampede Intellectual Property”) and certain contracts in which JC Entertainment is a party to host and operate the 2024 Country Stampede (the “Assumed Contracts”, and together with the Country Stampede Intellectual Property, the “Purchased Assets”). As consideration for acquiring the Purchased Assets, Kustom 440 paid JC Entertainment the aggregate purchase price amount $ 542,959 , with the sum of $ 400,000 paid at the time of closing (“Closing”), and the remainder to be paid on or before thirty days from the time of Closing. Kustom 440 shall receive a credit for all non-refunded festival ticket sales for the 2024 Country Stampede to be calculated immediately prior to Closing, and JC Entertainment shall be entitled to keep all ticket sale proceeds made and/or received prior to Closing. Kustom 440 shall be obligated, to the extent a refund is sought after Closing, to provide such refund, if appropriate, to the customer requesting a refund, and shall indemnify and hold harmless JC Entertainment from any and all claims, liabilities, costs, suits, or the like relating to such refund request. The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the Country Stampede Acquisition has been allocated to the acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the Country Stampede Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The Country Stampede Acquisition was structured as an asset purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and is deductible for income tax purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date. 32 The purchase price of the Country Stampede Acquisition was allocated to tangible assets, goodwill, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company will continue to evaluate the fair value of the identified intangible assets. The preliminary estimated fair value of assets acquired, and liabilities assumed in the Country Stampede Acquisition were as follows: SCHEDULE OF ESTIMATED FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED ACQUISITION As allocated As allocated (Preliminary) Description March 1, 2024 Assets acquired (provisional): Tangible assets acquired $ 305,000 Identifiable intangible assets acquired (Trademarks and trade names) 300,000 Goodwill 225,959 Liabilities assumed ( 288,000 ) Liabilities assumed pursuant to stock purchase agreement ( 288,000 ) Net assets acquired and liabilities assumed $ 542,959 Consideration: Cash paid at Country Stampede Acquisition date $ 400,000 Cash paid subsequent to closing 142,959 Total Country Stampede Acquisition purchase price $ 542,959 During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. 33 NOTE 18. SEGMENT DATA The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s three operating segments are Video Solutions, Revenue Cycle Management, and Entertainment, each of which has specific personnel responsible for that business and reports to the CODM. Corporate expenses capture the Company’s corporate administrative activities, is also to be reported in the segment information. The Company’s captive insurance subsidiary provides services to the Company’s other business segments and not to outside customers. Therefore, its operations are eliminated in consolidation and is not considered a separate business segment for financial reporting purposes. The Video Solutions Segment encompasses our law, commercial, and Shield™ divisions. This segment includes both service and product revenues through our subscription models offering cloud and warranty solutions, and hardware sales for video and health safety solutions. The Revenue Cycle Management Segment provides working capital and back-office services to a variety of healthcare organizations throughout the country, as a monthly service fee. The Entertainment Segment acts as an intermediary between ticket buyers and sellers within our secondary ticketing platform, ticketsmarter.com, and we also acquire tickets from primary sellers to then sell through various platforms. The Company’s corporate administration activities are reported in the corporate line item. These activities primarily include expense related to certain corporate officers and support staff, certain accounting staff, expense related to the Company’s Board of Directors, stock option expense for options granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes. Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of March 31, 2024, and March 31, 2023: SCHEDULE OF SEGMENT REPORTING 2024 2023 Three Months Ended March 31, 2024 2023 Net Revenues: Video Solutions $ 1,718,293 $ 1,899,364 Revenue Cycle Management 1,434,598 1,781,590 Entertainment 2,376,460 4,016,236 Total Net Revenues $ 5,529,351 $ 7,697,190 Gross Profit: Video Solutions $ 565,694 $ 534,195 Revenue Cycle Management 463,731 775,934 Entertainment 494,274 234,663 Total Gross Profit $ 1,523,699 $ 1,544,792 Operating Income (loss): Video Solutions $ ( 891,588 ) $ ( 1,963,186 ) Revenue Cycle Management ( 24,031 ) 103,765 Entertainment ( 642,219 ) ( 1,233,006 ) Corporate ( 2,081,196 ) ( 3,080,379 ) Total Operating Loss $ ( 3,639,034 ) $ ( 6,172,806 ) Depreciation and Amortization: Video Solutions $ 198,028 $ 198,122 Revenue Cycle Management 26,715 25,507 Entertainment 326,248 319,481 Total Depreciation and Amortization $ 550,991 $ 543,110 34 March 31, 2024 December 31, 2023 Assets (net of eliminations): Video Solutions $ 24,172,478 $ 26,396,559 Revenue Cycle Management 1,989,068 2,260,376 Entertainment 6,482,510 6,324,211 Corporate 12,520,139 12,047,663 Total Identifiable Assets $ 45,164,195 $ 47,028,809 The segments recorded noncash items effecting the gross profit and operating income (loss) through the established inventory reserves based on estimates of excess and/or obsolete current and non-current inventory. The Company recorded a reserve for excess and obsolete inventory in the video solutions segment of $ 4,315,132 and a reserve for the entertainment segment of $ 171,257 as of March 31, 2024. The segment net revenues reported above represent sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income, which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets. NOTE 19. RELATED PARTY TRANSACTIONS Transactions with Managing Member of Nobility Healthcare The Company accrued reimbursable expenses payable to Nobility, LLC totaling $ 576,690 and $ 265,241 for the three months ended March 31, 2024 and 2023 and management fees in accordance with the operating agreement of $ 12,379 and $ 32,181 for the three months ended March 31, 2024 and 2023. Transactions with Related Party of TicketSmarter On September 22, 2023, a trust, the beneficiaries of which are TicketSmarter’s Chief Executive Officer and his spouse, made a loan in the amount of $ 2,325,000 to TicketSmarter to support TicketSmarter’s operations. On October 2, 2023 an additional $ 375,000 was advanced to Ticketsmarter. The transaction was recorded as a related party note payable (the “TicketSmarter Related Party Note”). The TicketSmarter Related Party Note bears interest of 13.25 % per annum with repayment beginning January 2, 2024. As of March 31 2024, the entire TicketSmarter Related Party note is $ 2,700,000 , is classified as current, with an accrued interest balance of $ 187,346 . The use of proceeds of the TicketSmarter Related Party Note was 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. NOTE 20. SUBSEQUENT EVENTS Series A Preferred Stock and Series B Preferred Stock Elimination On April 5, 2024, Digital Ally, Inc., a Nevada corporation (the “Company”), filed with the Secretary of State of the State of Nevada an Elimination of Certificate of Designations of the Preferences, Rights and Limitations of the Series A Convertible Redeemable Preferred Stock (the “Series A Elimination Certificate”) and Elimination of Certificate of Designations of the Preferences, Rights and Limitations of the Series B Convertible Redeemable Preferred Stock (the “Series B Elimination Certificate”) in order to eliminate and cancel all designations, rights, preferences and limitations of the shares of the Company’s Series A Convertible Redeemable Preferred Stock, par value $ 0.001 per share (the “Series A Preferred Stock”) and Series B Convertible Redeemable Preferred Stock, par value $ 0.001 per share (the “Series B Preferred Stock”). In December 2022, all 1,400,000 shares of Series A Preferred Stock that had originally been issued pursuant to the Certificate of Designations of the Preferences, Rights and Limitations of the Series A Preferred Stock of the Company (the “Series A Certificate of Designations”) and all 100,000 shares of Series B Preferred Stock that had originally been issued pursuant to the Certificate of Designations of the Preferences, Rights and Limitations of the Series B Preferred Stock of the Company (the “Series B Certificate of Designations”) were exchanged for shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock. Such shares of Series A Preferred Stock and Series B Preferred Stock have resumed the status of authorized but unissued shares of preferred stock of the Company. Prior to the filing of the Series A Elimination Certificate, none of the 1,400,000 authorized shares of Series A Preferred Stock or 100,000 authorized shares of Series B Preferred Stock were issued and outstanding, and no shares of Series A Preferred Stock or Series B Preferred Stock were to be issued subject to the Series A Certificate of Designations or Series B Certificate of Designations. The Series A Elimination Certificate and Series B Elimination Certificate became effective upon their filing with the Secretary of State of the State of Nevada. Merchant Cash Advances – Video Solutions Segment In April 2024, the Company received additional advances of $ 444,000 from the lender and agreed to new terms where total proceeds received since inception totaled $ 2,144,000 . The Company will repay an aggregate of $ 2,880,000 to the lender. The advances remain secured by expected future sales of the Company with payments on a weekly basis and the full amount is expected to be repaid in 2024. ************************************* 35