Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion
and Analysis of Financial Condition and Results of Operation.
This
discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,”
“should,” “could,” “will,” “plan,” “future,” “continue,” and
other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify
forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can
be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which
are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document,
and readers are cautioned not to place undue reliance on such forward-looking statements.
We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events
or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability,
cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact,
transpire or prove to be accurate.
You
should read the following discussion together with our financial statements and the related notes included elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections
about our business and operations
15
Current
Trends and Recent Developments for the Company
Segment
Overview
Video
Solutions Operating Segment – Within our video solutions operating segment we supply technology-based products utilizing our
portable digital video and audio recording capabilities for the law enforcement and security industries and for the commercial fleet
and mass transit markets. We have the ability to integrate electronic, radio, computer, mechanical, and multi-media technologies to create
positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital
video systems for law enforcement and commercial markets; the FirstVU body-worn camera line, consisting of the FirstVu Pro, FirstVu,
and the FirstVU HD; our patented and revolutionary VuLink product integrates our body-worn cameras with our in-car systems by providing
hands-free automatic activation for both law enforcement and commercial markets; EVO Web Portal, which is our cloud-based evidence management system for
Law enforcement and commercial market; the EVO Fleet, FLT-250, DVM-250, and DVM-250 Plus, which are our
commercial line of digital video products that serve as “event recorders” for the commercial fleet and mass transit markets;
and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings
in 2020, by introducing two new lines of branded products: (1) the ThermoVu™ which is a line of self-contained temperature monitoring
stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2)
our Shield™ disinfectants and cleansers which are for use against viruses and bacteria.
Our
video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and
the sale of Shield disinfectant and personal protective products. This segment generates revenues through our subscription models offering
cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product
sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the
term of the subscription, typically 3 or 5 years.
Revenue
Cycle Management Operating Segment – We entered the revenue cycle management business late in the second quarter of 2021
with the formation of our wholly owned subsidiary, Digital Ally Healthcare, Inc., and its majority-owned subsidiary Nobility
Healthcare. Nobility Healthcare completed its first acquisition in June 2021, when it acquired a private medical billing company,
and has since completed three additional acquisitions of private medical billing companies, in which we will assist in providing
working capital and back-office services to healthcare organizations throughout the country. Our assistance consists of insurance
and benefit verification, medical treatment documentation and coding, and collections. Through our expertise and experience in this
field, we maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins
and cash flows.
Our
revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform
the obligations of our revenue cycle management services. Our revenue cycle management services are services, performed and charged monthly,
generally based on a contractual percentage of total customer collections, for which we recognize our net service fees.
Entertainment
Operating Segment - We also entered into live entertainment and events ticketing services through the formation of our wholly owned
subsidiary, TicketSmarter and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter
provides ticket sales, partnerships, and mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com.
TicketSmarter offers tickets for over 125,000 live events throughout the country through its platform, including concerts, sporting events,
theatres, and performing arts. We also offer production and promotion of live music events in third-party venues throughout the country.
These services begin with the logistical matters of an event, including artist booking and research, ticketing, staging, on-site operations,
vendor sourcing, and day of production.
Our
entertainment operating segment consists of entertainment services provided through TicketSmarter and its online platform, TicketSmarter.com.
Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket
and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold. Entertainment direct expenses include
the cost of tickets purchased for resale by the Company and held as inventory, credit card fees, ticketing platform expenses, website
maintenance fees, as well as other administrative costs.
16
Comparison
of the Year Ended December 31, 2024 and 2023
Summary
Financial Data
Summarized
financial information for the Company’s reportable business segments is provided for the years ended December 31, 2024, and 2023:
Years Ended December 31,
2024
2023
Net Revenues:
Video Solutions
$
5,755,391
$
7,471,285
Revenue Cycle Management
6,131,650
6,713,678
Entertainment
7,763,761
14,063,381
Total Net Revenues
$
19,650,802
$
28,248,344
Gross Profit (loss):
Video Solutions
$
2,722,894
$
1,290,509
Revenue Cycle Management
2,365,314
2,772,271
Entertainment
401,124
1,699,704
Total Gross Profit
$
5,489,332
$
5,762,484
Operating Income (loss):
Video Solutions
$
(1,199,855
)
$
(7,135,584
)
Revenue Cycle Management
(3,818,614
)
292,543
Entertainment
(4,804,853
)
(3,646,770
)
Corporate
(5,378,218
)
(11,750,742
)
Total Operating Income (Loss)
$
(15,201,540
)
$
(22,240,553
)
Depreciation and Amortization:
Video Solutions
$
598,895
$
836,699
Revenue Cycle Management
106,878
104,352
Entertainment
1,316,541
1,277,186
Total Depreciation and Amortization
$
2,022,314
$
2,218,237
Assets (net of eliminations):
Video Solutions
$
12,804,820
$
26,396,559
Revenue Cycle Management
1,771,850
2,260,376
Entertainment
5,741,116
6,324,211
Corporate
7,418,787
12,047,663
Total Identifiable Assets
$
27,736,573
$
47,028,809
The
segments recorded noncash items affecting 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 $2,037,252 and $4,355,666 and a reserve for the entertainment segment of $132,403 and $186,795 as of
December 31, 2024 and 2023.
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.
17
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial
conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant
components of revenue or expenses.
We
are a party to operating leases and license agreements that represent commitments for future payments (described in Note 15, “Commitments
and Contingencies,” to our consolidated financial statements) and we have issued purchase orders in the ordinary course of business
that represent commitments to future payments for goods and services.
For
the Years Ended December 31, 2024 and 2023
Results
of Operations
Summarized
immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended
December 31, 2024 and 2023, represented as a percentage of total revenues for each respective year:
Years Ended December 31,
2024
2023
Revenue
100
%
100
%
Cost of revenue
72
%
80
%
Gross profit
28
%
20
%
Selling, general and administrative expenses:
Research and development expense
7
%
9
%
Selling, advertising and promotional expense
11
%
25
%
General and administrative expense
63
%
65
%
Goodwill and intangible asset impairment charge
24
%
—
%
Total selling, general and administrative expenses
105
%
99
%
Operating loss
(77
)%
(79
)%
Change in fair value of derivative liabilities
(6
)%
7
%
Change in fair value of contingent consideration promissory notes and earn-out agreements
—
%
1
%
Loss on disposal of intangible assets
(1
)%
—
%
Loss on litigation
(10
)%
(6
)%
Loss on extinguishment of debt
(4
)%
(4
)%
Gain on extinguishment of liabilities
5
%
2
%
Gain on sale of property, plant and equipment
2
%
—
%
Interest expense
(19
)%
(11
)%
Interest income and other income, net
—
%
1
%
Loss before income tax benefit
(110
)%
(89
)%
Income tax expense (benefit)
—
%
—
%
Net loss
(110
)%
(89
)%
Net (loss) income attributable to noncontrolling interests of consolidated subsidiary
10
%
(1
)%
Net loss attributable to common stockholders
(100
)%
(90
)%
Net loss per share information:
Basic
$
(5.58
)
$
(9.22
)
Diluted
$
(5.58
)
$
(9.22
)
18
Revenues
Revenues
by Type and by Operating Segment
Our
operating segments generate two types of revenues:
Product
revenues primarily includes video solutions operating segment hardware sales of in-car and body-worn cameras, along with sales of
our ThermoVu TM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale
of tickets by our entertainment operating segment that have been purchased or received through our sponsorships and partnerships and
held in inventory by our entertainment segment until their sale.
Service
and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video
solutions segment. Our entertainment operating segment’s secondary ticketing marketplace revenues are included in service revenue.
We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary
ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services
provided to medical providers throughout the country.
The
following table presents revenues by type and segment:
Year Ended December 31,
2024
% Change
2023
Product revenues:
Video solutions
$
1,997,389
(53.6
)%
$
4,303,369
Entertainment
3,406,928
(32.5
)%
5,044,576
Total product revenues
5,404,317
(42.2
)%
9,347,945
Service and other revenues:
Video solutions
3,758,002
18.6
%
3,167,916
Entertainment
4,356,833
(51.7
)%
9,018,805
Revenue cycle management
6,131,650
(8.7
)%
6,713,678
Total service and other revenues
14,246,485
(24.6
)%
18,900,399
Total revenues
$
19,650,802
(30.4
)%
$
28,248,344
Our
video solutions operating segment sells our products and services to customers in the following manner:
●
Sales to domestic customers
are made directly to the end customer (typically a law enforcement agency or a commercial customer) through our sales force, comprised
of our employees. Revenue is recorded when the product is shipped to the end customer.
●
Sales to international
customers are made through independent distributors who purchase products from us at a wholesale price and sell to the end user (typically
law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as compensation for its
role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards
of ownership. Revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement.
●
Repair parts and services
for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon
shipment of the repair parts and acceptance of the service or materials by the end customer.
19
Our
revenue cycle management operating segment sells its services to customers in the following manner:
●
Our revenue cycle management
operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying
service revenue is recognized upon execution of services. Service revenues are generally determined as a percentage of the dollar
amount of medical billings collected by the customer.
Our
entertainment operating segment sells our products and services to customers in the following manner:
●
Our entertainment operating
segment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating
segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter
are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects
service fees for each transaction completed through this platform.
We
may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape.
Product
revenues by operating segment is as follows:
Years ended December 31,
2024
2023
Product Revenues:
Video Solutions
$
1,997,389
$
4,303,369
Revenue Cycle Management
—
—
Entertainment
3,406,928
5,044,576
Total Product Revenues
$
5,404,317
$
9,347,945
Product revenues for the years ended December 31,
2024 and 2023 were $5,404,317 and $9,347,945, respectively, a decrease of $3,943,628 (42.2%), due to the following factors:
●
Revenues generated
by the entertainment operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The new entertainment
operating segment generated $3,406,928 in product revenues for the year ended December 31, 2024, compared to $5,044,576 for the year
ended December 31, 2023. This product revenue relates to the first Country Stampede music festival held by Kustom during 2024, as
well as the resale of tickets purchased for live events, sporting events, concerts, and theatre, then sold through various platforms
to customers. The decrease in revenues is attributable to a reduction in scope of primary ticket sales by Ticketsmarter as it focuses
on higher margin events to improve its gross margins.
●
The Company’s video
segment operating segment generated revenues totaling $1,997,389 during the year ended December 31, 2024 compared to $4,303,369 for
the year ended December 31, 2023. In general, our video solutions operating segment has experienced pressure on its product revenues
as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced
features. Additionally, our law enforcement revenues declined compared to the same period in 2023 due to the Company not having inventory
in–stock to fulfill existing backlog orders, price-cutting and competitive actions by our competitors and adverse marketplace
effects related to our recent financial condition.
20
●
Our video solutions operating
segment management has continued to focus on migrating commercial customers, from a hardware sale to a service fee model. Therefore,
we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and a portion of our body-worn
camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly
service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment
during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras
without incurring a significant upfront capital outlay. This program has gained some traction, resulting in decreased product revenues
and increasing our service revenues. We expect this program to continue to hold traction, resulting in recurring revenues over a
span of three to five years.
Service
and other revenues by operating segment is as follows:
Years ended December 31,
2024
2023
Service and Other Revenues:
Video Solutions
$ 3,758,002
$ 3,167,916
Revenue Cycle Management
6,131,650
6,713,678
Entertainment
4,356,833
9,018,805
Total Service and Other Revenues
$ 14,246,485
$ 18,900,399
Service
and other revenues for the years ended December 31, 2024 and 2023 were $14,246,485 and $18,900,399, respectively, a decrease of $4,653,914
(25%), due to the following factors:
●
Cloud revenues generated
by the video solutions operating segment were $2,557,400 and $1,994,066 for the years ended December 31, 2024 and 2023, respectively,
an increase of $563,334 (28%). We continue to experience increased interest in our cloud solutions for law enforcement primarily
due to the deployment of our cloud-based EVO-HD in-car system and our next generation body-worn camera products, which contributed
to our increased cloud revenues in the year ended December 31, 2024. We expect this trend to continue for 2025 as the migration from
local storage to cloud storage continues in our customer base.
●
Video solutions operating
segment revenues from extended warranty services were $822,839 and $860,337 for the years ended December 31, 2024 and 2023, respectively,
a decrease of $37,498 (4%). T his correlates with consistent sales of hardware and additional
extended warranties sold during the year .
●
Our
entertainment operating segment generated service revenues totaling $4,356,833 and $9,018,805 for the years ended December 31, 2024
and 2023, respectively, a decrease of $4,661,972 (52%). TicketSmarter collects fees on transactions administered through the
TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. We expect our entertainment
operating segment to continue to fluctuate as we look to right-size this segment and work towards profitability. Our entertainment
segment has focused on cost cutting and overall improvements in gross margin rather than top line revenues which has resulted in a
reduction in revenues for ticketing events that did not meet its gross margin goals.
●
Our revenue cycle management
operating segment generated service revenues totaling $6,131,650 and $6,713,678 for the years ended December 31, 2024 and 2023, respectively,
a decrease of $582,028 (9%). Our revenue cycle management operating segment provides revenue cycle management solutions and back-office
services to healthcare organizations throughout the country. The decrease in revenue is due
to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue.
Total revenues for the years ended
December 31, 2024, and 2023 were $19,650,802 and $28,248,344, respectively, a decrease of $8,597,542 (30%), due to the reasons noted above.
21
Cost
of Product Revenue
Overall
cost of product revenue sold for the years ended December 31, 2024, and 2023 was $5,899,130 and $9,974,890, respectively, a decrease
of $4,075,760 (41%). Overall cost of goods sold for products as a percentage of product revenues for the years ended December 31, 2024,
and 2023 were 109% and 107%, respectively. Cost of products sold by operating segment is as follows:
Years Ended December 31,
2024
2023
Cost of Product Revenues:
Video Solutions
$ 1,780,284
$ 4,824,967
Revenue Cycle Management
—
—
Entertainment
4,118,846
5,149,923
Total Cost of Product Revenues
$ 5,899,130
$ 9,974,890
The
decrease in cost of goods sold for our video solutions segment products is due to numerous factors including a sizeable decrease in the
allowance for excess and obsolete inventory in 2024, mostly surrounding the personal protective equipment product line. Cost of product
sold as a percentage of product revenues for the video solutions segment decreased to 89% for the year ended December 31, 2024 as compared
to 112% for the year ended December 31, 2023.
The
decrease in entertainment operating segment cost of product sold directly correlates to the lower product revenues for the year ended
December 31, 2024. Cost of Product Revenues were $4,118,846 and $5,149,923 for the year ended December 31, 2024 and 2023, a decrease
of $1,031,077 (20%). Cost of product sold as a percentage of product revenues for the entertainment segment increased to 121% for the
year ended December 31, 2024 as compared to 102% for the year ended December 31, 2023.
We
recorded $2,169,655 and $4,542,461 in reserves for obsolete and excess inventories for the years ended December 31, 2024 and 2023, respectively.
Total raw materials and component parts were $2,589,804 and $3,044,653 for the years ended December 31, 2024 and 2023, respectively,
a decrease of $454,849 (15%). Finished goods balances were $2,161,011 and $5,322,693 for the years ended December 31, 2024 and December
31, 2023, respectively, a decrease of $3,161,682 (59%) which was attributable to a reduction in inventory for the video solutions product
lines and a large decrease in ticket inventory for the newly acquired entertainment segment. The decrease in the inventory reserve is
primarily due to the disposal of obsolete inventory that was included in the reserves during 2024. Additionally, the Company determined
a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold,
thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of
December 31, 2024.
Cost
of Service Revenue
Overall
cost of service revenue sold for the years ended December 31, 2024, and 2023 was $8,262,340 and $12,510,970, respectively, a decrease
of $4,248,630 (34%). Overall cost of goods sold for services as a percentage of service revenues for the years ended December 31, 2024,
and 2023 were 58% and 66%, respectively. Cost of service revenues by operating segment is as follows:
Years Ended December 31,
2024
2023
Cost of Service Revenues:
Video Solutions
$ 1,252,213
$ 1,355,809
Revenue Cycle Management
3,766,336
3,941,407
Entertainment
3,243,791
7,213,754
Total Cost of Service Revenues
$ 8,262,340
$ 12,510,970
22
The
decrease in cost of service revenues for our video solutions segment demonstrates the leverage we are enjoying as we increase our service
revenues during the year ended December 31, 2024 compared to the year ended December 31, 2023. Cost of service revenues as a percentage
of service revenues for the video solutions segment decreased to 33% for the year ended December 31, 2024 as compared to 43% for the
year ended December 31, 2023.
The
decrease in revenue cycle management operating segment cost of service revenue is commensurate with the decline in revenues due to certain
loss generating services being eliminated during the year. Cost of service revenues as a percentage of product revenues for the revenue
cycle management operating segment increased to 61% for the year ended December 31, 2024 as compared to 59% for the year ended December
31, 2023.
The
decrease in entertainment operating segment cost of service revenues is due to management right sizing the business working towards profitability.
The Entertainment cost of service revenue was $3,243,791 for the year ended December 31, 2024, compared to $7,213,754 for the year ended
December 31, 2023. Cost of service revenues as a percentage of service revenues for the entertainment segment decreased to 74% for the
year ended December 31, 2024 as compared to 80% for the year ended December 31, 2023.
Gross
Profit
Overall gross profit for the years
ended December 31, 2024 and 2023 was $5,489,332 and $5,762,484, respectively, a decrease of $273,152 (5%). Gross profit by operating segment
was as follows:
Years Ended December 31,
2024
2023
Gross Profit:
Video Solutions
$
2,722,894
$
1,290,509
Revenue Cycle Management
2,365,314
2,772,271
Entertainment
401,124
1,699,704
Total Gross Profit
$
5,489,332
$
5,762,484
The
decrease is commensurate with the decrease in overall revenues offset by a decrease in cost of goods sold across our video and entertainment segment for the year ended December
31, 2024. There was an overall decrease in the cost of sales as a percentage of overall revenues to 72% for the year ended December
31, 2024 from 80% for the year ended December 31, 2023. This is primarily driven by large head-count reductions in our work force during the year ended December 31,
2024, a focus on right sizing recent acquisitions to increase profitability and a transition to a service subscription-based model in
our video solutions segment. Our goal is to improve our margins over the longer term based on the expected margins generated by our new
recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected
margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, EVO Fleet, FLT-250, DVM-250, DVM-250 Plus and our cloud evidence storage and management offering, provided that
they gain traction in the marketplace. We plan to continue our initiative to more efficient management of our supply chain through outsourcing
production, quantity purchases and more effective purchasing practices.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $20,690,872 and $28,003,037 for the year ended December 31, 2024 and 2023, respectively, a
decrease of $7,312,165 (26%). The decrease was primarily attributable to the reduction in new advertising sponsorships being entered
into by the Company offset by the goodwill and intangible asset impairment charge. Our selling, general and administrative expenses
as a percentage of sales increased to 105% for the year ended December 31, 2024 compared to 99% in the same period in 2023. The
significant components of selling, general and administrative expenses are as follows:
Year ended December 31,
2024
2023
Research and development expense
$ 1,339,673
$ 2,618,746
Selling, advertising and promotional expense
2,144,494
7,137,529
General and administrative expense
12,376,705
18,246,762
Goodwill and intangible asset impairment charge
4,830,000
—
Total
$ 20,690,872
$ 28,003,037
23
Research
and development expense. Our research and development expenses totaled $1,339,673 and $2,618,746 for the year ended December
31, 2024 and 2023, respectively which represents a decrease of $1,279,073 (49%). We have focused on controlling our expenditures on bringing
new products to market, including updates and improvements to current products in response to our decline in revenues. The decrease in
research and development expense reflects the large cut-back in our engineering staff and research activities in order to right-size
our expenses in this area with our revenues.
Selling,
advertising and promotional expenses. Selling, advertising and promotional expense totaled $2,144,494 and $7,137,529 for the
years ended December 31, 2024 and 2023, respectively, a decrease of $4,993,035 (70%). The decrease in selling, advertising and promotional
expenses reflects the large cut-back in selling staff and promotional and advertising activities in order to right-size our expenses
in this area with our revenues. In addition, the decrease is attributable to the reduction in new sponsorships being entered into by
the Company and its subsidiary TicketSmarter.
General
and administrative expense . General and administrative expenses totaled $12,376,705 and $18,246,762 for the year ended
December 31, 2024 and 2023, respectively which represents a decrease of $5,870,057 (32%). The decrease in general and administrative expenses in the year ended December 31, 2024
compared to the same period in 2023 is primarily attributable to a decrease in administrative salaries and reductions in headcount
in order to right-size our expenses in this area with our revenues. The decrease in general and administrative expenses was offset
by a substantial increase legal and professional expenses for the year ended December 31, 2024 compared to the same period in 2023
due to the failed merger with CloverLeaf and various capital raises we have undertaken.
Goodwill
and intangible asset impairment charge. We performed an impairment test as of the last day of the fiscal third quarter of 2024
as management determined that a triggering event had occurred resulting from the additional decline in demand for our services, prolonged
economic uncertainty, the fact that the split-off transaction did not occur when and as expected and a further decrease in our stock
price. Therefore, we performed an impairment test as of September 30, 2024 for our reporting units with remaining goodwill.
As
a result of our impairment test, we concluded that the carrying amount of the revenue cycle management and entertainment reporting units
exceeded their estimated fair value. Thus, we recorded a non-cash goodwill impairment charge of $4,322,000, representing a portion of
the goodwill balance for the revenue cycle management segment, which was included in goodwill and intangible asset impairment charge
on our statement of operations for the year ended December 31, 2024. In addition, we recorded a non-cash goodwill impairment charge of
$307,000, representing a portion of the goodwill balance for the entertainment segment, which was included in goodwill and intangible
asset impairment charge on our consolidated statements of operations for the year ended December 31, 2024. The goodwill impairment was
primarily driven by recent performance of the entertainment reporting unit since our annual impairment testing date, as well as a delay
in the projected timing of recovery.
During
the year ended December 31, 2024, we concluded that the carrying amount of a trade name/trademark related to the entertainment segment
exceeded its estimated fair value and we recorded a non-cash impairment charge of $201,000, which was included in goodwill and intangible
asset impairment charge on our consolidated statements of operations for the year ended December 31, 2024. The charge was primarily driven
by the split-off transaction not being completed when and as expected and our recent revenue performance of the related business given
a decline in demand and overall economic uncertainty. The remaining balance for this trade name/trademark was $699,000 as of December
31, 2024.
24
Operating
Loss
For the reasons previously stated, our operating loss was $15,201,540 and
$22,240,553 for the years ended December 31, 2024 and 2023, respectively, an improvement of $7,039,013 (31.6%). Operating loss as a percentage
of revenues improved to 77% in 2024 as compared to 78% in 2023.
Interest
Income
Interest
income decreased to $69,509 for the year ended December 31, 2024, from $95,717 in 2023, which reflects our overall decline in our cash
and cash equivalent levels in 2024 compared to 2023.
Interest
Expense
We
incurred interest expenses of $3,815,323 and $3,134,253 during the years ended December 31, 2024 and 2023, respectively. The increase
is attributable to the amortization of debt discounts associated with the convertible debt, revolving loan agreements and merchant advances.
Other
income (expense)
Other
income (expense) decreased to $26,733 for the year ended December 31, 2024, from $144,735 during the year ended December 31, 2023,
which reflects income related to a warehouse sublease within the corporate headquarters during 2023 which ceased in 2024 upon the sale of
the building.
Loss
on Litigation
The
Company recognized a loss on litigation of $1,959,396 and $1,792,308 during the years ended December 31, 2024 and 2023, respectively.
This is in connection with the ongoing lawsuit with Culp McCauley, Inc. Considering the loss recorded
in 2024 and prior years the Company has reduced its net exposure to zero relative to this matter at December 31, 2024.
Loss
on Conversion of Convertible Debt
The
Company recognized a loss on conversion of convertible debt of $-0- and $1,112,705 during the years ended December 31, 2024 and 2023,
respectively. This is in connection with the convertible notes issued during the year ended December 31, 2023, and the related conversion
from debt to equity and cash settlement of the convertible debt during the 2023 period.
Loss on Disposal of Intangible assets
During the year ended December
31, 2024, the Company’s video solutions segment disposed of its personal protection product line which held various EPA licenses
resulting in a loss on disposal of intangible assets $125,561. This loss was offset by a gain on disposal of certain personal seat licenses
by the Company’s entertainment segment which resulted in a gain of $5,582 during the year ended December 31, 2024.
Change
in Fair Value of Derivative Liabilities
The change in fair value of the
warrant derivative liabilities for the years ended December 31, 2024 and 2023, respectively totaled a loss of $1,240,407 during the year
ended December 31, 2024 as compared to a gain of $1,846,642 during the year ended December 31, 2023.
During 2024, the Company issued
Series A and Series B detachable warrants in conjunction with its June 2024 capital raise. The underlying warrant terms under both of
the Series A and Series B warrants provide for net cash settlement outside the control of the Company in the event of tender offers under
certain circumstances and requires reset provisions which were triggered upon the approval the warrant issuances by the Company’s
shareholders. 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 statement of operations
as the change in fair value of warrant derivative liabilities. The warrants were approved by shareholders at the Company’s annual
meeting on December 17, 2024, which triggered the reset provisions which resulted in an increase in the estimated fair value of the Series
A and Series B warrants.
During
2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured
convertible notes. The Company issued an additional 1,195,219 warrants in June 2024. The underlying warrant terms provide for net cash
settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required
to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting
date with any subsequent changes reported in the consolidated statement of operations as the change in fair value of warrant derivative
liabilities.
Change
in Fair Value of Contingent Consideration Promissory Notes
During
the year ended December 31, 2023, the Company recognized a gain on the change in fair value of contingent consideration promissory notes
of $177,909. This is in connection with the four acquisitions made by our revenue cycle management segment. There was no similar transaction
during the year ended December 31, 2024.
25
Gain
on Extinguishment of Liabilities
The
Company recorded a gain on the extinguishment of liabilities for the year ended December 31, 2024 of $917,935, which reflects income
related to the video solutions and entertainment segment’s ability to negotiate down payables and contract liabilities during the
year ended December 31, 2024. In addition, the Company negotiated a termination of its lease on its former headquarters which resulted in a gain of $9,385
on the termination during the year ended December 31, 2024.
The
gain on extinguishment of liabilities was $550,867 for the year ended December 31, 2023, which reflects income related to the entertainment
segment’s ability to negotiate down payables and contract liabilities during the period. The Company utilized funds from the related
party note payable to resolve numerous outstanding payables at a discounted rate, the discount received was recognized as a gain on extinguishment
of liabilities in the statement of operations for the year ended December 31, 2023.
Loss
on Extinguishment of Debt
On
March 1, 2024, the Company obtained a short-term merchant advance for its entertainment segment, which totaled $1,000,000, from a single
lender to fund operations. The Company modified/amended the underlying loan agreement twice during the year ended December 31, 2024.
The modifications were both deemed to be extinguishments of debt resulting in a $310,505 total loss during the year ended December 31,
2024.
On
November 7, 2024 the Company raised sufficient funds through a private placement which closed on November 7, 2024, to repay the
short-term merchant advance for its entertainment segment in full. The Company’s full repayment of the outstanding obligations
under such amended note which effectively cured all then existing defaults and resulted in a loss of $374,007 from the
extinguishment of this debt during the year ended December 31, 2024.
During
the year ended December 31, 2024, the Company refinanced its merchant advance loan for its video segment and determined the refinancing
of the debt should be treated as a debt extinguishment. As a result, the Company recorded a loss of $68,827 on the extinguishment during
the year ended December 31, 2024.
Gain
on Sale of Property, Plant and Equipment
During
the year ended December 31, 2024, the Company sold its building for $5,900,000 less closing costs of $36,634. The carrying amount of the
building on the date of sale was $5,461,623. As a result of the sale the Company recorded a gain of $401,743 in the consolidated statement
of operations during the year ended December 31, 2024. This amount was offset by a separate loss on sale of fixed assets of $41,661 for
the year ended December 31, 2024.
Loss
before Income Tax Benefit
As a result of the above, we reported a net loss before income tax benefit
of $21,715,725 and $25,463,949 for the years ended December 31, 2024 and 2023, respectively, an improvement of $3,748,224 (15%).
Income
Tax Benefit
We
recorded an income tax benefit of $-0- for the years ended December 31, 2024 and 2023, respectively. The effective tax rate for both
2024 and 2023 varied from the expected statutory rate due to our continuing to provide a 100% valuation allowance on net deferred tax
assets. We determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31,
2024 and 2023 primarily because of the recurring operating losses.
We
have further determined to continue providing a full valuation reserve on our net deferred tax assets as of December 31, 2024. During
2024, we increased our valuation reserve on deferred tax assets by $4,680,000 whereby our deferred tax assets continue to be fully reserved
due to our recent operating losses.
We
had approximately $159,280,000 of federal net operating loss carryforwards and $1,742,000 of research and development tax credit carryforwards
as of December 31, 2024 available to offset future net taxable income.
26
Net
Loss
As a result of the above, we reported a net loss of $21,715,725 and $25,463,949
for the years ended December 31, 2024 and 2023, respectively, an improvement of $3,748,224 (15%).
Net
Income Attributable to Noncontrolling Interests of Consolidated Subsidiary
The
Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders
or minority interest is allocated 49% of the income/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 $(1,871,578) and $224,598 for the years ended December 31, 2024
and 2023, respectively.
Net
Loss Attributable to Common Stockholders
As a result of the above, we reported a net loss of $19,844,147 and $25,688,547
for the years ended December 31, 2024 and 2023, respectively, an improvement of $5,844,400 (23%).
Basic
and Diluted Income/(Loss) per Share
The basic and diluted income/(loss) per share was ($5.58) and ($9.22) for
the years ended December 31, 2024 and 2023, respectively, for the reasons previously noted. All outstanding stock options and common stock
purchase warrants were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the years ended
December 31, 2024 and 2023 because all potentially dilutive securities were excluded from the computation because of the net loss reported
for both 2024 and 2023.
Liquidity
and Capital Resources
Overall:
Management’s
Liquidity Plan. We have experienced net losses and cash outflows from operating activities since inception. Based upon our current
operating forecast, we anticipate that we will need to restore positive operating cash flows and/or raise additional capital in the short-term
to fund operations, meet our customary payment obligations and otherwise execute our business plan over the next 12 months. We are continuously
in discussions to raise additional capital, which may include a variety of equity and debt instruments; however, there can be no assurance
that our capital raising initiatives will be successful. Our recurring losses and level of cash used in operations, along with uncertainties
concerning our ability to raise additional capital, raise substantial doubt about our ability to continue as a going concern.
Cash,
cash equivalents: As of December 31, 2024, we had cash and cash equivalents with an aggregate balance of $454,314, a decrease from
a balance of $778,149 (including restricted cash) at December 31, 2023. Summarized immediately below and discussed in more detail in
the subsequent subsections are the main elements of the $323,835 net decrease in cash during the year ended December 31, 2024:
●
Operating activities :
Net cash used in operating activities was $5,114,718 and $9,893,838 for
the years ended December 31, 2024 and 2023, respectively, an improvement of $4,779,120. The decrease is attributable to the improved net
loss, an increase in noncash expenses such as non-cash interest expense and cash provided the change in operating assets and liabilities
during the year ended December 31, 2024 compared to the same period in 2023.
●
Investing activities :
Net cash provided by (used in) investing activities was $387,549 and $(240,706)
for the years ended December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, we made expenditures or received
cash for the following: (i) sold our corporate headquarters building for $5,900,000 and received net cash of $425,653 after paying off
the building loan and various other deductions (ii) the acquisition of Country Stampede; and (iii) received proceeds from the sale of
our aircraft.
27
●
Financing activities :
Net cash provided by financing activities was $4,403,334 and $7,380,494
for the years ended December 31, 2024 and 2023, respectively. During 2024, we most notably refinanced a loan resulting in proceeds of
$1,144,000, obtained an additional merchant advance providing proceeds of $1,511,826, obtained $1,475,000 in new commercial extension
of credits, issued senior promissory notes with commitment shares resulting in $2,669,250 in net cash proceeds and issued common stock
with detachable warrants resulting in $2,194,745 in net cash proceeds. The cash proceeds were partially offset by payments on outstanding
loans including the payments on merchant advances.
The
net result of these activities was a decrease in cash of $323,835 to $454,314 for the year ended December 31, 2024.
Commitments:
We had $454,314 of cash and cash equivalents and net negative working capital
of $19,377,507 as of December 31, 2024. Accounts receivable and other receivables balances represented $5,446,098 of our net working capital
at December 31, 2024. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2025, which
would help to provide positive cash flow to support our operations during 2025. Inventory represents $2,586,066 of our net working capital
at December 31, 2024. We are actively managing the level of inventory and our goal is to reduce such level during 2025 by our sales activities,
the decrease of which should provide additional cash flow to help support our operations during 2025.
Capital
Expenditures:
We
had the following material commitments for capital expenditures at December 31, 2024:
Lease
commitments. Total lease expense under the Company’s operating leases was approximately $627,212 during the year ended
December 31, 2024.
The following sets forth the operating
lease right of use assets and liabilities as of December 31, 2024:
Assets:
Operating lease right of use assets
$
718,509
Liabilities:
Operating lease obligations-current portion
158,304
Operating lease obligations-less current portion
560,205
Total operating lease obligations
$
718,509
Following are the minimum lease
payments for each year and in total.
Year ending December 31:
2025
$
210,086
2026
210,925
2027
189,275
2028
100,863
2029 and thereafter
130,086
Total undiscounted minimum future lease payments
841,235
Imputed interest
(122,726
)
Total operating lease liability
$
718,509
28
Debt
obligations - We have the following outstanding debt as of December 31, 2024 which require future principal payments:
December 31, 2024
Economic injury disaster loan (EIDL)
$ 144,495
Commercial Extension of Credit- Entertainment Segment
100,000
Merchant Advances – Video Solutions Segment
1,922,750
Senior Secured Promissory Notes
3,600,000
Unamortized debt issuance costs
(664,719 )
Debt obligations
5,102,526
Less: current maturities of debt obligations
4,961,443
Debt obligations, long-term
$ 141,083
Debt
obligations mature on an annual basis as follows as of December 31, 2024:
December 31, 2024
2025
$ 4,961,443
2026
3,412
2027
3,542
2028
3,677
2029 and thereafter
130,452
Total
$ 5,102,526
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 re-evaluate and update accruals as matters
progress over time.
While
the ultimate resolution is unknown, 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. See Item 3, “Legal Proceedings,” of
this Annual Report on Form 10-K for information on our litigation.
29
401
(k) Plan. The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended, requires
it to provide 100% matching contributions for employees, who elect to contribute up to 3% of their compensation to the plan and 50% matching
contributions for employee’s elective deferrals on the next 2% of their contributions. The Company made matching contributions
totaling $144,589 and $207,463 for the years ended December 31, 2024 and 2023, respectively. Each participant is 100% vested at all times
in employee and employer matching contributions.
Critical
Accounting Estimates
Our
significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies ,”
to our consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective
judgments and estimates, we believe the following accounting policies and estimates are the most critical to our financial statements,
potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and
changing conditions:
●
Revenue Recognition / Allowance
for Doubtful Accounts;
●
Allowance for Excess and
Obsolete Inventory;
●
Goodwill and other intangible
assets;
●
Warranty Reserves;
●
Fair value of assets and liabilities acquired in business combinations ;
●
Fair value of warrant derivative
liabilities;
●
Stock-based Compensation
Expense; and
●
Accounting for Income Taxes.
Revenue
Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when
all five of the following conditions are met:
(i)
Identify the contract with the customer;
(ii)
Identify the performance obligations in the contract;
(iii)
Determine the transaction price;
(iv)
Allocate the transaction price to the performance obligations
in the contract; and
(v)
Recognize revenue when a performance obligation is
satisfied.
We
consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We
determine we have a contract when the customer order is approved, we can identify each party’s rights regarding the services to
be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay
and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance
obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors,
including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining
to the customer.
Performance
obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that
are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources
that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the
services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i)
products, (ii) professional services, and (iii) extended warranties.
30
The
transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to
the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future
reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component.
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation
based on the relative standalone selling price (“SSP”).
Revenue
for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control
of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount
that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with
customers.
Revenue
for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to-end service fees.
These service fees are reported as revenue monthly, upon completion of our performance obligation to provide the agreed upon services.
Revenue
for our entertainment segment is recorded on a gross or net basis based on management’s assessment of whether we are acting as
a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the
right to sell the ticket, prior to its transfer to the ticket buyer.
We
sell our tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the
buyer upon confirmation of the order. We act as the principal in these transactions as we own the ticket at the time of sale, therefore
we control the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the
value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.
We
also act as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace
primarily consist of service fees from entertainment operations, and consists of one primary performance obligation, which is facilitating
the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As we do not control the ticket
prior to the transfer, we act as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller
when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment
is due at the time of sale.
We
review all significant, unusual, or nonstandard shipments of product or delivery of services as a routine part of our accounting and
financial reporting process to determine compliance with these requirements. Extended warranties are offered on selected products, and
when a customer purchases an extended warranty, the associated proceeds are treated as contract liability and recognized over the term
of the extended warranty.
For
our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have
been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater
risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual
circumstances. Our historical bad debts have been negligible since we commenced deliveries during 2006.
For
our entertainment segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service
fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve
for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition,
we will track historical bad debts and continue to assess appropriate reserves.
31
For
our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon
the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider
a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related
to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves.
Allowance
for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items.
The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions
about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify
reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis.
In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost.
Inventories
consisted of the following at December 31, 2024 and 2023:
December 31, 2024
December 31, 2023
Raw material and component parts– video solutions segment
$ 2,589,804
$ 3,044,653
Work-in-process– video solutions segment
4,906
20,396
Finished goods – video solutions segment
1,655,317
4,623,489
Finished goods – entertainment segment
505,694
699,204
Subtotal
4,755,721
8,387,742
Reserve for excess and obsolete inventory– video solutions segment
(2,037,252 )
(4,355,666 )
Reserve for excess and obsolete inventory – entertainment segment
(132,403 )
(186,795 )
Total inventories
$ 2,586,066
$ 3,845,281
We
balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk
of inventory obsolescence due to changing technology and customer requirements. As reflected above, our inventory reserves represented
46% of the gross inventory balance at December 31, 2024, compared to 54% of the gross inventory balance at December 31, 2023. We had
$2,169,655 and $4,542,461 in reserves for obsolete and excess inventories at December 31, 2024 and 2023, respectively. The decrease in
the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory. Additionally, the Company
determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or
go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory
levels as of December 31, 2024.
If
actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to
our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory
reserves already established.
Goodwill
and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed
on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and
content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses
of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired
intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast
of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects
the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because
the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party
valuation expert to assist us with the fair value analyses for acquired intangible assets.
32
Determining
the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions
based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history.
Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected
future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically,
the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying
acquired intangible assets.
Determining
an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including,
but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well
as any contractual provisions that could limit or extend an asset’s useful life.
The
Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at
least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In
addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential
impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual
plan or historical performance; changes in our strategic plans or the use of our assets; restructuring changes or other changes in our
business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant
decline in our stock price and our market capitalization relative to our net book value.
When
performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any
events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting
units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our
reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results
of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective
carrying amount, then we perform a two-step quantitative impairment test.
Evaluating
the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision
and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general
economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business
measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically
utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability
and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data.
We
performed an impairment test as of the last day of the fiscal third quarter of 2024 as management determined that a triggering event
had occurred resulting from the additional decline in demand for our services, prolonged economic uncertainty, the fact that the split-off
transaction did not occur when and as expected and a further decrease in our stock price. Therefore, we performed an impairment test
for our reporting units with remaining goodwill.
The
fair value of each reporting unit was estimated using a weighting of the income and market valuation approaches. The income approach
applied a fair value methodology to each reporting unit based on discounted cash flows. This analysis requires significant judgments,
including estimation of future cash flows, which is dependent on internally-developed forecasts of revenue and profitability, estimation
of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of
our weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested.
The weighted average cost of capital used in our most recent impairment test ranged from 18.3% to 21.3%. We also applied a market approach,
which develops a value correlation based on the market capitalization of similar publicly traded companies, referred to as a multiple,
to apply to the operating results of the reporting units. The primary market multiple used is revenue. The income and market approaches were equally
weighted in our most recent annual impairment test, for all of the reporting units.
33
The
combined fair values for all reporting units were then reconciled to our aggregate market value of our shares of common stock on the
date of valuation, while considering a reasonable control premium. We consider a reporting unit’s fair value to be substantially
in excess of the reporting unit’s carrying value at a 25% premium or greater. Based on our most recent impairment test, the video
solutions reporting unit’s fair value was substantially in excess of its carrying value, while the revenue cycle management and
entertainment segments were determined to be impaired.
We held goodwill of $5,480,966 as of September 30, 2024 and December 31,
2023, related to businesses within our revenue cycle management segment. We held goodwill of $6,112,507 and $5,886,548 as of September
30, 2024 and December 31, 2023, respectively, related to businesses within our entertainment segment. As a result of our impairment test,
we concluded that the carrying amount of the revenue cycle management and the entertainment reporting units exceeded its estimated fair
values. Thus, we recorded a non-cash goodwill impairment charge of $4,322,000, related to the goodwill carrying balance for the revenue
cycle management segment, and a non-cash goodwill impairment charge of $307,000, related to the goodwill carrying balance for the entertainment
segment, both of which was included in goodwill and intangible asset impairment charge on our Consolidated Statements of Operations for
the year ended December 31, 2024. The goodwill impairment was primarily driven by recent performance of the revenue cycle management and
entertainment reporting units since our annual impairment testing date, as well as a delay in the projected timing of recovery. The remaining
balance for the goodwill carrying balance related to businesses within our revenue cycle management segment and entertainment segment
was $1,158,966 and $5,805,507, respectively as of December 31, 2024.
We held indefinite-lived trade names/trademarks of $900,000 and $600,000
as of September 30, 2024 and December 31, 2023, respectively, related to businesses within our entertainment segment.
During
the year ended December 31, 2024, we concluded that the carrying amount of a trade name/trademark related to the entertainment segment
exceeded its estimated fair value and we recorded a non-cash impairment charge of $201,000, which was included in goodwill and intangible
asset impairment charge on our Consolidated Statements of Operations for the year ended December 31, 2024. The charge was primarily driven
by the split-off transaction not being completed when and as expected and our recent revenue and operating performance of the related
business given a decline in demand and overall economic uncertainty. The remaining balance for this trade name/trademark was $699,000
as of December 31, 2024.
Fair value
of assets and liabilities acquired in business combinations .
The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values
at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from
goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations
that use information and assumptions provided by management to valuation specialists, which consider management’s best estimates
of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds
the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions,
including estimated growth rates, cash flows, discount rates and estimated useful lives could result in different purchase price allocations
and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred
through selling, general and administrative expense on the consolidated statement of operations. In those circumstances where an acquisition
involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments
expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the
fair value through operating income within the consolidated statements of operations.
Warranty
Reserves. We generally provide up to a two-year parts and labor standard warranty
on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold.
These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends
of claims and take action to improve product quality and minimize claims. Our warranty reserves were decreased to $11,615 as of December
31, 2024 compared to $17,699 as of December 31, 2023 due to newer products gaining a long history of claims to consider, which was slightly
offset as we began to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty
exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers, which reduced our overall warranty exposure
as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost
of claims than our history has indicated on our legacy mirror products compared to our new products for which we have limited experience.
Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.
Warrant
derivative liabilities.
The
Company accounts for their derivative financial instruments in accordance with ASC 815 “Derivatives and Hedging”
therefore any embedded conversion options and warrants accounted for as derivatives are to be recorded at their fair values as of the
inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating,
non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments
at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of
the date of the event that caused the reclassification.
The Black-Scholes option valuation model was used to estimate the fair value of the embedded
conversion options and warrants. The model includes subjective input assumptions that can materially affect the fair value estimates.
34
Accounting
for Income Taxes. Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates
and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse
in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating
losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.
As
required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and
tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse.
Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that
all or some portion of the deferred tax asset will not be realized. As of December 31, 2024, we have fully reserved all of our deferred
tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance
should be increased by $4,680,000 to a balance of $46,290,000 to fully reserve our deferred tax assets at December 31, 2024. We determined
that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of December 31, 2024, because
of the overall net operating loss carryforwards available. We expect to continue to maintain a full valuation allowance until we determine
that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the
realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the
valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions
for stock option exercises, an increase in shareholders’ equity.
As
required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance
with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken
in a filed tax return or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for
financial reporting purposes. We have no recorded liability as of December 31, 2024 representing uncertain tax positions.
We
have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken
for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of
these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes.
In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income
tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least
equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred
income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the
deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate
taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will
not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore,
we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable
income not be realized.
35
Inflation
and Seasonality
Inflation
has not materially affected us during the past fiscal year. We do not believe that our Video Solutions and Revenue Cycle Management segments
business is seasonal in nature, however; the Entertainment Segment is expected to generate higher revenues during the second half of
the calendar year than in the first half.
Item 7a.
Quantitative and Qualitative Disclosures About Market
Risk.
Not
applicable.
Item 8.
Financial Statements and Supplementary Data.
Our
financial statements are included in this Annual Report on Form 10-K commencing on page F-1.
Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.