DIGITAL ALLY INC

Previous wording

Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2024, and 2023:

Current wording

Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2024, and June 30, 2023:

Previous wording

We experienced operating losses for the first quarter of 2024 and all quarters during 2023. The following is a summary of our recent operating results on a quarterly basis:

Current wording

We experienced operating losses for the first half of 2024 and all quarters during 2023. The following is a summary of our recent operating results on a quarterly basis:

Previous wording

Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; and (7) the completion of corporate acquisitions including the recent purchases in the revenue cycle management and entertainment operating segments. We reported a net loss of $3,943,268 on revenues of $5,529,351 for first quarter of 2024.

Current wording

Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; and (7) the completion of corporate acquisitions including the recent purchases in the revenue cycle management and entertainment operating segments. We reported a net loss of $8,953,819 on revenues of $11,145,586 for the six months ended June 30, 2024.

Previous wording

Product revenues by operating segment are as follows:

Current wording

Product revenues by operating segment is as follows:

Previous wording

Service and other revenues by operating segment are as follows:

Current wording

Service and other revenues by operating segment is as follows:

Previous wording

Total revenues for the three months ended March 31, 2024 and 2023 were $5,529,351 and $7,697,190, respectively, a decrease of $2,167,839 (28%), due to the reasons noted above.

Current wording

Total revenues for the three months ended June 30, 2024 and 2023 were $5,616,235 and $8,279,632, respectively, a decrease of $2,663,397 (32%), due to the reasons noted above.

Previous wording

Overall cost of product revenue sold for the three months ended March 31, 2024, and 2023 was $1,567,393 and $2,301,100, respectively, a decrease of $733,707 (32%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended March 31, 2024, and 2023 were 100% and 94%, respectively. Cost of products sold by operating segment is as follows:

Current wording

Overall cost of product revenue sold for the three months ended June 30, 2024, and 2023 was $3,419,254 and $2,219,515, respectively, an increase of $1,199,739 (54%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended June 30, 2024, and 2023 were 155% and 72%, respectively. Cost of products sold by operating segment is as follows:

Previous wording

The decrease in entertainment operating segment cost of product sold directly correlates to the decrease in product revenues for the three months ended March 31, 2024 compared to March 31, 2023, resulting in cost of product revenue of $769,899 for the three months ended March 31, 2024, compared to $1,263,506 for the three months ended March 31, 2023. Cost of product sold as a percentage of product revenues for the entertainment segment was 91% for the three months ended March 31, 2024 as compared to 100% for the three months ended March 31, 2023.

Current wording

The increase in entertainment operating segment cost of product sold was driven by the costs of the Country Stampede music festival for the three months ended June 30, 2024 compared to June 30, 2023, resulting in cost of product revenue of $2,460,792 for the three months ended June 30, 2024, compared to $1,414,126 for the three months ended June 30, 2023. Cost of product sold as a percentage of product revenues for the entertainment segment was 155% for the three months ended June 30, 2024 as compared to 73% for the three months ended June 30, 2023.

Previous wording

We recorded $4,486,389 and $4,542,461 in reserves for obsolete and excess inventories at March 31, 2024 and December 31, 2023, respectively. Total raw materials, component parts, and work-in-progress were $2,964,525 and $3,065,049 at March 31, 2024 and December 31, 2023, respectively, a decrease of $100,524 (3%). Finished goods balances were $4,670,553 and $5,322,693 at March 31, 2024 and December 31, 2023, respectively, a decrease of $652,140 (12%) which was attributable to a decrease in finished goods from our entertainment segment. The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory, offset by the decrease in reserve at the entertainment segment. We believe the reserves are appropriate given our inventory levels as of March 31, 2024.

Current wording

We recorded $4,135,001 and $4,542,461 in reserves for obsolete and excess inventories at June 30, 2024 and December 31, 2023, respectively. Total raw materials, component parts, and work-in-progress were $2,630,162 and $3,065,049 at June 30, 2024 and December 31, 2023, respectively, a decrease of $434,887 (14%). Finished goods balances were $3,722,972 and $5,322,693 at June 30, 2024 and December 31, 2023, respectively, a decrease of $1,599,721 (30%) which was attributable to a decrease in finished goods from our entertainment segment. The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory, offset by the decrease in reserve at the entertainment segment. We believe the reserves are appropriate given our inventory levels as of June 30, 2024.

Previous wording

Overall cost of service revenue sold for the three months ended March 31, 2024, and 2023 was $2,438,259 and $3,851,298, respectively, a decrease of $1,413,039 (37%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended March 31, 2024, and 2023 was 62% and 73%, respectively. Cost of service revenues by operating shipment is as follows:

Current wording

Overall cost of service revenue sold for the three months ended June 30, 2024, and 2023 was $1,954,589 and $3,323,077, respectively, a decrease of $1,368,488 (41%). Overall cost of goods sold for services as a percentage of service revenues for the three months ended June 30, 2024, and 2023 were 57% and 64%, respectively. Cost of service revenues by operating shipment is as follows:

Previous wording

The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Cost of service revenues as a percentage of service revenues for the video solutions segment decreased to 36% for the three months ended March 31, 2024 as compared to 46% for the three months ended March 31, 2023.

Current wording

The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Cost of service revenues as a percentage of service revenues for the video solutions segment decreased to 35% for the three months ended June 30, 2024 as compared to 42% for the three months ended June 30, 2023.

Previous wording

The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Cost of service revenues as a percentage of service revenues for the entertainment segment was 73% for the three months ended March 31, 2024 as compared to 91% for the three months ended March 31, 2023.

Current wording

The decrease in entertainment operating segment cost of service revenues is commensurate with the decrease in service revenues in the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Cost of service revenues as a percentage of service revenues for the entertainment segment was 74% for the three months ended June 30, 2024 as compared to 77% for the three months ended June 30, 2023.

Previous wording

Overall gross profit for the three months ended March 31, 2024 and 2023 was $1,523,699 and $1,544,792, respectively, a decrease of $21,093 (1%). Gross profit by operating segment was as follows:

Current wording

Overall gross profit for the three months ended June 30, 2024 and 2023 was $242,392 and $2,737,040, respectively, a decrease of $2,494,648 (91%). Gross profit by operating segment was as follows:

Previous wording

The overall decrease is attributable to the decrease in revenues for the three months ended March 31, 2024 and a decrease in the overall cost of sales as a percentage of overall revenues to 72% for the three months ended March 31, 2024 from 80% for the three months ended March 31, 2023. Our goal is to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, Shield TM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.

Current wording

The overall decrease is attributable to the decrease in gross profit for the entertainment segment for the three months ended June 30, 2024 along with a decrease in the overall cost of sales as a percentage of overall revenues to 96% for the three months ended June 30, 2024 from 67% for the three months ended June 30, 2023. Our goal is to continue to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, Shield TM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. In addition, if revenues from the video solutions segment increase, we will seek to further improve our margins from this segment through expansion and increased efficiency utilizing fixed manufacturing overhead components. We plan to continue our initiative to more efficiently management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices.

Previous wording

Selling, general and administrative expenses were $5,162,732 and $7,717,598 for the three months ended March 31, 2024 and 2023, respectively, a decrease of $2,554,865 (33%). The decrease was primarily attributable to the reduction in sponsorships and advertising being by the Company. Our selling, general and administrative expenses as a percentage of sales increased to 93% for the three months ended March 31, 2024 compared to 100% in the same period in 2023. The significant components of selling, general and administrative expenses are as follows:

Current wording

Selling, general and administrative expenses were $4,156,613 and $7,677,744 for the three months ended June 30, 2024 and 2023, respectively, a decrease of $3,521,131 (46%). The decrease was primarily attributable to the reduction in new sponsorships being entered into by the Company. Our selling, general and administrative expenses as a percentage of sales decreased to 74% for the three months ended June 30, 2024 compared to 93% in the same period in 2023. The significant components of selling, general and administrative expenses are as follows:

Previous wording

***Research and development expense.***We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $487,466 and $934,939 for the three months ended March 31, 2024 and 2023, respectively, a decrease of $447,473 (48%). Most of our engineers are dedicated to research and development activities for new products, primarily the new generation of body-worn cameras, EVO-HD and EVO Fleet that can be located in multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings based on our new body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources.

Current wording

***Research and development expense.***We continue to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $545,776 and $540,276 for the three months ended June 30, 2024 and 2023, respectively. Most of our engineers are dedicated to research and development activities for new products, primarily the new generation of body-worn cameras, EVO-HD and EVO Fleet that can be located in multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings based on our new body-worn camera and EVO-HD product platform and as we outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and intend to continue to invest in this area on a prudent basis and consistent with our financial resources.

Previous wording

***Selling, advertising and promotional expenses.***Selling, advertising and promotional expense totaled $761,118 and $1,847,489 for the three months ended March 31, 2024 and 2023, respectively, a decrease of $1,086,371 (59%). Promotional and advertising expenses represent the primary component of these costs and totaled $377,231 during the three months ended March 31, 2024, compared to $1,460,823 during the three months ended March 31, 2023, a decrease of $1,083,592 (74%). The decrease is primarily attributable to the reduction in sponsorships being entered into by the Company.

Current wording

***Selling, advertising and promotional expenses.***Selling, advertising and promotional expense totaled $728,906 and $2,104,625 for the three months ended June 30, 2024 and 2023, respectively, a decrease of $1,357,719 (65%). Promotional and advertising expenses represent the primary component of these costs and totaled $387,179 during the three months ended June 30, 2024, compared to $1,654,593 during the three months ended June 30, 2023, a decrease of $1,267,414 (77%). The decrease is primarily attributable to the reduction in new sponsorships being entered into by the Company. Additionally, TicketSmarter remains active in sponsorship and advertising, as it continues to build its brand and gain recognition.

Previous wording

General and administrative expense. General and administrative expenses totaled $3,914,149 and $4,935,170 for the three months ended March 31, 2024 and 2023, respectively, a decrease of $1,021,021 (21%). The decrease in general and administrative expenses in the three months ended March 31, 2024 compared to the same period in 2023 is primarily attributable to a decrease in administrative salaries, as payroll begins to adjust from the new acquisitions completed by the Company and reductions in headcount. General and administrative expenses also decreased due to a decline in rent expenses for the three months ended March 31, 2024 compared to the same period in 2023.

Current wording

General and administrative expense. General and administrative expenses totaled $2,881,931 and $5,032,843 for the three months ended June 30, 2024 and 2023, respectively. The decrease in general and administrative expenses in the three months ended June 30, 2024 compared to the same period in 2023 is primarily attributable to a decrease in administrative salaries and reductions in headcount. General and administrative expenses also decreased due to a decline in travel expenses and legal and professional expenses for the three months ended June 30, 2024 compared to the same period in 2023.

Previous wording

For the reasons stated above, our operating loss was $3,639,034 and $6,172,806 for the three months ended March 31, 2024 and 2023, respectively, a decrease of $2,533,772 (41%). Operating loss as a percentage of revenues decreased to 66% in the three months ended March 31, 2024 from 80% in the same period in 2023.

Current wording

For the reasons stated above, our operating loss was $3,914,221 and $4,940,704 for the three months ended June 30, 2024 and 2023, respectively, an improvement of $1,026,483 (21%). Operating loss as a percentage of revenues increased to 70% in the three months ended June 30, 2024 from 60% in the same period in 2023.

Previous wording

During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities during three months ended March 31, 2024 totaled $348,891, compared to $-0- for the three months March 31, 2023, which was recognized as a loss on the Consolidated Statements of Operations.

Current wording

During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes previously described. The Company issued an additional 1,768,227 warrants in June 2024. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities from March 31, 2024, to June 30, 2024, totaled $2,818, as a result a loss was recognized in the income statement for the three months ended June 30, 2024.

Previous wording

Other income increased to $27,602 for the three months ended March 31, 2024, from $25,393 during the three months ended March 31, 2023, which largely reflects income related to a warehouse lease within the corporate headquarters.

Current wording

Other income (loss) increased to $30,445 for the three months ended June 30, 2024, from $25,394 during the three months ended June 30, 2023, which reflects income related to a warehouse lease within the corporate headquarters.

Previous wording

As a result of the above results of operations, we reported a loss before income tax benefit of $3,943,268 and $5,979,579 for the three months ended March 31, 2024 and 2023, respectively, a decrease of $2,036,311 (34%).

Current wording

As a result of the above results of operations, we reported a loss before income tax benefit of $5,010,551, and $8,320,549 for the three months ended June 30, 2024 and 2023, respectively, a decrease of $3,309,998 (40%).

Previous wording

We did not record an income tax expense related to our income for the three months ended March 31, 2024 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of March 31, 2024. We had approximately $145.0 million of net operating loss carryforwards and $1.8 million of research and development tax credit carryforwards as of March 31, 2024 available to offset future net taxable income.

Current wording

We did not record an income tax expense related to our income for the three months ended June 30, 2024 due to our overall net operating loss carryforwards available. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of June 30, 2023. We had approximately $113.3 million of net operating loss carryforwards and $1.8 million of research and development tax credit carryforwards as of June 30, 2024 available to offset future net taxable income.

Previous wording

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.

Current wording

The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income of Nobility Healthcare which is reflected in the statement of income as “net income attributable to noncontrolling interests of consolidated subsidiary”. We reported net income attributable to noncontrolling interests of consolidated subsidiary of $73,310 and $72,755 for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

As a result of the above, we reported a net loss attributable to common stockholders of $3,931,020 and $6,105,818 for the three months March 31, 2024 and 2023, respectively, a decrease of $2,174,798 (36%).

Current wording

As a result of the above, we reported a net loss attributable to common stockholders of $5,083,861 and $8,393,304 for the three months June 30, 2024 and 2023, respectively, an improvement of $3,309,443 (39%).

Previous wording

The basic and diluted loss per share was $1.37 and $2.22 for the three months ended March 31, 2024 and 2023, respectively. Basic loss per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended March 31, 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 loss per share.

Current wording

The basic and diluted loss per share was $1.74 and $3.01 for the three months ended June 30, 2024 and 2023, respectively. Basic loss per share is based upon the weighted average number of common shares outstanding during the period. For the three months ended June 30, 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 loss per share.

Previous wording

The decrease in cost of goods sold for our video solutions segment products is directly correlated with the decrease in product sales for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. In addition, the Video Solutions Segment recorded valuation allowances for its older product lines and a portion of its Shield™ products during the first quarter of 2023. Cost of product sold as a percentage of product revenues for the video solutions segment increased to 111% for the three months ended March 31, 2024 as compared to 87% for the three months ended March 31, 2023.

Current wording

The decrease in cost of goods sold for our video solutions segment products is directly correlated with the decrease in product sales for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. In addition, the video solutions segment recorded valuation allowances for its older product lines and a portion of its Shield products during the first six months of 2023, directly increasing cost of goods sold for the period. Cost of product sold as a percentage of product revenues for the video solutions segment improved to 131% for the six months ended June 30, 2024 as compared to 79% for the six months ended June 30, 2023.

Previous wording

Gain on extinguishment of liabilities increased to $682,345 for the period ended March 31, 2024, from $-0- during the period ended March 31, 2023, which reflects income related to the video segment’s ability to negotiate down payables and contract liabilities during the period.

Current wording

During the second quarter of 2024, the Company recorded a gain on the extinguishment of liabilities for the six months ended June 30, 2024 of $682,345, which reflects income related to the video segment’s ability to negotiate down payables and contract liabilities during the period.

Previous wording

The Company recorded a loss on sale of fixed assets of $41,661 and $-0- for the three months ended March 31, 2024 and 2023.

Current wording

The Company recorded a loss on sale of fixed assets of $41,661 and $-0- for the six months ended June 30, 2024 and 2023.

Previous wording

Cash, cash equivalents, and restricted cash: As of March 31, 2024, we had cash, cash equivalents, and restricted cash with an aggregate balance of $1,025,461, an increase from a balance of $778,149 at December 31, 2023. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $247,312 net increase in cash during the three months ended March 31, 2024:

Current wording

Cash, cash equivalents: As of June 30, 2024, we had cash, cash equivalents and restricted cash with an aggregate balance of $614,713, a decrease from a balance of $778,149 at December 31, 2023. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $163,436 net decrease in cash during the six months ended June 30, 2024:

Previous wording

We had $1,025,461 of cash and cash equivalents, including restricted cash of $97,600, and net negative working capital $9,624,118 as of March 31, 2024. Accounts receivable and other receivables balances represented $4,421,492 of our net working capital at March 31, 2024. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2024, which would help to provide positive cash flow to support our operations during 2024. Inventory represents $3,148,689 of our net working capital at March 31, 2024. We are actively managing the level of inventory and our goal is to reduce such level during the balance of 2024 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2024.

Current wording

We had $614,713 of cash and cash equivalents, including restricted cash of $97,600 and net negative working capital of $13,431,836 as of June 30, 2024. Accounts receivable and other receivables balances represented $4,889,038 of our net working capital at June 30, 2024. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2024, which would help to provide positive cash flow to support our operations during 2024. Inventory represents $2,218,133 of our net working capital at June 30, 2024. We are actively managing the level of inventory and our goal is to reduce such level during the balance of 2024 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2024.

Previous wording

The components of lease expense were as follows for the three months ended March 31, 2024:

Current wording

The components of lease expense were as follows for the six months ended June 30, 2024:

Previous wording

For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible, with less than $258,000 charged off as uncollectible on cumulative revenues of $248.0 million since we commenced deliveries during 2006.

Current wording

For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible, with less than $258,000 charged off as uncollectible on cumulative revenues of $253.6 million since we commenced deliveries during 2006.

Previous wording

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 59% of the gross inventory balance at March 31, 2024, compared to 54% of the gross inventory balance at December 31, 2023. We had $4,486,389 and $4,542,461 in reserves for obsolete and excess inventories at March 31, 2024 and December 31, 2023, respectively. Total raw materials, component parts, and work-in-process were $2,964,525 and $3,065,049 at March 31, 2024 and December 31, 2023, respectively, a decrease of $100,524 (3%). Finished goods balances were $4,670,553 and $5,322,693 at March 31, 2024 and December 31, 2023, respectively, a decrease of $652,140 (12%). The small decrease in the inventory reserve is primarily due to the reduction in finished goods and movement of excess inventory. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of March 31, 2024.

Current wording

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 65% of the gross inventory balance at June 30, 2024, compared to 54% of the gross inventory balance at December 31, 2023. We had $4,135,001 and $4,542,461 in reserves for obsolete and excess inventories at June 30, 2024 and December 31, 2023, respectively. Total raw materials, component parts, and work-in-process were $2,630,162 and $3,065,049 at June 30, 2024 and December 31, 2023, respectively, a decrease of $434,887 (14%). Finished goods balances were $3,722,972 and $5,322,693 at June 30, 2024 and December 31, 2023, respectively, a decrease of $1,599,721 (30%). 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 June 30, 2024.

Previous wording

Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were increased to $20,529 as of March 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 begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.

Current wording

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 June 30, 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 begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.

Previous wording

**Stock-based Compensation Expense.**We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were no stock options granted during the three months ended March 31, 2024.

Current wording

**Stock-based Compensation Expense.**We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were no stock options granted during the three or six months ended June 30, 2024.

Previous wording

As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. As of March 31, 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 $7,410,000 to a balance of $41,610,000 to fully reserve our deferred tax assets at December 31, 2023. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of March 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.

Current wording

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 June 30, 2023, we have fully reserved all of our deferred tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased by $17,220,000 to a balance of $34,200,000 to fully reserve our deferred tax assets at December 31, 2023. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of June 30, 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.

Previous wording

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 are 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.

Current wording

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.