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. Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal 2021 and 2020; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to deliver our new product offerings as scheduled in 2022, and whether new products perform as planned or advertised and whether they will help increase our revenues; (7) whether we will be able to increase the sales, domestically and internationally, for our products in the future; (8) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (9) our ability to produce our products in a cost-effective manner; (10) competition from larger, more established companies with far greater economic and human resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities as customers; (13) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (14) characterization of our market by new products and rapid technological change; (15) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (16) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (17) our dependence on key personnel; (18) our reliance on third-party distributors and sales representatives for part of our marketing capability; (19) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (20) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (21) our ability to generate more recurring cloud and service revenues; (22) risks related to our license arrangements; (23) our revenues and operating results may fluctuate unexpectedly from quarter to quarter; (24) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (25) the sale of substantial amounts of our Common Stock that may have a depressive effect on the market price of the outstanding shares of our Common Stock; (26) the possible issuance of Common Stock subject to options and warrants that may dilute the interest of stockholders; (27) our nonpayment of dividends and lack of plans to pay dividends in the future; (28) future sale of a substantial number of shares of our Common Stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (29) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our Common Stock; (30) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (31) whether such technology will have a significant impact on our revenues in the long-term; (32) whether we will be able to meet the standards for continued listing on the Nasdaq Capital Market; and (33) indemnification of our officers and directors. 16
Current Trends and Recent Developments for the Company
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; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as "event recorders" for the commercial fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu® which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual's temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria. We began offering our Shield™ disinfectants and cleansers to our law enforcement and commercial customers late in the second quarter of 2020. Revenue Cycle Management Operating Segment - We have recently entered the revenue cycle management business late in the second quarter of 2021 with the formation of our wholly owned subsidiary,Digital Ally Healthcare, Inc. and its majority-owned subsidiaryNobility Healthcare .Nobility Healthcare completed its first acquisition onJune 30, 2021 , when it acquired a private medical billing company, and a second acquisition onAugust 31, 2021 upon the completion of its acquisition of another private medical billing company, 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, leafing to substantial improvements in their operating margins and cash flows. Ticketing Operating Segment - We have also recently entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter and its completed acquisitions ofGoody Tickets, LLC andTicketSmarter, LLC , onSeptember 1, 2021 . TicketSmarter provides ticket sales, partnerships, and mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events through its platform, for a wide range of events, including concerts, sporting events, theatres, and performing arts,
throughout the country. Segment Overview
Our reportable segments are: 1) video solutions, 2) revenue cycle management, and 3) ticketing.
Video Solutions Operating Segment
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 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. To judge the health of our video solutions segment, we review the current active subscriptions and deferred service revenues, along with the quantity and gross margins generated by our video solutions hardware sales.
Revenue Cycle Management Operating Segment
Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment arerecognized after we perform our 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.
To judge the health of our revenue cycle management segment, we review the collection success rate and collection timing. In addition, we review the associated costs incurred to assist our customers, and any changes in operating margins and cash flows.
17 Ticketing Operating Segment Our ticketing operating segment consists of ticketing 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. Ticketing direct expenses include the cost of tickets purchased for resale by the Company and holds as inventory, credit card fees, ticketing platform expenses, website maintenance fees, along with other administrative costs. To judge the health of our ticketing operating segment, we review the gross transaction value, which represents the total value related to a ticket sale and includes the face value of the ticket as well as the service charge. In addition, we review the number of visits to our websites, cost of customer acquisition, the purchase conversion rate, the overall number of customers in our database, and the number and percentage of tickets sold via the website
and mobile app. Results of Operations
Summarized financial information for the Company's reportable business segments
is provided for the years ended
Years Ended December 31, 2021 2020 Net Revenues: Video Solutions$ 9,073,626 $ 10,514,868 Revenue Cycle Management 1,630,048 - Ticketing 10,709,760 - Total Net Revenues$ 21,413,434 $ 10,514,868 Gross Profit: Video Solutions$ 2,002,345 $ 4,062,594 Revenue Cycle Management 521,047 - Ticketing 3,140,382 - Total Gross Profit$ 5,663,774 $ 4,062,594 Operating Income (loss): Video Solutions$ (4,497,196 ) $ (578,417 ) Revenue Cycle Management 93,763 - Ticketing 235,432 - Corporate (10,592,909 ) (7,085,234 )
Total Operating Income (Loss)
Depreciation and Amortization: Video Solutions$ 395,361 $ 250,156 Revenue Cycle Management - - Ticketing 427,128 -
Total Depreciation and Amortization
Assets (net of eliminations): Video Solutions$ 25,983,348 $ 16,435,769 Revenue Cycle Management 934,095 - Ticketing 12,260,780 - Corporate 43,810,974 4,361,758 Total Identifiable Assets$ 82,989,197 $ 20,797,527 Segment net revenues reported above represent only sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income (loss), which is used in management's evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets.
Consolidated Results of Operations
We experienced operating losses for all quarters during 2021 and 2020. The following is a summary of our recent operating results on a quarterly basis: For the Three Months Ended: December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2021 2021 2021 2021 2020 2020 2020 2020 Total revenue$ 11,744,112 $ 4,639,822
2,190,523 1,400,570 1,260,800 811,882 1,182,160 1,222,648 392,758 1,265,028 Gross profit margin percentage 18.7 % 30.2 % 50.6 % 32.0 % 43 % 34.1 % 22.7 % 52.2 % Total selling, general and administrative expenses 7,869,883 4,999,543 3,877,684 3,677,575 2,931,334 3,066,606 2,535,912 3,192,396 Operating loss (5,679,360 ) (3,598,973
) (2,616,884 ) (2,865,693 ) (1,749,174 ) (1,843,958 ) (2,143,154 ) (1,927,368 ) Operating loss percentage
(48.4 )% (77.6 )% (104.9 )% (113.0 )% (63.2 )% (51.4 )% (123.7 )% (79.5 )% Net income/(loss)$ 1,122,791 $ 8,068,799
Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; (7) the impact of COVID-19 on the economy and our businesses; and (8) the completion of corporate acquisitions including the 2021 purchases in the revenue cycle management and ticketing operating segments. We reported net income of$1,122,790 on revenues of$11,744,112 for fourth quarter 2021. 18
The factors and trends affecting our recent performance include:
? The Company formed two new operating segments in 2021 and revenues increased
in the third and fourth quarters of 2021 compared to the previous quarters.
The primary reason for the revenue increase, beginning in the third quarter of
2021 is the completion of three acquisitions, being TicketSmarter which is
included in our ticketing operating segment and two acquisitions of medical
billing companies through our revenue cycle management operating segment. The
new ticketing operating segment generated
its acquisition date of
management operating segment generating
ended
from our two new operating segments and their recent acquisitions, and expect
to continue acquiring new businesses particularly in our revenue cycle
management operating segment. We are employing a roll-up strategy in our
revenue cycle management operating segment and have completed two acquisitions
in 2022 and have a signed letter of intent to acquire a third in 2022.
? Our objective is to expand our video solutions segment's recurring service
revenue to help stabilize our revenues on a quarterly basis. Revenues from
cloud storages have been increasing in recent quarters and reached
approximately
(32%) over the fourth quarter of 2020. Overall, cloud revenues increased to
approximately
approximately
traditional law enforcement and private security customers, similar to our
appeal of our products and service capabilities to new commercial markets. If
successful, we believe that these new market channels could yield recurring
service revenues for us in the future.
? We have a multi-year official partnership with
Technology Provider of
cameras that are mounted in the Monster Energy NASCAR Cup Series garage
throughout the season, bolstering both
racetrack, as well as enhancing its officiating process through technology.
Our relationship with
related sponsors. We believe this partnership with
flexibility of our product offerings and help expand the appeal of our
products and service capabilities to new commercial markets. We also have an
affiliation with the Indy series races and, in particular, the Rahal Letterman
relationships provide us with access to many potential customers through the
various programs supported by both the
? On
a Termination Agreement and Mutual Release (the "Termination Agreement").
Under the terms of the Termination Agreement, the Company made a payment in
the amount of
Proceeds Investment Agreement (the "PIA"), which they previously entered into
on
the PIA. As a result, any obligations under the PIA have been extinguished and
a
2020.
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 13, "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. 19
For the Years Ended
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 endedDecember 31, 2021 and 2020, represented as a percentage of total revenues for each respective year: Years Ended December 31, 2021 2020 Revenue 100 % 100 % Cost of revenue 74 % 61 % Gross profit 26 % 39 % Selling, general and administrative expenses: Research and development expense 9 % 18 % Selling, advertising and promotional expense 27 % 25 % General and administrative expense 60 % 69 % Total selling, general and administrative expenses 96 % 112 % Operating loss (69 )% (73 )%
Change in fair value of derivative liabilities 171 % - % Change in fair value of contingent consideration promissory notes and earn-out agreements 17 % - % Warrant modification expense (1 )% - % Change in fair value of short-term investments - % - % Change in fair value of note payable - % (12 )% Change in fair value of proceeds investment agreement - % 50 % Gain on extinguishment of debt - % 13 % Secured convertible note payable issuance expenses - % (1 )% Interest income (expense) and other income, net 1 % - % Income (loss) before income tax benefit 119 %
(25 )% Income tax expense (benefit) - % - % Net income (loss) 119 % (25 )% Net loss attributable to noncontrolling interests of consolidated subsidiary - % - % Net income (loss) attributable to common stockholders 119 % 107 % Net loss per share information: Basic $ 0.51 $ (0.12 ) Diluted $ 0.51 $ (0.12 ) Revenues
Revenues by Type and by Operating Segment
Our operating segments generate two types of revenues:
Product revenues primarily includes video operating segment hardware sales of in-car and body-worn cameras, along with sales of our ThermoVuTM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale of tickets by our ticketing operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our ticketing 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 ticketing operating segments' secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services provided to medical providers throughout the country. 20
The following table presents revenues by type and segment:
Year Ended December 31, 2021 % Change 2020 Product revenues: Video solutions$ 6,393,050 (20.4 )%$ 8,029,457 Ticketing 2,787,237 100 % - Total product revenues 9,180,287 14.3 % 8,029,457 Service and other revenues: Video solutions 2,680,576 7.9 % 2,485,411 Ticketing 7,922,523 100 % - Revenue cycle management 1,630,048 100 % -
Total service and other revenues 12,233,147 392.2 % 2,485,411 Total revenues
$ 21,413,434 103.6 %$ 10,514,868 Current product offerings from our video operating segment include the following: Product Description EVO-HD An in-car digital audio/video system which records in 1080P HD video and is designed for law enforcement and commercial fleet customers. This system includes two cameras and can use up to four external cameras for a total of four video streams. This system includes integrated, patented VuLink technology, internal GPS, and an internal Wi-Fi Module. The system includes the choice between a Wireless Microphone Kit or the option to use the, FirstVy PRO, FirstVu II, or FirstVu HD Body Camera as the wireless microphone. This system also includes a three-year advanced exchange warranty. We offer a cloud storage solution to manage the recorded evidence and charge a monthly device license fee for our cloud storage. DVM-750 An in-car digital audio/video system that is integrated into a rear-view mirror primarily designed for law enforcement customers. We offer local storage as well as cloud storage solutions to manage the recorded evidence. We charge a monthly storage fee for our cloud storage option and a one-time fee for the local storage option. This product is being discontinued and phased out of our product line but we are supporting existing customers with new products and repair and parts. DVM-250 An in-car digital audio/video system that is integrated into a Plus/DVM-250 rear-view mirror primarily designed for commercial fleet customers. We offer a web-based, driver management and monitoring analytics package for a monthly service fee that is available for our DVM-250 customers. FLT-250 The same great features of the DVM-250 in a new compact, non-mirrored form factor that allows for multiple mounting options in any vehicle type for commercial fleets. DVM-800 An in-car digital audio/video system which records in 480P standard definition video that is integrated into a rear-view mirror primarily designed for law enforcement customers. This system can use an internal fixed focus camera or two external cameras for a total of four video streams. This system also includes the premium package which has additional warranty. We offer local storage as well as cloud storage solutions to manage the recorded evidence. We charge a monthly storage fee for our cloud storage option and a one-time fee for the local storage option. DVM-800 Lite An in-car digital audio/video system which records in 480P standard definition video that is integrated into a rear view mirror primarily designed for law enforcement customers. This system can use an internal fixed focus camera or two external cameras for a total of four video streams. We offer local storage as well as cloud storage solutions to manage the recorded evidence. We charge a monthly storage fee for our cloud storage option and a one-time fee for the local storage option. This system is replacing the DVM-100 and DVM-400 product offerings and allows the customer to configure the system to their needs. 21 FirstVu Pro A body-worn camera system that is light weight, one-piece unit that captures full HD video and audio, while offering industry leading features such as live streaming, a full-color touchscreen display, an advanced image sensor with IR LEDs, proprietary image distortion reduction, IP67 rated resisting dust & wind and is water submersible for 30 minutes at a depth of 3 feet. It is MIL-STD-810G compliant capable of handling drops, shock, and vibration, and will function flawlessly in a wide temperature range. We also offer a cloud-based evidence storage and management solution for our FirstVu Pro customers for a monthly service fee. FirstVu II A body-worn camera system that is a one-piece device and offers industry leading technology such as an articulating camera head, a full-color display, an advanced image sensor, and GPS. It can be used by law enforcement, private and event security and commercial customers. We also offer a cloud-based evidence storage and management solution for our FirstVu II customers for a monthly service fee. FirstVu HD A body-worn digital audio/video camera system primarily designed for law enforcement customers. We also offer a cloud-based evidence storage and management solution for our FirstVu HD customers for a monthly service fee. VuLink An in-car device that enables an in-car digital audio/video system and a body worn digital audio/video camera system to automatically and simultaneously start recording. QuickVu Compatible with the FirstVu PRO and FirstVu II, the QuickVu Docking docking stations provide a comprehensive and elegant solution for Stations storing and charging body cameras while uploading video evidence to the cloud. QuickVu also allows for rapid reviewing of footage right from the interactive touchscreen display. Available in eight (8) or twenty-four (24) individual docking bays. 12-Bay Compatible with the FirstVu HD body-worn camera, the 12-bay Docking docking station includes a 1TB local memory hard drive and can Stations & simultaneously upload 4 hours of video from 12 FirstVu HD cameras Mini-Docks within a 15-minute shift change and push configuration updates. The Mini-Dock is a single unit, portable smart dock that uploads video evidence to VuVault.com from a FirstVu HD body camera. ThermoVuTM A non-contact temperature-screening instrument that measures temperature through the wrist and controls entry to facilities when temperature measurements exceed pre-determined parameters ShieldTM Disinfectant and cleanser line, which is for use against viruses line and bacteria, that is less harsh than many of the traditional products now widely distributed. Offered in a variety of sizes and quantities. Also offering personal protective equipment, including nitrile and vinyl gloves, level 3 and N95 NIOSH certified face masks, as well as the electrostatic sprayer. Event TicketSmarter offers ticket to over 125,000 live events through Ticketing their ticket marketplace, including sporting events, concerts, and theatre. TicketSmarter is the official resale partner of more than 35 collegiate conferences, 300+ universities, and hundreds of events and venues.
Our video operating segment sells our products and services to customers in the following manner:
? Sales to domestic customers are made directly to the end customer (typically a
law enforcement agency or a commercial customer) through our sales force,
comprised of our employees. Revenue is recorded when the product is shipped to
the end customer.
? Sales to international customers are made through independent distributors who
purchase products from us at a wholesale price and sell to the end user
(typically law enforcement agencies or a commercial customer) at a retail
price. The distributor retains the margin as its 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.
22 ? Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is
recognized upon shipment of the repair parts and acceptance of the service or
materials by the end customer.
Our revenue cycle management operating segment sells its services to customers in the following manner:
? Our revenue cycle management operating segment generates service revenues
through relationships with medium to large healthcare organizations, in which
the underlying service revenue is recognized upon execution of services.
Service revenues are generally determined as a percentage of the amount of
medical billings collected by the customer.
Our ticketing operating segment sells our products and services to customers in the following manner:
? Our ticketing operating segment generates product revenues from the sale of
tickets directly to consumers for a particular event that the ticketing
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.
The COVID-19 pandemic had an impact on all of our operating segment revenue streams for the year endedDecember 31, 2021 . In particular, it had a negative impact generally on our video solutions operating segment legacy products and, specifically, our commercial event recorder hardware (DVM-250 Plus) and in-car hardware for law enforcement (DVM-800) during the year. Ticketing operating segment revenues were also negatively impacted due to the cancellation of a number of live events and government-imposed restrictions and large gatherings. Our revenue cycle management operating segment was also affected due to the higher level of healthcare service utilization due to the pandemic while certain elective and routine healthcare services were reduced due to COVID-19 pandemic restrictions.
Product revenues for the years ended
? Revenues generated by the new ticketing operating segment began with the
Company's recent acquisition of TicketSmarter on
new ticketing operating segment generated
for the year ended
live events, including sporting events, concerts, and theatre, then sold
through various platforms to customers.
? The Company's video segment operating segment generated revenues totaling
over$6,393,050 during the years endedDecember 31, 2021 compared to$8,029,457 for the year endedDecember 31, 2020 due to new product lines
in 2020 related to our COVID-19 response. Late in the second quarter of
2020, the Company launched two product lines in direct response to the increased safety precautions that organizations and individuals are taking due to the COVID-19 pandemic. ThermoVu™ was launched as a
non-contact temperature-screening instrument that measures temperature
through the wrist and controls entry to facilities when temperature
measurements exceed pre-determined parameters. ThermoVu™ has optional
features such as facial recognition to improve facility security by
restricting access based on temperature and/or facial recognition
reasons. ThermoVu™ provides an instant pass/fail audible tone with its
temperature display and controls access to facilities based on such results. ThermoVuTM has been applied in schools, dental office, hospitals, office buildings, and other public venues. The Company also
launched its Shield™ disinfectant/sanitizer product lines to fulfill
demand by current customers and others for a disinfectant and sanitizer
that is less harsh than many of the traditional products now widely
distributed. The Shield™ Cleanser product line contains a cleanser with
no harsh chemicals or fumes. 23
The Company's video solution operating segment began offering the Shield™ line
of disinfecting products to its first responder customers including police,
fire and paramedics late in the second quarter of 2020. Commercial customers
such as hospitals, dental offices, office buildings, retail stores, and
restaurants have applied these products. The Company has enhanced the line of
disinfectant products through the newly designed Shield Electrostatic Sprayer
to efficiently and effectively dispense the disinfectants. The Company is
hopeful that its law enforcement and commercial customers will adopt this new
product offering to combat the spread of the COVID-19 virus as well as other
bacteria and viruses.
? The video solutions operating segment shipped seven individual
orders in excess of$100,000 , for a total of approximately$986,062 in revenue for the year endedDecember 31, 2021 , compared to four individual orders in excess of$100,000 , for a total of approximately$903,910 in revenue for the year endedDecember 31, 2020 .
? 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 over the prior period due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation
proceedings and
our recent financial condition. We introduced our EVO-HD late in the second quarter of 2019 with the goal of enhancing our product line features to meet these competitive challenges and we started to see traction in late 2019. We expect customers and potential customers to review and test the EVO-HD prior to committing to this new product platform, all of which has been delayed due to the COVID-19 pandemic. Additionally, we introduced or new body-worn cameras, the FirstVu Pro and FirstV II, in the fourth quarter of 2021, with the goal of shipping these products in the first quarter of 2022. We hope to see increased traction with these products into 2022 after the market is able to review and test these new products. ? Our video solutions operating segment product shipments have been particularly impacted by the COVID-19 pandemic because of delays in the shipment of certain law enforcement orders since the first quarter of 2020 as police forces and governments deal with its impact. Our product sales to law enforcement decreased for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , as the impact of the COVID-19 pandemic continues to impact our business. The COVID-19 pandemic impact remains relevant, as the shipment of commercial orders during the year endedDecember 31, 2021 remain slow, and cruise lines, taxi cabs, paratransit and other commercial customers continue to deal with its impact. Our product sales to commercial customers decreased for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 due to the impact of the COVID-19 pandemic. ? Our video solutions operating segment management has been focusing on migrating customers, and in particular commercial
customers, from
a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250's, FLT-250's, and our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has 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. 24 Service and other revenues for the years endedDecember 31, 2021 and 2020 were$12,233,147 and$2,485,411 , respectively, an increase of$9,747,736 (392.2%), due to the following factors: ? Cloud revenues generated by the video solutions operating segment were$1,055,965 and$954,873 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$101,092 (11%). We have experienced increased interest in our cloud solutions for law enforcement primarily due to the deployment of our
cloud-based
EVO-HD in-car system and our next generation body-worn camera products, which contributed to our increased cloud revenues
in the
year endedDecember 31, 2021 . We expect this trend to
continue for
2022 as the migration from local storage to cloud storage continues in our customer base. ? Video solutions operating segment revenues from extended warranty services were$978,018 and$1,173,169 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$195,151 (17%). We have many customers that have purchased extended warranty packages, primarily in our DVM-800 premium service program. However, the fallout from the COVID-19 pandemic and related restrictions on travel adversely affected our sales of DVM-800 hardware systems resulting in a decrease in their sales of 15% in the 2021 period compared to 2020.
? Video solutions operating segment installation service revenues were
$204,701 and$180,319 for the years endedDecember 31, 2021
and
2020, respectively, an increase of$24,382 (14%).
Installation
revenues tend to vary more than other service revenue types
and are
dependent on larger customer implementations. The slight
increase in
installation revenues in the years endedDecember 31, 2021 compared to the same period 2020 was attributable to the resumption of previous projects pending install due to the effects related to the COVID-19 pandemic. ? Revenues from building rental income were$290,012 and$-0 - for the years endedDecember 31, 2021 and 2020, respectively, an
increase of
$290,012 (100%). The Company completed the purchase of an office/warehouse building during the years endedDecember 31, 2021 , in which current tenants were under existing agreements. The agreement terminated at the end ofAugust 2021 . ? Our new ticketing operating segment generated service revenues totaling$7,922,523 and$-0 - for the years endedDecember 30, 2021 and 2020, respectively, an increase of$7,922,523 (100%). The Company completed the acquisitions ofGoody Tickets, LLC and TicketSmarter, LLC onSeptember 1, 2021 , thus resulting in the new revenue stream for the Company. TicketSmarter collects fees on transactions administered through the TicketSmarter.com
platform for
the buying and selling of tickets for live events throughout the country. This increase reflects just four months of service revenues by our ticketing operating segment, which we hope will present a strong revenue outlook moving forward. ? Our new revenue cycle management operating segment generated service revenues totaling$1,630,048 and$-0 - for the years endedDecember 31, 2021 and 2020, respectively, an increase of$1,630,048 (100%). Our revenue cycle management operating segment completed the acquisitions of its first medical billing company onJune 30, 2021 and the second medical billing company onAugust 31, 2021 , thus resulting in the new service revenue stream added in the year endedDecember 31, 2021 for the Company. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. This increase reflects three months of the first medical billing company revenues and just one month of the second medical billing company revenues within the new revenue cycle management operating segment, which we home will present a strong revenue outlook moving forward. 25 Total revenues for the years endedDecember 31, 2021 , and 2020 were$21,413,434 and$10,514,868 , respectively, an increase of$10,898,566 (103.6%), due to
the reasons noted above. Cost of Product Revenue
Overall cost of product revenue sold for the years endedDecember 31, 2021 , and 2020 was$8,635,047 and$5,739,572 , respectively, an increase of$2,895,475 (50.4%). Overall cost of goods sold for products as a percentage of product revenues for the years endedDecember 31, 2021 , and 2020 were 94.1% and 71.5%, respectively. Cost of products sold by operating segment is as follows: Years Ended December 31, 2021 2020 Cost of Product Revenues: Video Solutions$ 6,197,061 $ 5,739,572 Revenue Cycle Management - - Ticketing 2,437,986 -
Total Cost of Product Revenues
The increase in cost of goods sold for our video solutions segment products is due to numerous factors including higher sales of the lower margin Shield disinfectant and personal protective products during 2021 and increases in the allowance for excess and obsolete inventory. Cost of product sold as a percentage of product revenues for the video solutions segment increased to 96.9% for the year endedDecember 31, 2021 as compared to 71.5% for the year endedDecember 31, 2020 . The increase in ticketing operating segment cost of product sold is the due to theSeptember 1 , 2021acquisition of TicketSmarter, resulting in an increase to cost of product revenue of$2,437,986 for the year endedDecember 31, 2021 , compared to$-0 - for the year endedDecember 31, 2020 . Cost of product sold as a percentage of product revenues for the ticketing solutions was 87.5% for the year endedDecember 31, 2021 . We recorded$3,353,458 and$1,960,351 in reserves for obsolete and excess inventories for the years endedDecember 31, 2021 and 2020, respectively. Total raw materials and component parts were$3,062,046 and$3,186,426 for the years endedDecember 31, 2021 and 2020, respectively, a decrease of$124,380 (4%). Finished goods balances were$10,512,577 and$6,974,291 for the years endedDecember 31, 2021 andDecember 31, 2020 , respectively, an increase of$3,538,286 (51%) which was attributable to accumulating inventory for the expanded Shield and video solutions product lines, along with$2,102,272 in finished goods from our newly acquired ticketing segment. The increase in the inventory reserve is primarily due to inventory obsolescence for the level of component parts of the older versions of our printed circuit boards and the phase out of our DVM-750, DVM-500 Plus, LaserAlly legacy products, and ThermoVu products. 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 ofDecember 31, 2021 . Cost of Service Revenue
Overall cost of service revenue sold for the years endedDecember 31, 2021 , and 2020 was$7,114,612 and$712,702 , respectively, an increase of$6,401,910 (898.3%). Overall cost of goods sold for services as a percentage of service revenues for the years endedDecember 31, 2021 , and 2020 were 58.2% and 28.7%, respectively. Cost of service revenues by operating shipment is as follows:
Years Ended December 31, 2021 2020 Cost of Service Revenues: Video Solutions$ 874,219 $ 712,702 Revenue Cycle Management 1,109,001 - Ticketing 5,131,392 -
Total Cost of Service Revenues
The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 32.6% for the year endedDecember 31, 2021 as compared to 28.7% for year endedDecember 31, 2020 .
The increase in revenue cycle management operating segment cost of service revenue is the due to the 2021 acquisitions of two medical billing companies in late 2021 The revenue cycle management operating segment was formed in 2021 and did not exist in 2020. Cost of service revenues as a percentage of product revenues for the revenue cycle management operating segment was 68.0% for 2021. The increase in ticketing operating segment cost of service revenues is the due to theSeptember 1, 2021 acquisition of TicketSmarter, resulting in an increase to cost of service revenue of$5,131,392 for the year endedDecember 31, 2021 , compared to$-0 - for the year endedDecember 31, 2020 . Cost of service revenues as a percentage of service revenues for the ticketing increased to 64.8% for the year endedDecember 31, 2021 . Gross Profit
Overall gross profit for the years ended
Gross Profit: Video Solutions$ 2,002,345 $ 4,062,594 Revenue Cycle Management 521,047 - Ticketing 3,140,383 - Total Gross Profit$ 5,663,775 $ 4,062,594 The overall increase is attributable to the large overall increase in revenues for the year endedDecember 31, 2021 and an increase in the overall cost of sales as a percentage of overall revenues to 73.6% for the year endedDecember 31, 2021 from 61.4% for the year endedDecember 31, 2020 . 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 ticketing operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, FirstVu HD, ThermoVuTM, ShieldTM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace and subject to a normalizing economy in the wake of the COVID-19 pandemic. 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. 26
Selling, General and Administrative Expenses
Overall selling, general and administrative expenses were$20,424,685 and$11,726,245 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$8,698,440 (74.2%). The increase was primarily attributable to the recent acquisitions completed in the third quarter of 2021. Our selling, general and administrative expenses as a percentage of sales decreased to 95% for 2021 compared to 112% in the same period in 2020. The significant components of selling, general and administrative expenses are as follows: The significant components of selling, general and administrative expenses are as follows: Year ended December 31, 2021 2020 Research and development expense$ 1,930,784 $
1,842,800
Selling, advertising and promotional expense 5,717,824
2,607,242
Professional fees and expense 1,513,862
990,975
Executive, sales, and administrative staff payroll 3,288,360 2,449,690 Other 7,973,855 3,835,538 Total$ 20,424,685 $ 11,726,245 Selling, general and administrative expenses by operating segment are as follows: Years Ended December 31, 2021 2020 Selling, general and administrative expenses: Video Solutions$ 6,231,254 $ 4,641,011 Revenue Cycle Management 427,284 - Ticketing 2,904,951 - Corporate 10,861,196 7,085,234
Total selling, general and administrative expenses
Research and development expense. Our video solutions operating segment continues to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled$1,930,784 and$1,842,800 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$87,984 (4.8%). We employed 17 engineers atDecember 31, 2021 compared to 15 engineers atDecember 31, 2020 , most of whom are dedicated to research and development activities for new products and primarily the FirstVu Pro, FirstVu II, QuickVu docking stations, ThermoVuTM, ShieldTM, EVO-HD and non-mirror based DVM-250 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 EVO-HD product platform and we continue to outsource more development projects. We consider our research and development capabilities and new product focus to be a competitive advantage and will continue to invest in this area on a prudent basis and consistent with our financial resources. Selling, advertising and promotional expenses. Selling, advertising and promotional expense totaled$5,717,824 and$2,607,242 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$3,110,582 (119.3%). Salesman salaries and commissions for our video solutions segment represent the primary components of these costs and were$1,605,034 and$1,616,267 for the years endedDecember 31, 2021 and 2020, respectively, a slight decrease of$11,233 (1%). The effective commission rate was 7.5% for the year endedDecember 31, 2021 compared to 15.4% for the year endedDecember 31, 2020 . We reduced the number of salesmen in our law enforcement and commercial channels in 2021 compared to 2020. In addition, we are utilizing third-party distributors as a major component of our new Shield and ThermoVu sales channel. Lastly, our recent acquisitions require minimal salespeople, due to their specific service offerings and platforms. Promotional and advertising expenses totaled$4,112,790 during the year endedDecember 31, 2021 compared to$990,975 during the year endedDecember 31, 2020 , an increase of$3,121,815 (315%). The overall increase is primarily attributable to our 2021 sponsorship ofNASCAR and IndyCar, compared to the reduced expense due to the ultimate suspension of the 2020NASCAR season during 2020, and a reduction in attendance at trade shows as a result of the COVID-19 pandemic during 2020. Additionally, TicketSmarter is very active in sponsorship and advertising, as they are continuing to build a brand and gaining recognition. TicketSmarter accounted for$1,541,670 of the total promotional and advertising expense for the year endedDecember 31, 2021 . Professional fees and expense. Professional fees and expenses totaled$1,513,862 and$990,975 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$522,887 (52.8%). The increase in professional fees is primarily attributable to increased legal fees surrounding the two registered direct offerings during the year endedDecember 31, 2021 , along with increased legal and broker fees associated with the Company's numerous acquisitions in 2021, paired with other current due diligence items and opportunities the Company is exploring. Additionally, increased board fees, audit fees, and service fees
are attribute to this increase. 27 Executive, sales and administrative staff payroll. Executive, sales and administrative staff payroll expenses totaled$3,288,360 and$2,449,690 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$838,670 (34.2%). The primary reason for the increase in executive, sales and administrative staff payroll was the recent formation of the revenue cycle management and ticketing operating segments and their acquisitions of the medical billing companies and TicketSmarter which occurred in 2021 and therefore had no impact on 2020 expenses. This increase is also due to a return to regular staff levels compared to the same period in 2020, in which the Company experienced a reduction in technical support staffing in response to the COVID-19 pandemic during the second quarter of 2020, as the COVID-19 pandemic had significantly impacted the Company's new event security business channel in 2020 because many sporting venues were closed including those served by these service technicians. Additionally, this trend is expected to continue because of the acquisitions completed during the year endedDecember 31, 2021 , which resulted in additional payroll expenses with expanded executive positions, sales, and administrative staff numbers compared to 2020. Additionally, the acquisitions completed during the year endedDecember 31, 2021 , resulted in additional payroll expenses with expanded executive positions, sales, and administrative staff numbers. Other. Other selling, general and administrative expenses totaled$7,973,854 and$3,835,538 for the years endedDecember 31, 2021 and 2020, respectively, an increase of$4,138,316 (108%). The increase in other expenses in the year endedDecember 31, 2021 compared to the same period in 2020 is primarily attributable to the increased expenses related to the two new operating segments and their acquisitions, and associated operating expenses, completed during the year endedDecember 31, 2021 , that were not relevant to the year endedDecember 31, 2020 . Additionally, this increase is also attributable to an increase in travel costs as COVID-19 restrictions begin to ease, as well as substantially increased insurance costs compared to the same period in 2020. The increased insurance costs are primarily in general liability and related coverages which premiums have been increased to address the exposure to the COVID-19 pandemic. Operating Loss
For the reasons previously stated, our operating loss was
Interest and Other Income
Interest income increased to$310,200 for the year endedDecember 31, 2021 , from$47,893 in 2020, which reflects our overall higher cash and cash equivalent levels in 2021 compared to 2020. The Company completed two registered direct offerings in the year endedDecember 31, 2021 which yielded net proceeds of approximately$66.4 million which balances have earned increased interest income when compared to the same period in 2020. Additionally, this increase is a result of interest incurred on debt that the Company has issued, as well as interest incurred on leased products. Interest Expense
We incurred interest expense of$28,600 and$342,379 during the years endedDecember 31, 2021 and 2020, respectively. The decrease was attributable to utilizing a portion of the net proceeds from the registered direct offerings to eliminate substantially all interest-bearing debt balances outstanding in the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . OnMay 12, 2020 , the Company received$150,000 in additional loan funding under the Economic Injury Disaster Loans ("EIDL") program administered by theSmall Business Administration ("SBA"). Under the terms of the EIDL promissory note, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of the EIDL promissory note is thirty years and monthly principal and interest payments are deferred for twelve months after the date of disbursement and total$731.00 per month thereafter. Additionally, the increase is attributable to the contingent earn-out notes associated with the twoNobility Healthcare acquisitions, currently at a total balance of$967,211 for the two notes, with interest rates of 3.00% per annum.
Change in Fair Value of Secured Convertible Notes
We recognized a loss on change in fair value of secured convertible notes
totaling
We elected to account for the secured convertible notes that were issued onApril 17, 2020 on their fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date ofApril 17, 2020 and throughJune 12, 2020 , when they were paid in full. The change in fair value from their issuance date ofApril 17, 2020 to their pay-off date was$887,807 , which was recognized as a charge in the Consolidated Statement of Operations for the year endedDecember 31, 2020 . No similar changes in fair value occurred during the year endedDecember 31, 2021 . 28
We elected to account for the secured convertible notes that were issued inAugust 2019 on its fair value basis. Therefore, we determined the fair value of the secured convertible notes as of their issuance date onDecember 31, 2019 until they were paid in fullMarch 3, 2020 . The change in fair value fromDecember 31, 2019 to their pay-off date was$412,445 , which was recognized as a charge in the Consolidated Statement of Operations atDecember 31, 2020 . No similar changes in fair value occurred during the year endedDecember 31, 2021 .
Change in Fair Value of Proceeds Investment Agreement
We recorded a gain on the change in fair value of proceeds investment agreement
of
We elected to account for the PIA that we entered into with BKI inJuly 2018 on its fair value basis. Therefore, we determined the fair value of the 2018 PIA as ofDecember 30, 2021 , andDecember 31, 2020 to be$-0 - and$5,250,000 , respectively. The change in fair value fromDecember 21, 2019 , toDecember 31, 2020 was$5,250,000 , which was recognized as a gain in the Consolidated Statement of Operations for the years endedDecember 31, 2020 . No similar changes in fair value occurred during the year endedDecember 31, 2021 .
Change in Fair Value of Short-Term Investments
We recognized a loss on change in fair value of short-term investments totaling$101,645 and$-0 - during the years endedDecember 31, 2021 and 2020, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. The increase reflects our overall higher cash and cash equivalent levels in 2021 compared to 2020. The Company completed two registered direct offerings in the year endedDecember 31, 2021 which yielded net proceeds of approximately$66.4 million , a portion of which was invested in short-term securities with original maturities of 90 days or less.
Change in Fair Value of Warrant Derivative Liabilities
During the year endedDecember 31, 2021 , the Company issued detachable warrants to purchase a total of 42,550,000 shares of Common Stock in association with the two registered direct offerings previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the condensed consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities from their issuance date toDecember 31, 2021 totaled$36,664,907 which was recognized as a gain in the year endedDecember 31, 2021 . The Company determined the fair value of such warrants as of their issuance date, and as ofDecember 31, 2021 , to be$51,216,058 and$14,846,932 , respectively.
Change in Fair Value of Contingent Consideration Promissory Notes and Earn-Out Agreements
During the year endedDecember 31, 2021 , the Company issued a contingent consideration earn-out agreement in connection with the Stock Purchase Agreement betweenTicketSmarter, Inc. ,Goody Tickets, LLC and TicketSmarter of$3,700,000 . As ofDecember 31, 2021 , Management determined that the actual Measurement Period EBITDA generated by TicketSmarter was less than 70% of the Projected EBITDA threshold provided in such agreement. Therefore, no TicketSmarter earn-out payments were due under such agreement. Therefore, the fair value of the contingent consideration earn-out agreement was reduced to zero, and the resulting gain of$3,700,000 was reported in our Consolidated Statements of Operations for the year endedDecember 31, 2021 . Additionally, during the year endedDecember 31, 2021 , the Company issued a contingent consideration promissory note in connection with the Stock Purchase Agreement between our revenue cycle management segment and a private company of$350,000 . Management's estimate of the fair value of this contingent promissory note atDecember 31, 2021 is$317,211 representing a reduction in its estimated fair value of$32,789 . The Company recorded a gain of$32,789 in the Consolidated Statements of Operations for the year endedDecember 31, 2021 .
Gain on Extinguishment of Debt
We recognized a gain on extinguishment of debt totaling$10,000 and$1,417,413 during the years endedDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 the Company was notified that its$10,000 EIDL advance received with the Payroll Protection Program (the "PPP") Loan was fully forgiven, thus included in "Gain on Extinguishment of Debt" in our Consolidated Statements of Operations for the year endedDecember 31, 2021 . As discussed in Note 8, "Debt Obligations," onMay 4, 2020 the Company received a$1,418,900 promissory note under the SBA's PPP Loan through the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). OnDecember 10, 2020 , we were informed that the Company's SBA Loan had been forgiven, resulting in the remaining balance has been released resulting in a gain on extinguishment of debt. In accordance with ASC Topic No. 470, "Debt - Modifications and Extinguishments" (Topic 470), the transactions noted above were determined to be an extinguishment of the existing debt. As a result, we recorded a gain on the extinguishment of debt in the amount of$1,417,413 , which is included in "Gain on Extinguishment of Debt" in our Consolidated Statements of Operations for the year endedDecember 31, 2020 .
Secured Convertible Notes Issuance Expenses
We recognized secured convertible note issuance expenses of
We elected to account for and record our$1,667,000 principal amount of secured convertible notes onApril 17, 2020 on a fair value basis. Accordingly, we were required to expense the related issuance costs to other expense in the consolidated statements of operations. Such costs totaled$34,906 for the year endedDecember 31, 2020 and primarily included related legal and accounting fees. No similar debt issuances occurred during the year endedDecember 31 ,
2021. 29
Income/(Loss) before Income Tax Benefit
As a result of the above, we reported a net income/(loss) before income tax
benefit of
Income Tax Benefit
We recorded an income tax benefit of$-0 - for the years endedDecember 31, 2021 and 2020, respectively. The effective tax rate for both 2021 and 2020 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 ofDecember 31, 2021 and 2020 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 ofDecember 31, 2021 . During 2021, we decreased our valuation reserve on deferred tax assets by$7,615,000 whereby our deferred tax assets continue to be fully reserved due to our recent operating losses. We had approximately$81,385,000 of federal net operating loss carryforwards and$1,795,000 of research and development tax credit carryforwards as ofDecember 31, 2021 available to offset future net taxable income.
Net Income/(Loss)
As a result of the above, we reported a net income/(loss) of$25,530,961 and ($2,625,882 ) for the years endedDecember 31, 2021 and 2020, respectively, an improvement of$28,156,843 (1,072%).
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 ofNobility 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$56,453 and$-0 - for the years endedDecember 31, 2021 and 2020, respectively.
Net Income/(Loss) Attributable to Common Stockholders
As a result of the above, we reported a net income/(loss) of$25,474,508 and ($2,625,882 ) for the years endedDecember 31, 2021 and 2020, respectively, an improvement of$28,100,390 (1,070%).
Basic and Diluted Income/(Loss) per Share
The basic and diluted income/(loss) per share was$0.51 and ($0.12 ) for the years endedDecember 31, 2021 and 2020, 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 endedDecember 31, 2021 and 2020 because all potentially dilutive securities during 2021 had exercise prices in excess of the market value of the company's common stock and because of the net loss reported for 2020.
Liquidity and Capital Resources
Overall:
Management's Liquidity Plan - The Company has historically raised and continue to raise capital in the form of equity and debt instruments from private and public sources to supplement its needs for funds to support its business operational and strategic plans. The Company believes, that through such instruments, it has the ability to generate and obtain adequate amounts of capital to meet its requirements and plans for capital in the short-term and long-term. In that regard, the Company had raised net proceeds of approximately$66.4 million in registered direct offerings of Common Stock, pre-funded warrants and warrants during the year endedDecember 31, 2021 . Furthermore, the Company has minimal interest-bearing debt for the year endedDecember 31, 2021 in that of$150,000 remaining due on the promissory notes under the EIDL program, along with the two acquired private medical billing companies' contingent consideration promissory notes and agreement, as more fully described in Note 8, "Debt Obligations". The net proceeds of the registered direct offerings are sufficient to fund our operations during 2022 and management believes that it now has adequate liquidity for the foreseeable future from the recently completed registered direct offerings in 2021. Such offerings were completed through utilization of the Company's shelf-registration statement on Form S-3 (File No. 333-239419), which was initially filed with theSEC onJune 25, 2020 , and was declared effective onJuly 2, 2020 (the "Shelf Registration Statement"). 30
Shelf Registration Statement on Form S-3 - The Shelf Registration Statement allows the Company to offer and sell, from time to time in one or more offerings, any combination of our Common Stock, debt securities, debt securities convertible into Common Stock or other securities in any combination thereof, rights to purchase shares of Common Stock or other securities in any combination thereof, warrants to purchase shares of Common Stock or other securities in any combination thereof or units consisting of Common Stock or other securities in any combination thereof having an aggregate initial offering price not exceeding$125,000,000 . The Company has utilized the Shelf Registration Statement for two recent offerings of its securities, as described as follows:
? Registered Direct Offering - On
securities purchase agreement, closed a registered direct offering (the
"January Offering") of (i) 2,800,000 shares of Common Stock, (ii) pre-funded
warrants to purchase up to 7,200,000 of Common Stock at an exercise price of
Stock would otherwise result in such investor, together with its affiliates
and certain related parties, beneficially owning more than 4.99% (or, at the
election of the holder, 9.99%) of the Company's outstanding Common Stock
immediately following the consummation of the January Offering; and (iii)
common stock purchase warrants ("January Warrants") to purchase up to an
aggregate of 10,000,000 shares of Common Stock, which are exercisable for a
period of five years after issuance at an initial exercise price
share, subject to certain adjustments, as provided in the January Warrants.
The January Offering was conducted pursuant to a placement agency agreement,
dated
Company and
(the "January Placement Agent"). The combined offering price of each share of
Common Stock and accompanying January Warrant in the January Offering was
Pursuant to the terms of the January Placement Agency Agreement, the Company
agreed not to, for a period of 90 days after the date of the January Placement
Agency Agreement, with certain exceptions, unless it has obtained the prior
written consent of the January Placement Agent, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of
capital stock of the Company or any securities convertible into or exercisable
or exchangeable for shares of capital stock of the Company; (ii) file or cause
to be filed any registration statement with the
of any shares of capital stock of the Company or any securities convertible
into or exercisable or exchangeable for shares of capital stock of the
Company; (iii) complete any offering of debt securities of the Company, or
(iv) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of capital
stock of the Company. The Company received approximately$29,013,000 in net
proceeds from
the January Offering after deducting the discounts,
commissions and
other estimated offering expenses payable by the Company. The Company plans to use the net proceeds from the January
Offering for
working capital, product development, order fulfillment and for general corporate purposes. 31
? Registered Direct Offering - On
pursuant a securities purchase agreement closed a registered direct offering (the "February Offering") of (i) 3,250,000 shares of Common Stock, (ii) pre-funded warrants to purchase up to 11,050,000 of Common Stock at an exercise price of$0.01 per share,
issuable to
investors whose purchase of shares of Common Stock would otherwise result in such investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the holder, 9.99%) of the Company's outstanding Common Stock immediately following the consummation of the February Offering; and (iii) common stock purchase warrants ("February Warrants") to purchase up to an aggregate of 14,300,000 shares of Common Stock, which are exercisable for a period of five
years after
issuance at an initial exercise price$3.25 per share,
subject to
certain adjustments, as provided in the Warrants. The
February
Offering was conducted pursuant to a placement agency
agreement,
datedJanuary 28, 2021 (the "February Placement Agency
Agreement"),
between the Company and EF Hutton, division ofBenchmark Investments, LLC ("February Placement Agent"). The combined offering price of each share of Common Stock and accompanying February Warrant in the February Offering was$2.80 . Pursuant to the terms of theFebruary Placement Agency
Agreement,
the Company has agreed not to, for a period of 90 days after the date of the February Placement Agency Agreement, with certain exceptions, unless it has obtained the prior written consent of the February Placement Agent, (i) offer, pledge, sell, contract
to sell,
sell any option or contract to purchase, purchase any option
or
contract to sell, grant any option, right or warrant to
purchase,
lend, or otherwise transfer or dispose of, directly or
indirectly,
any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with theSEC relating to the offering of any shares of capital stock of the Company or any securities
convertible
into or exercisable or exchangeable for shares of capital stock of the Company; (iii) complete any offering of debt securities of the Company, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company. The Company received approximately$37,447,100 in net
proceeds from
the February Offering after deducting the discounts,
commissions and
other estimated offering expenses payable by the Company. The Company plans to use the net proceeds from the February Offering for working capital, product development, order fulfillment and for general corporate purposes. OnAugust 19, 2021 , the Company entered into a warrant exchange agreement (the "Exchange Agreement") with the investors of the February Offering (the "February Investors ") cancelling February Warrants exercisable for an aggregate of 7,681,540 shares of Common Stock in consideration for its issuance of (i) new warrants (the "Exchange Warrants") to theFebruary Investors exercisable for an aggregate of up to 7,681,540 shares of Common Stock. The Company also issued warrants (the "Replacement Original Warrants") replacing the February Warrants for the remaining shares of Common Stock exercisable thereunder, representing an aggregate of 6,618,460 shares of Common Stock, and extended the expiration date of the February Warrants toSeptember 18, 2026 . The Company also filed a supplement to the Prospectus Supplement removing the cancelled February Warrants and the shares of Common Stock exercisable thereunder from registration under the shelf registration statement in order to provide additional availability for the issuance of securities under the shelf registration statement. The Exchange Warrants have a term of five years and 30 days and provide for an initial exercise price of$3.25 per share, subject to customary adjustments thereunder, and are immediately exercisable upon issuance for cash and on a cashless basis.
Management believes that it has adequate funding to support its business operations for the foreseeable future as a result of the funds raised by the January Offering and the February Offering.
The Company has increased its addressable market to expand beyond that of law and non-law enforcement customers through the recent acquisitions completed in 2021. Additionally, the Company continues to obtain new law and non-law enforcement contracts in 2021 and 2020, which contracts include recurring revenue during the period from 2021 to 2025. The Company believes that its quality control and cost cutting initiatives, expansion to other sales channels and new product introductions will eventually restore positive operating cash flows and profitability, although it can offer no assurances in this regard. The extent to which our future operating results are affected by the COVID-19 pandemic will largely depend on future developments which cannot be accurately predicted, including the duration and scope of the pandemic, governmental and business responses to the pandemic and the impact on the global economy, our customers' demand for our products and services, and our ability to provide our products and services, particularly as a result of our employees working remotely and/or the closure of certain offices and facilities. While these factors are uncertain, we believe that the COVID-19 pandemic and/or the perception of its effects will have a material adverse effect on our business, financial condition, results of operations and cash flows. We had warrants outstanding exercisable to purchase 26,008,598 shares of Common Stock at a weighted average exercise price$3.24 per share outstanding as ofDecember 31, 2021 . In addition, there are Common Stock options outstanding exercisable to purchase 1,086,064 shares of Common Stock at an average price of$2.37 per share. We could potentially use such outstanding warrants to provide near-term liquidity if we could induce their holders to exercise their warrants by adjusting/lowering the exercise price on a temporary or permanent basis if the exercise price was below the then market price of our Common Stock, although we can offer no assurances in this regard. Ultimately, we must restore profitable operations and positive cash flows to provide liquidity to support our operations and, if necessary, to raise capital on commercially reasonable terms in 2022, although we can offer no assurances in this regard. 32
Our Common Stock is currently listed on The Nasdaq Capital Market. In order to maintain our listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders' equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards. See "Nasdaq Listing" below.
We had
Cash, cash equivalents: As ofDecember 31, 2021 , we had cash and cash equivalents with an aggregate balance of$32,007,792 , an increase from a balance of$4,361,758 for the yearDecember 31, 2020 . Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the$27,646,034 net increase in cash during the year endedDecember 31, 2021 : ? Operating$17,825,108 of net cash used in operating activities. Net cash
activities: used in operating activities was
the years endedDecember 31, 2021 and 2020,
respectively, a
deterioration of$4,550,393 . The deterioration is
attributable to
the net loss incurred for 2021, the non-cash gain
attributable to
the change in value of the warrant derivative liability, the usage of cash to decrease accounts payable and to increase accounts receivable, prepaid expenses, and other
operating assets
during the year endedDecember 31, 2021 compared to the same period in 2020. ? Investing$19,124,379 of net cash used in investing activities. Cash used activities: in investing activities was$19,124,379 and$1,499,189 for the years endedDecember 31, 2021 and 2020 respectively. In 2021 we incurred costs for: (i) the purchase of a office and warehouse building; (ii) the build out of the new leased office and warehouse space; (iii) the tooling of new products; (iv) patent applications on our proprietary technology utilized in our new products and included in intangible assets; and (v) the closing of three acquisitions during the year endedDecember 31, 2021 .
? Financing
activities: provided by financing activities was$64,595,521 for the year endedDecember 31, 2021 , compared to cash provided by$18,775,977 for the year endedDecember 31, 2020 . In 2021, we closed two underwritten public offerings of our Common Stock, which generated$66.6 million of cash and repurchased and cancelled shares of common stock of approximately$1.98 million . During 2020, we closed several underwritten public offerings of our Common Stock, which generated$12.8 million of cash, we received total proceeds of$5.2 million from the exercise of common stock purchase warrants and we received a total of$1.6 million in borrowings under the PPP and EIDL programs administered by the SBA. InApril 2020 , we received net proceeds of
the issuance of the convertible notes with detachable common stock purchase warrants. In addition, we received$419,000 in proceeds from the issuance of unsecured promissory notes payable during the year endedDecember 31, 2020 . These 2020 financing cash inflows were offset by the extinguishment of the PIA obligation and the repayment of principal on the secured convertible notes and unsecured promissory notes.
The net result of these activities was an increase in cash of
33 Commitments: We had$32,007,792 of cash and cash equivalents and net positive working capital$33,122,288 as ofDecember 31, 2021 . Accounts receivable and other receivable balances represented$4,748,865 of our net working capital as ofDecember 31, 2021 . We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2022, which would help to provide positive cash flow to support our operations during 2022. Inventory represented$9,659,536 of our net working capital as ofDecember 31, 2021 and finished goods represented$10,631,618 of total current and non-current inventory. We are actively managing the level of inventory and our goal is to reduce such level during 2022 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2022. Capital Expenditures. OnApril 30, 2021 , the Company closed on the purchase and sale agreement to acquire a 71,361 square feet commercial office/warehouse building located inLenexa, Kansas which is intended to serve as the Company's principal office and warehouse needs. The building contains approximately 30,000 square feet of office space and the remainder warehouse space. The total purchase price was approximately$5.3 million , the Company funded the purchase price with cash on hand, without the addition of external debt or other financing. The Company will be incurred additional capital expenditures to renovate the building to suit its office/warehouse needs during 2021. The Company's revenue cycle management segment completed its first medical billing company acquisition using approximately$1.0 in cash for the portion of the purchase price during 2021. The acquisition of the medical billing company included a contingent consideration promissory note payable to the sellers of$350,000 at closing, which management estimated its fair value of$317,211
as ofDecember 31, 2021 . In addition, the Company's revenue cycle management segment completed its second medical billing company acquisition using approximately$2.3 in cash for a portion of the total purchase price. The acquisition of the second medical billing company purchase price included a contingent consideration promissory note payable to the sellers with an estimated fair value of$650,000 at closing which remains outstanding as ofDecember 31, 2021 . Management expects to continue its roll-up strategy in the RCM (medical billing services) industry during the balance of 2021 and beyond. Management of the revenue cycle management segment expects to continue its roll-up strategy in the RCM (medical billing services) industry during 2022 and beyond. The ticketing operating segment also completed the business acquisitions of Goody Tickets and TicketSmarter for a total purchase price of approximately$13.3 million during 2021 including approximately$8.6 million in cash at closing. The TicketSmarter purchase price includes a contingent consideration earn-out agreement payable to the sellers of up to$4,244,400 , which was given a fair value of$3,700,000 at acquisition, that was reduced to$-0 - as ofDecember 31, 2021 as the EBITDA thresholds specified in the agreement were not met. Lease commitments. OnMay 13, 2020 , the Company entered into an operating lease for new warehouse and office space, which served as its new principal executive office and primary business location prior to theApril 30 purchase and sale agreement. The original lease agreement was amended onAugust 28, 2020 to correct the footage under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments ranging from$12,398 to$14,741 thereafter, with a termination date ofDecember 2026 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location. The Company took possession of the leased facilities onJune 15, 2020 . The remaining lease term for the Company's office and warehouse operating lease as ofDecember 31, 2021 was sixty months. The Company's previous office and warehouse space lease expired inApril 2020 and the Company paid holdover rent for the time period until it moved to and commenced occupying the new space onJune 15, 2020 . The Company entered into an operating lease with a third party inOctober 2019 for copiers used for office and warehouse purposes. The terms of the lease include 48 monthly payments of$1,598 with a maturity date ofOctober 2023 . The Company has the option to purchase such equipment at maturity for its estimated fair market value at that point in time. The remaining lease term for the Company's copier operating lease as ofDecember 31, 2021 was 22 months. OnJune 30, 2021 , the Company completed the acquisition of is first medical billing company, throughNobility Healthcare . Upon completion of this acquisition,Nobility Healthcare became responsible for the operating lease for the seller's office space. The lease terms include monthly payments ranging from$2,648 to$2,774 thereafter, with a termination date inJuly 2024 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities onJune 30, 2021 . The remaining lease term for the Company's office and warehouse operating lease as ofDecember 31, 2021 was
thirty-one months. 34 OnAugust 31, 2021 , the Company completed the acquisition of its second acquired medical billing company, throughNobility Healthcare . Upon completion of this acquisition,Nobility Healthcare became responsible for the operating lease for the seller's office space. The lease terms include monthly payments ranging from$11,579 to$11,811 thereafter, with a termination date inMarch 2023 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities onSeptember 1, 2021 . The remaining lease term for the Company's office and warehouse operating lease as ofDecember 31, 2021 was fifteen months. OnSeptember 1, 2021 , the Company completed the acquisition ofGoody Tickets, LLC andTicketSmarter, LLC through TicketSmarter. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter's office space. The lease terms include monthly payments ranging from$7,211 to$7,364 thereafter, with a termination date ofDecember 2022 . The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities onSeptember 1, 2021 . The remaining lease term for the Company's office and warehouse operating lease as ofDecember 31, 2021 was twelve months. Lease expense related to the office spaces and copier operating leases was recorded on a straight-line basis over the lease term. Total lease expense under the five operating leases was approximately$266,294 for the year endedDecember 31, 2021 .
The weighted-average remaining lease term related to the Company's lease
liabilities as of
The discount rate implicit within the Company's operating leases was not generally determinable, and therefore, the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8%.
The following sets forth the operating lease right of use assets and liabilities
as of
Assets:
Operating lease right of use assets$ 993,384
Liabilities:
Operating lease obligations-current portion
$ 1,061,578
Following are the minimum lease payments for each year and in total.
Year endingDecember 31 : 2022$ 445,635 2023 252,518 2024 191,059 2025 173,333 Thereafter 175,113
Total undiscounted minimum future lease payments 1,237,658 Imputed interest
(176,080 ) Total operating lease liability$ 1,061,578
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. 35 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. 401 (k) Plan. The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended, requires the Company 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$127,293 and$110,491 for the years endedDecember 31, 2021 and 2020, respectively. Each participant is 100% vested at all times in employee and employer matching contributions. Consulting and Distributor Agreements. The Company entered into an agreement that required it to make monthly payments that will be applied to future commissions and/or consulting fees to be earned by the provider. The agreement is with a limited liability company ("LLC") that is minority owned by a relative of the Company's chief financial officer. Under the agreement, datedJanuary 15, 2016 , and as amended onFebruary 13, 2017 , the LLC provides consulting services for developing a new distribution channel outside of law enforcement for its body-worn camera and related cloud storage products to customers inthe United States . The Company advanced amounts to the LLC against commissions ranging from$5,000 to$6,000 per month plus necessary and reasonable expenses for the period throughJune 30, 2017 , which can be automatically extended based on the LLC achieving minimum sales quotas. The agreement was renewed inJanuary 2017 for a period of three years, subject to yearly minimum sales thresholds that would allow the Company to terminate the contract if such minimums are not met. As ofDecember 31, 2021 , the Company had advanced a total of$274,731 pursuant to this agreement which has been fully reserved for a net advance of$-0 -. The minimum sales threshold was not met, and the Company discontinued all advances, although the contract has not been formally terminated. However, the exclusivity provisions of the agreement have been terminated. OnJune 1, 2018 , the Company entered into an agreement with an individual that required it to make monthly payments that will be applied to future commissions and/or consulting fees to be earned by the provider. Under the agreement, the individual provides consulting services for developing new distribution channels both inside and outside of law enforcement for its in-car and body-worn camera systems and related cloud storage products to customers within and outsidethe United States . The Company was required to advance amounts to the individual as an advance against commissions of$7,000 per month plus necessary and reasonable expenses for the period throughAugust 31, 2018 , which was extended toDecember 31, 2018 , by mutual agreement of the parties at$6,000 per month. The parties have mutually agreed to further extend the arrangement on a monthly basis at$5,000 per month. The Company had advanced a total of$53,332 pursuant to this agreement, untilSeptember 2020 when the agreement was mutually terminated, thus as ofDecember 31, 2021 , the Company had advanced$-0 - pursuant to this agreement.
Critical Accounting Policies
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 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; ? Stock-based Compensation Expense; ? Fair value of warrants;
? Fair value of assets and liabilities acquired in business combinations; and
? Accounting for Income Taxes.
36
Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all five of the following conditions are met:
(i) Identify the contract with the customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price;
(iv) Allocate the transaction price to the performance obligations in the
contract; and (v) Recognize revenue when a performance obligation is satisfied. We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract when the customer order is approved, we can identify each party's rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance obligation. We apply judgment in determining the customer's ability and intent to pay, which is based on a variety of factors, including the customer's historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i) products, (ii) professional services, and (iii) extended warranties. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on the relative standalone selling price ("SSP"). Revenue for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with customers. Revenue for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to end service fees. These service fees are reported as revenue monthly upon completion of the our performance obligation to provide the agreed upon services. Revenue for our ticketing 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 ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As 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. 37
We review all significant, unusual, or nonstandard shipments of product or delivery of services as a routine part of our accounting and financial reporting process to determine compliance with these requirements. Extended warranties are offered on selected products, and when a customer purchases an extended warranty, the associated proceeds are treated as contract liability and recognized over the term of the extended warranty. For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. Our historical bad debts have been negligible, with less than$258,000 charged off as uncollectible on cumulative revenues of$248.0 million since we commenced deliveries during 2006. For our ticketing segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition, we will track historical bad debts and continue to assess appropriate reserves. For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves.
As of
We periodically perform a specific review of significant individual receivables outstanding for risk of loss due to uncollectability. Based on such review, we consider our reserve for doubtful accounts to be adequate as ofDecember 31, 2021 . However, should the balance due from any significant customer ultimately become uncollectible then our allowance for bad debts will not be sufficient to cover the charge-off and we will be required to record additional bad debt expense in our statement of operations. 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 as of
December 31, 2021 December 31, 2020 Raw material and component parts $ 3,062,046 $
3,186,426
Work-in-process -
1,907
Finished goods - video solutions 8,410,307
- Finished goods - ticketing 2,102,272 6,974,291 Subtotal 13,574,625 10,162,625 Reserve for excess and obsolete inventory - video solutions (3,353,458 ) (1,960,351 ) Reserve for excess and obsolete inventory - ticketing (561,631 ) - Total inventories $ 9,659,536 $ 8,202,274 38 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 28.8% of the gross inventory balance as ofDecember 31, 2021 , compared to 19.3% of the gross inventory balance as ofDecember 31, 2020 . We had$3,915,089 and$1,960,351 in reserves for obsolete and excess inventories as ofDecember 31, 2021 and 2020, respectively. Total raw materials and component parts were$3,062,046 and$3,186,427 as ofDecember 31, 2021 and 2020, respectively, a decrease of$124,381 (4%). InJune 2020 , the Company moved to new and smaller warehouse facilities and during the move sorted through its entire inventory and disposed of all excess and obsolete inventory rather than moving such distressed products to the new location which contributed to the significant decrease in the cost of raw materials and component parts. We scrapped older version inventory component parts that were mostly or fully reserved in 2020, which was the primary cause for steady levels in total raw materials and component parts. Finished goods balances were$10,512,577 and$6,974,291 as ofDecember 31, 2021 and 2020, respectively, an increase of$3,538,286 (51%). The increase in finished goods was primarily attributable to accumulating inventory for the new Shield and ThermoVuTM product lines, our new body-worn cameras and docking stations, along with$2,102,272 in inventory from our Ticketing segment, acquired inSeptember 2021 . The increase in the inventory reserve is primarily due to inventory obsolescence for the level of component parts of the older versions of our printed circuit boards and the phase out of our DVM-750, DVM-500 Plus, LaserAlly legacy products, and ThermoVu products. 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 ofDecember 31, 2021 . If actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established.Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets. Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets. Determining an acquired intangible asset's useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset's useful life. The Company's goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring charges or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value. When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test. Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company's weighted average cost of capital and other data. Our most recent annual impairment test of goodwill was a qualitative analysis conducted as ofDecember 31, 2021 that indicated no impairment. Subsequent to completing our 2021 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 - Nature of Business and Summary of Significant Accounting Policies and Note 7 -Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements provide additional information regarding the Company's goodwill
and other intangible assets. Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were decreased to$13,742 as ofDecember 31, 2021 compared to$31,845 as ofDecember 31, 2020 as we begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. Stock-based Compensation Expense. We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were 300,000 stock options granted during the year endedDecember 31, 2021 . If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect our estimates of fair values of our share-based compensation. Certain share-based payment awards, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. In addition, we account for forfeitures as they occur. 39 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 ofDecember 31, 2021 , cumulative valuation allowances in the amount of$16,980,000 were recorded in connection with the net deferred income tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be decreased by$7,615,000 to a balance of$16,980,000 to fully reserve our deferred tax assets atDecember 31, 2021 . We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as ofDecember 31, 2021 , 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 ofDecember 31, 2021 , representing uncertain tax positions. We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year however, we believe that it is likely to have significant impact to all of our operating segments in 2022 and beyond. We do not believe that our business is seasonal in nature; however, we generally generate higher revenues during the second half of the calendar year compared to the first half.
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