Company: DGLY
Filing Date: 2025-05-20
Form Type: 10-Q
Source: 0001641172-25-011765
Chunk: 234

Company: DIGITAL ALLY, INC.
Filing Date: 2025-05-20
Form: 10-Q
Item: Part I, Item 2
Chunk 234
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 higher warranty claim
frequency rates and average cost of claims than our history has indicated on our legacy mirror products compared to our new products for
which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities
in future periods.

59

Warrant derivative liabilities.

The Company accounts for their derivative financial
instruments in accordance with ASC 815 “Derivatives and Hedging” therefore any embedded conversion options and warrants accounted
for as derivatives are to be recorded at their fair values as of the inception date of the agreement and at fair value as of each subsequent
balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each
balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the
classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the
reclassification.

The Black-Scholes option valuation
model was used to estimate the fair value of the embedded conversion options and warrants. The model includes subjective input assumptions
that can materially affect the fair value estimates.

Accounting for Income Taxes.
Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments
include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future,
the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently
recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.

As required by authoritative guidance,
we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities
using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires
that deferred tax assets be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax
asset will not be realized. As of March 31, 2025 and December 31, 2024, we have fully reserved all of our deferred tax assets. Based on
a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased by
$4,680,000 to a balance of $46,290,000 to fully reserve our deferred tax assets at March 31,