Company: DGLY
Filing Date: 2025-08-18
Form Type: 10-Q
Source: 0001641172-25-024667
Chunk: 296

Company: DIGITAL ALLY, INC.
Filing Date: 2025-08-18
Form: 10-Q
Item: Part I, Item 2
Chunk 296
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 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. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers, which reduced
our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim
frequency rates and average cost of claims than our history has indicated on our legacy mirror products compared to our new products for
which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities
in future periods.

Warrant derivative liabilities.

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

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

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