Company: DGLY
Filing Date: 2025-05-02
Form Type: 424B3
Source: 0001641172-25-008437
Chunk: 57

Company: DIGITAL ALLY, INC.
Filing Date: 2025-05-02
Form: 424B3
Chunk 57
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 through operating income within the consolidated statements of operations.

Warranty Reserves.We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were decreased to $11,615 as of December 31, 2024 compared to $17,699 as of December 31, 2023 due to newer products gaining a long history of claims to consider, which was slightly offset as we began to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers, which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products compared to our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods.

Warrant derivative liabilities.

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

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

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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