KUST 10-Q
Kustom Entertainment, Inc. (KUST)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended | |
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ___________ to __________. | |
| Commission
File Number: | |
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| (Title of each class) | (Trading Symbol(s) | (Name of each exchange on which registered) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding at May 14, 2026 | |
| Common Stock, $ par value per share |
FORM 10-Q
KUSTOM ENTERTAINMENT, INC.
MARCH 31, 2026
| 2 |
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements.
KUSTOM ENTERTAINMENT, INC.
(formerly Digital Ally, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
| March
31, 2026 | December
31, 2025 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable-trade,
less allowance for doubtful accounts of $ | ||||||||
| Subscriptions receivables,
net of $ | ||||||||
| Other receivables | ||||||||
| Notes receivable | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Assets of revenue-cycle management business held-for-sale | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill and other intangible assets, net | ||||||||
| Operating lease right of use assets, net | ||||||||
| Subscriptions receivables – long term | ||||||||
| Notes receivable - long term | ||||||||
| Other assets | ||||||||
| Assets of revenue-cycle management business held-for-sale | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of operating lease obligations | ||||||||
| Deferred revenue – current | ||||||||
| Debt obligations – current | ||||||||
| Warrant derivative liabilities | ||||||||
| Income taxes payable | ||||||||
| Liabilities of revenue-cycle management business held for sale | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Debt obligations – long term | ||||||||
| Operating lease obligation – long term | ||||||||
| Deferred revenue – long term | ||||||||
| Notes payable – related party – long term | ||||||||
| Liabilities of revenue-cycle management business held for sale | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value per share, shares authorized; issued or outstanding – March 31, 2026 and December 31, 2025 | ||||||||
| Common stock, $ par value; authorized; shares issued: – March 31, 2026 and – December 31, 2025 | ||||||||
| Additional paid in capital | ||||||||
| Noncontrolling interest in consolidated subsidiary | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total equity: | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
| 3 |
KUSTOM ENTERTAINMENT, INC.
(formerly Digital Ally, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Revenue: | ||||||||
| Product | $ | $ | ||||||
| Service and other | ||||||||
| Total revenue | ||||||||
| Cost of revenue: | ||||||||
| Product | ||||||||
| Service and other | ||||||||
| Total cost of revenue | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses: | ||||||||
| Research and development expense | ||||||||
| Selling, advertising and promotional expense | ||||||||
| General and administrative expense | ||||||||
| Total selling, general and administrative expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Gain on extinguishment of debt – related party | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Gain on extinguishment of liabilities | ||||||||
| Total other income (expense) from continuing operations | ( | ) | ||||||
| Income (loss) before income tax benefit (provision) from continuing operations | ( | ) | ||||||
| Income tax expense benefit (provision) | ||||||||
| Net income (loss) from continuing operations | ( | ) | ||||||
| Discontinued operations: | ||||||||
| Income (loss) from discontinued operations | ( | ) | ||||||
| Income tax expense benefit (provision) | ||||||||
| Net income (loss) from discontinued operations | ( | ) | ||||||
| Net income (loss) | ( | ) | ||||||
| Net income (loss) attributable to noncontrolling interests | ( | ) | ||||||
| Net income (loss) attributable to common stockholders | $ | ( | ) | $ | ||||
| Net income (loss) per share attributable to common stockholders’ information: | ||||||||
| Basic: | ||||||||
| Continuing operations | $ | ( | ) | $ | ||||
| Discontinued operations | ( | ) | ||||||
| Net income (loss) attributable to common stockholders per share – basic | $ | ( | ) | $ | ||||
| Diluted: | ||||||||
| Continuing operations | $ | ( | ) | $ | ||||
| Discontinued operations | ( | ) | ||||||
| Net income (loss) attributable to common stockholders per share – diluted | $ | ( | ) | $ | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these financial statements.
| 4 |
KUSTOM ENTERTAINMENT, INC.
(formerly Digital Ally, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2026 AND 2025
(Unaudited)
| Noncontrolling | ||||||||||||||||||||||||
| Additional | Interest in | |||||||||||||||||||||||
| Common Stock | Paid In | consolidated | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | subsidiary | Deficit | Total | |||||||||||||||||||
| Balance, December 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Sale of common stock and pre-funded warrants, net of offering costs | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of pre-funded warrants | ( | ) | ||||||||||||||||||||||
| Fair value of pre-funded warrants issued along with sale of common stock | — | ( | ) | ( | ) | |||||||||||||||||||
| Transition of warrant derivative liability to equity upon exercise of pre-funded warrants | — | |||||||||||||||||||||||
| Issuance of common stock upon exercise of June 2024 Series B common stock purchase warrants | ||||||||||||||||||||||||
| Transition of warrant derivative liability to equity upon exercise of Series B warrants | — | |||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance, March 31, 2025 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance, December 31, 2025 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credi | ||||||||||||||||||||||||
| Issuance of common stock upon conversion of convertible notes | ||||||||||||||||||||||||
| Transition to additional paid-in capital upon conversion of convertible notes | — | |||||||||||||||||||||||
| Round up of fractional shares resulting from the reverse stock splits | ||||||||||||||||||||||||
| Disposition of Nobility Healthcare | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2026 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these financial statements.
| 5 |
KUSTOM ENTERTAINMENT, INC.
(formerly Digital Ally, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
(Unaudited)
| March
31, 2026 | March
31, 2025 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ||||
| Less: net income (loss) from discontinued operations, net of tax | ( | ) | ||||||
| Net loss from continuing operations | ( | ) | ||||||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Non-cash interest expense | ||||||||
| Gain on extinguishment of liabilities | ( | ) | ( | ) | ||||
| Gain on extinguishment of debt – related party | ( | ) | ||||||
| Provision for doubtful accounts receivable | ( | ) | ||||||
| Provision for doubtful lease receivable | ||||||||
| Change in fair value of warrant derivative liability | ( | ) | ||||||
| Provision for inventory obsolescence | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable – trade | ||||||||
| Accounts receivable – other (including related party) | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Operating lease right of use assets | ||||||||
| Other assets | ( | ) | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accrued interest - related party | ||||||||
| Income taxes payable | ||||||||
| Lease deposit | ( | ) | ||||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Deferred revenues | ( | ) | ( | ) | ||||
| Net cash used in operating activities – continuing operation | ( | ) | ( | ) | ||||
| Net cash used in operating activities – discontinued operation | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Purchases of intangible assets | ( | ) | ( | ) | ||||
| Proceeds from sale of Nobility Healthcare | ||||||||
| Net cash used in investing activities – continuing operation | ( | ) | ( | ) | ||||
| Net cash used in investing activities – discontinued operation | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Net proceeds from issuance of common stock under equity line of credit | ||||||||
| Net proceeds of February 2025 public equity offering with detachable warrants | ||||||||
| Net proceeds of unsecured promissory note – Entertainment segment | ||||||||
| Payments of related party note payable | ( | ) | ||||||
| Payments on Commercial Extension of Credit – Entertainment segment | ( | ) | ||||||
| Payments on Senior Secured Promissory Notes – Video Solutions segment | ( | ) | ||||||
| Payments on Merchant Advances – Video Solutions segment | ( | ) | ||||||
| Payments on Senior Secured Promissory Notes – Entertainment segment | ( | ) | ||||||
| Principal payment on EIDL loan | ( | ) | ( | ) | ||||
| Proceeds from issuance of common shares upon exercise of Series B warrants | ||||||||
| Net cash provided by financing activities – continuing operation | ||||||||
| Net cash provided by financing activities – discontinued operation | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash payments for interest | $ | $ | ||||||
| Cash payments for income taxes | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Note receivable received in connection with sale of discontinued operation | $ | $ | ||||||
| Transition to additional paid-in capital upon conversion of convertible notes | $ | $ | ||||||
| Issuance of common stock upon conversion of convertible notes payable | $ | $ | ||||||
| Fair value of warrants issued with sale of shares | $ | $ | ||||||
| Transition of warrant derivative liability to equity upon exercise of warrants | $ | $ | ||||||
| Issuance costs withheld from ELOC proceeds | $ | $ | ||||||
| Issuance of common stock upon exercise of pre-funded warrants | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
| 6 |
KUSTOM ENTERTAINMENT, INC.
(formerly Digital Ally, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business:
Kustom Entertainment, Inc. (formerly Digital Ally, Inc.) was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November 30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital Ally, Inc.
On January 8, 2026, the Company changed its legal name from Digital Ally, Inc. to Kustom Entertainment, Inc. pursuant to a Certificate of Amendment to its Articles of Incorporation filed with the Secretary of State of the State of Nevada. The name change became effective on January 8, 2026, and the Company began trading on the Nasdaq Capital Market (“Nasdaq”) under its new name at the start of trading on January 8, 2026. In connection with the name change, the Company also changed its Nasdaq trading symbol from “DGLY” to “KUST.” The name change and symbol change did not affect the Company’s assets, liabilities, operations, or capital structure, and stockholders were not required to take any action with respect to their stock certificates. The Company’s board of directors (the “Board of Directors”) also approved a conforming amendment to the Company’s Amended and Restated Bylaws solely to reflect the new corporate name. Unless the context otherwise requires, references in these condensed consolidated financial statements to the “Company,” “Digital Ally,” “Digital,” “Kustom” or similar terms refer to Kustom Entertainment, Inc. and its consolidated subsidiaries.
The Company formed Digital Ally International, Inc. in August 2009 to facilitate the export sales of its digital video imaging and storage products. The Company formed TicketSmarter, Inc. on September 1, 2021, upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its global ticketing operations. The Company formed Kustom Entertainment, Inc. and Kustom 440, Inc. in 2022 to create and produce live entertainment experiences directly for consumers.
The business of the Registrant, Kustom Entertainment, Inc. (formerly Digital Ally, Inc.), together with its wholly owned subsidiaries Digital Ally International, Inc., Digital Ally Healthcare, LLC, TicketSmarter, Inc., and Kustom 440, Inc., collectively referred to as the “Company,” is divided into two reportable operating segments: (1) video solutions (“Video Solutions”) and (2) entertainment (“Entertainment”). The Company previously operated a third reportable segment, the Revenue Cycle Management (“Revenue Cycle Management”) segment, which reflected the operations of Nobility Healthcare, LLC (“Nobility Healthcare”). Following the sale of Nobility Healthcare on January 8, 2026, the results of this segment have been classified as discontinued operations for all periods presented and are no longer reported as a separate segment. The Video Solutions segment is the Company’s legacy business that produces digital video imaging, storage products, and related security and commercial applications. This segment includes both service and product revenues through subscription models offering cloud-based services and warranty solutions, as well as hardware sales for video and safety solutions. The Entertainment segment generates revenue through the production of live events and concerts, including the Company’s annual Country Stampede music festival. This segment also acts as an intermediary between ticket buyers and sellers through the Company’s secondary ticketing platform, TicketSmarter.com, and includes the acquisition of tickets from primary sellers for resale through various platforms.
The accounting guidance on segment reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information about those segments to be presented. Such required segment information is included in Note 20, Operating Segments.
| 7 |
Reverse Stock Split
The Company retroactively adjusts all historical share and per-share amounts reflected throughout the condensed consolidated financial statements and other financial information to reflect reverse stock splits as if they had occurred as of the earliest period presented. The par value per share of the Company’s common stock is not affected by reverse stock splits. See Note 16, Stockholders’ Equity for details regarding each reverse stock split effectuated during and subsequent to the periods presented.
Discontinued Operations
In accordance with ASC 205-20, Discontinued Operations, a component of the entity is reported as a discontinued operation when it is disposed of, or classified as held for sale, and represents a strategic shift having a major effect on the Company’s operations and financial results. A component is classified as held for sale when management with the appropriate authority commits to a plan to sell, the component is available for immediate sale in its present condition, an active program to locate a buyer has been initiated, and the sale is probable and expected to be completed within one year at a price reasonable in relation to current fair value.
Held-for-sale assets are measured at the lower of carrying amount or fair value less costs to sell, with depreciation and amortization ceasing upon classification. Results of operations of the disposal group are reported as discontinued operations, net of tax, with prior periods retrospectively reclassified. Assets and liabilities of the disposal group are presented separately as held for sale on the balance sheet in the period of classification.
The Company classified Nobility Healthcare as held for sale and a discontinued operation as of December 31, 2025. See Note 22, Discontinued Operations, for additional information.
Going Concern
The Company evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued, in accordance with ASC 205-40, Presentation of Financial Statements - Going Concern. When substantial doubt is determined to exist, the Company evaluates whether its plans intended to mitigate those conditions, when implemented, will alleviate substantial doubt. The Company’s evaluation is based on relevant conditions and events that are known and reasonably knowable as of the date the condensed consolidated financial statements are issued. The condensed consolidated financial statements have been prepared on a going-concern basis, which assumes the realization of assets and settlement of liabilities in the ordinary course of business, and do not include any adjustments that might result from the outcome of this uncertainty.
The following is a summary of the Company’s Significant Accounting Policies:
Basis of Presentation:
The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information in accordance with ASC 270-10-50, Interim Reporting, and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026.
The balance sheet as of December 31, 2025 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.
For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2025.
| 8 |
Basis of Consolidation:
The accompanying condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Digital Ally International, Inc., Digital Ally Healthcare, LLC, TicketSmarter, Inc., and Kustom 440, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to, determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair value of warrants and options, the fair value of notes receivable and other consideration received in connection with dispositions, the recognition of revenue, inventory valuation reserve, allowances for doubtful accounts and other receivables, incremental borrowing rate on leases, the valuation allowance for deferred tax assets, and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated notes payable approximate fair value because of the short-term nature of these items.
Revenue Recognition:
The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company generates revenue from both product and service offerings across its two reportable segments. The Company reports all revenues on a gross basis, except for certain service revenues within the Entertainment segment, and all revenues are reported net of sales taxes.
Video Solutions Segment
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with the customer. In situations where sales are to a distributor, the Company has concluded its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of its consideration for the contract, the Company evaluates certain factors including the customers’ ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to refunds or adjustment to determine the net consideration to which it expects to be entitled. As the Company’s standard payment terms are generally less than one year for product sales (although some subscriptions for services may extend three to five years), it has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction price to each distinct product based on its relative standalone selling price. The product price, as specified on the purchase order, is considered the stand-alone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment. In determining whether control has been transferred, the Company considers if there is a present right to payment and legal title, along with whether risks and rewards of ownership have transferred to the customer. Customers do not have a right to return the product other than for warranty reasons, for which they would only receive repair services or replacement products. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions for product sales when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
| 9 |
Service and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue, and software revenue. Revenue is recognized upon shipment of the product and acceptance of the service or materials by the end customer for repair services. Revenue for extended warranty, cloud service, or other software-based products is recognized over the term of the contract warranty or service period. A time-elapsed method is used to measure progress because the Company transfers control evenly over the contractual period. Accordingly, the fixed consideration related to these revenues is generally recognized on a straight-line basis over the contract term, as long as the other revenue recognition criteria have been met.
The Company’s multiple performance obligations may include future body-worn camera devices to be delivered at defined points within a multi-year contract, and in those arrangements, the Company allocates total arrangement consideration over the life of the multi-year contract to future deliverables using management’s best estimate of selling price.
Entertainment Segment
The Company reports ticketing revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the underlying ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.
The Company sells 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. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of the sale, therefore controlling 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.
The Company also acts as an intermediary between buyers and sellers through 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 the Company does not control the ticket prior to the transfer, the Company acts 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.
Deferred Revenue
Deferred revenue includes payments received in advance of the Company’s performance obligations and is presented as current and non-current liabilities in the consolidated balance sheets. Revenue is recognized as the related performance obligations are satisfied over time. See Note 21, Deferred Revenue, for additional information regarding the composition, activity, and expected future recognition of deferred revenue balances.
Litigation:
From time to time, the Company is notified that it may be a party to a lawsuit or that a claim is being made against it. It is the Company’s policy not to disclose the specifics of any claim or threatened lawsuit until the summons and complaint are served on the Company. After carefully assessing the claim, and assuming the Company determines that it is not at fault or disagrees with the damage or relief demanded, the Company vigorously defends any lawsuit filed against it. The Company records a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, the Company determines 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, the Company takes into consideration factors such as its historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of prevailing, the availability of insurance, and the severity of any potential loss. The Company reevaluates and updates accruals as matters progress over time.
| 10 |
Cash and cash equivalents:
Cash and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less.
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC). At times, account
balances may exceed the federally insured limit of $
Accounts Receivable:
Accounts receivables are carried at original invoice amount less an allowance for doubtful accounts, which is estimated in accordance with ASC 326, Financial Instruments — Credit Losses. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, current economic conditions, and reasonable and supportable forecasts of future conditions that may affect the collectability of the reported amount. Trade receivables are written off when deemed uncollectible, and recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade receivables.
Goodwill and Other Intangibles:
Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles — Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31st, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
The Company has adopted ASU 2017-04, which simplifies goodwill impairment measurement by eliminating the second step from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
The Company determines the fair value of its reporting units using a weighting of the income and market valuation approaches. The income approach applies a fair value methodology to each reporting unit based on discounted cash flows. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internally-developed forecasts of revenue and profitability, estimation of the long-term rate of growth for the business, estimation of the useful life over which cash flows will occur, and determination of the weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested. Under the market approach, the Company estimates the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the income and market approach include: future levels of revenue growth, gross profit margin, EBITDA as a percentage of revenue, cash-free debt-free net working capital as a percentage of revenue, capital expenditures as a percentage of revenue, discount rate, selection of guideline public companies, and revenue market multiples.
Long-lived and Other Intangible Assets - The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the operating segment level.
| 11 |
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.
The
Company completed its annual goodwill and intangible asset impairment test as of December 31, 2025 on a full quantitative basis. Based
on the results of the annual test, the Company concluded that no impairment existed with respect to the Video Solutions segment. With
respect to the Entertainment segment, the Company recorded total impairment charges of $
As of March 31, 2026, management evaluated whether any triggering events or changes in circumstances occurred during the three months ended March 31, 2026 that would indicate the carrying value of goodwill or long-lived assets may not be recoverable. Based on that evaluation, no triggering events were identified and no interim impairment test was performed. Accordingly, no goodwill or intangible asset impairment charges were recorded for the three months ended March 31, 2026. Refer to Note 7, Goodwill and Other Intangible Assets, for additional details.
Intangible assets include deferred patent costs, license agreements, trademarks and trade names. Legal expenses incurred in preparation of patent applications have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will be charged to expense at that time. The Company has entered into several sublicense agreements under which it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements generally require upfront payments to obtain exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and amortizes such costs over their estimated useful life on a straight-line method.
Fair value of assets and liabilities acquired in business combinations:
The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, with any excess recorded as goodwill. Transaction costs associated with acquisitions are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations.
Inventories:
Inventories for the Video Solutions segment consist of electronic parts, circuitry boards, camera parts and ancillary parts (collectively, “components”), work-in-process, and finished goods. Finished goods that are manufactured and assembled by the Company are carried at the lower of cost or net realizable value, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor, and manufacturing overhead. Inventories for the Entertainment segment consist of tickets to live events, which are carried at the lower of cost or net realizable value. Any unsold tickets remaining in inventory after the event are fully written off. Management has established inventory reserves based on estimates of excess and/or obsolete current inventory.
Manufacturing inventory for the Video Solutions segment is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned changes to products, and known trends in markets and technology. Changes in support plans or technology could have a significant impact on obsolescence.
| 12 |
To support its worldwide service operations for the Video Solutions segment, the Company maintains service spare parts inventory, which consists of both consumable and repairable spare parts. Consumable service spare parts are used within its service business to replace worn or damaged parts in a system during a service call and are generally classified in current inventory as its stock of this inventory turns relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part is still necessary to support systems under service contracts, the part is non-current and included within non-current inventories within its consolidated balance sheet. Consumables are charged to cost of goods sold when issued during the service call.
As these service parts age over the related product group’s post-production service life, the Company reduces the net carrying value of its repairable spare part inventory on the consolidated balance sheet to account for the excess that builds over the service life. The post-production service life of its systems is generally seven to twelve years, and at the end of twelve years, the carrying value for these parts in its consolidated balance sheet is reduced to zero. The Company also performs periodic monitoring of its installed base for premature end-of-service-life events and expenses, through cost of sales, the remaining net carrying value of any related spare parts inventory in the period incurred.
Prepaid inventory represents advance payments made to suppliers for inventory not yet received. The Company periodically evaluates the recoverability of prepaid inventory balances and records an allowance when amounts are not expected to be fully realized.
Property, plant and equipment:
Property, plant and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful life of the asset, which ranges from three to thirty years, other than the infinite useful life of land. Amortization expense on capitalized leases is included with depreciation expense. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.
Leases:
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will evaluate whether to account for the lease as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheet as of March 31, 2026 and December 31, 2025. Finance leases would be included in property, plant and equipment, net, and long-term debt and finance lease obligations on the balance sheet. The Company had operating leases for copiers, offices, and warehouse space at March 31, 2026 and December 31, 2025, but no finance leases.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the operating lease liabilities if the operating lease does not provide an implicit rate. Lease terms may include the option to extend when the Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company elected to apply the short-term lease measurement and recognition exemption, under which ROU assets and lease liabilities are not recognized for short-term leases.
Warranties:
The Company’s Video Solutions segment products carry explicit product warranties that extend up to two years from the date of shipment. The Company records a provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts these provisions to reflect actual experience. Accrued warranty costs are included in accrued expenses. Extended warranties are offered on selected products and when a customer purchases an extended warranty the associated proceeds are treated as contract liabilities and recognized over the term of the extended warranty.
| 13 |
Income Taxes:
Deferred taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The
Company applies the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No.
740 – Income Taxes, which provides a framework for accounting for uncertainty in income taxes and a comprehensive model to recognize,
measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax return. The
Company initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained
upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit
that is
The
Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense
in the condensed consolidated statements of operations. There was
The Company is subject to taxation in the United States and various states. The Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2022 and all prior tax years for federal tax purposes, and 2023 and all prior years for state tax purposes.
For the three months ended March 31, 2026 and 2025, the Company recorded no income tax expense or benefit. The Company maintains a full valuation allowance against its net deferred tax assets as it is more likely than not that such assets will not be realized. Accordingly, no tax benefit has been recognized on the Company’s pretax losses for the three months ended March 31, 2026 and 2025.
Research and Development Expenses:
The Company expenses all research and development costs as incurred, which are generally incurred by the Video Solutions segment. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Costs incurred after achievement of technological feasibility were not significant, and software development costs were expensed as incurred during the three months ended March 31, 2026 and 2025.
Warrant Derivative Liabilities and Bifurcated Embedded Derivatives:
In accordance with ASC 815-40, Derivatives and Hedging: Contracts in an Entity’s Own Equity, entities must consider whether to classify contracts that may be settled in their own stock, such as warrants to purchase shares of common stock, as equity of the entity or as an asset or liability. If an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. The Company has determined that because the terms of the various warrants issued and remaining outstanding include a provision that entitles all the warrant holders to receive cash for their warrants in the event of a qualifying cash tender offer, while only certain of the holders of the underlying shares of common stock would be entitled to cash, its warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.
| 14 |
In addition, the Company evaluates the terms of its debt instruments for embedded features that require bifurcation under ASC 815-15, Derivatives and Hedging: Embedded Derivatives. When a convertible note contains a conversion feature or other embedded derivative that is not clearly and closely related to the host debt instrument and meets the definition of a derivative, the Company bifurcates the embedded feature from the host instrument and records it as a separate derivative liability measured at fair value. The host debt instrument is recorded at its residual carrying value after the bifurcation. The bifurcated embedded derivative and any detachable warrants issued in connection with the same debt instrument are initially recorded at their respective fair values, with any excess of the aggregate fair value over the proceeds allocated to the host note recognized immediately in earnings as a day-one loss. Subsequent changes in fair value of both the warrant derivative liabilities and bifurcated embedded derivatives are reported in earnings each period.
Volatility in the price of the Company’s common stock may result in significant changes in the value of these derivatives and resulting gains and losses on its condensed consolidated statements of operations.
The Company grants stock-based compensation to its employees, board of directors and certain third-party contractors. Share-based compensation arrangements may include the issuance of options to purchase common stock in the future or the issuance of restricted stock, which generally are subject to vesting requirements. The Company records stock-based compensation expense for all stock-based compensation granted based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.
The Company estimates the grant-date fair value of stock-based compensation using the Black-Scholes valuation model. Assumptions used to estimate compensation expense are determined as follows:
| ● | Expected term is determined using the contractual term and vesting period of the award; | |
| ● | Expected volatility of award grants made in the Company’s plan is measured using the weighted average of historical daily changes in the market price of the Company’s common stock over the period equal to the expected term of the award; | |
| ● | Expected dividend rate is determined based on expected dividends to be declared; | |
| ● | Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a maturity equal to the expected term of the awards; and | |
| ● | Forfeitures are accounted for as they occur. |
Segment Reporting
The
accounting guidance on segment reporting establishes standards for reporting information regarding operating segments in financial statements
and requires selected information about those segments to be presented in the condensed consolidated financial statements. Operating segments are
identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief
operating decision maker (the Company’s Chief Executive Officer, or “CODM”) in making decisions about how to allocate
resources and assess performance. The Company’s
| 15 |
The Company previously operated a third reportable segment, Revenue Cycle Management, which reflected the operations of Nobility Healthcare. Following the sale of Nobility Healthcare on January 8, 2026 (effective January 1, 2026), its results have been classified as discontinued operations for all periods presented and are no longer included in segment reporting.
The Company adopted ASU 2023-07 in 2024 and applied the amendment retrospectively to all periods presented. See Note 20, Operating Segments, for additional information.
Non-Controlling Interests
Non-controlling interests in the Company’s condensed consolidated financial statements represent the ownership interests in subsidiaries not attributable, directly or indirectly, to the Company. The Company previously held a 51% equity interest in Nobility Healthcare, with the remaining 49% held by third-party venture partners. Nobility Healthcare was sold on January 8, 2026, with an effective date of January 1, 2026, and has been classified as a discontinued operation for all periods presented. As of March 31, 2026, the Company has no non-controlling interests in any consolidated subsidiary. Because Nobility Healthcare represents the Company’s entire discontinued operation, the non-controlling interest related to Nobility Healthcare is fully included within discontinued operations and is not included in income or loss from continuing operations. The non-controlling owners’ share of Nobility Healthcare’s results of operations is presented within net income (loss) from discontinued operations in the condensed consolidated statements of operations.
Prior to its classification as held for sale and discontinued operations, the Company consolidated Nobility Healthcare based on its controlling financial interest. Upon classification as a discontinued operation, Nobility Healthcare’s assets, liabilities, results of operations, and the related non-controlling interest were presented separately from the Company’s continuing operations. See Note 22, Discontinued Operations, for additional details regarding the disposition and its impact on stockholders’ equity.
Subscription Receivable:
Subscription
receivables (also referred to as lease receivables) are carried at the original invoice amount less the total payments received pertaining
to each individual customer’s subscription lease agreement. These agreements generally range from three to five years and are removed
from subscription receivables upon termination of the agreement. The Company determines an allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering the customer’s financial condition, credit history, and current economic
conditions. The allowance for doubtful accounts was $
Notes Receivable:
Notes receivable represent amounts owed to the Company under promissory notes, including notes received as consideration in connection with the disposition of businesses. Notes receivable are initially recorded at their estimated fair value on the date of origination, with any resulting discount amortized to interest income over the term of the note using the effective-interest method. The Company evaluates notes receivable for collectibility based on the borrower’s financial condition, payment history, collateral (if any), and current economic conditions, and records an allowance for credit losses when amounts are not expected to be fully realized.
Earn-out features embedded in notes received as consideration for the disposition of a business adjust the contractual principal amount of the note based on the post-closing performance of the divested business. Such adjustments are recognized as fair value adjustments to the note receivable, with the resulting gain or loss recorded within loss from discontinued operations in the period the adjustment is determined, in accordance with ASC 205-20, Discontinued Operations. The Company does not separately recognize the earn-out feature as a contingent consideration arrangement.
As of March 31, 2026, notes receivable consisted of a note received as partial consideration in connection with the sale of Nobility Healthcare on January 8, 2026. See Note 22, Discontinued Operations, for additional details.
Discontinued Operations:
Under ASC 205-20, Discontinued Operations, the results of a disposed business are reported as discontinued operations when the held-for-sale and strategic shift criteria are met. When a business is classified as a discontinued operation, (i) its results of operations are presented in a single line, net of tax, in the condensed consolidated statements of operations, (ii) its assets and liabilities are classified as held for sale in the condensed consolidated balance sheets in the period of classification, and (iii) prior-period financial statements are retrospectively reclassified to conform to the current-period presentation. See Note 22, Discontinued Operations, for further details regarding the Company’s sale of Nobility Healthcare.
| 16 |
New Accounting Standards
The Company did not adopt any new accounting standards during the three months ended March 31, 2026 that had a material impact on its condensed consolidated financial statements. The Company’s adoption of ASU 2023-07, Improvements to Reportable Segment Disclosures, in 2024 and ASU 2023-09, Improvements to Income Tax Disclosures, in 2025 is described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.
Recently Issued Accounting Pronouncements.
In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40), which requires public business entities to disclose disaggregated information about certain income statement expense line items, including employee compensation, depreciation, and intangible asset amortization. As clarified by ASU 2025-01 issued in January 2025, the ASU is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.
In November 2024, the FASB issued ASU 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, which clarifies the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as induced conversions. The ASU is effective for annual reporting periods beginning after December 15, 2025 and interim periods within those fiscal years. The Company adopted this ASU effective January 1, 2026 and the adoption did not have a material impact on its condensed consolidated financial statements.
In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements, which clarifies when the interim reporting requirements of ASC 270 apply and improves the navigability of the related guidance. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.
In December 2025, the FASB issued ASU 2025-12, Codification Improvements, which contains 33 improvements to U.S. GAAP across a wide range of topics, including clarifications related to diluted earnings per share calculations when a loss from continuing operations exists. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.
The other recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) are not expected to have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.
NOTE 2. ACCOUNTS RECEIVABLE AND SUBSCRIPTION RECEIVABLES
March 31, 2026 | December 31, 2025 | |||||||
| Accounts receivable – trade, gross | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable – trade, net | $ | $ | ||||||
| Subscription receivables, gross – current | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Subscription receivables, net – current | ||||||||
| Subscription receivables – long term | ||||||||
| Total subscription receivables, net | $ | $ | ||||||
| 17 |
The allowance for doubtful accounts related to trade receivables was comprised of the following for the three months ended March 31, 2026 and the year ended December 31, 2025:
March 31, 2026 | December
31, 2025 | |||||||
| Beginning balance | $ | $ | ||||||
| Provision for bad debts | ||||||||
| Charge-offs to allowance, net of recoveries | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
NOTE 3. NOTES RECEIVABLE
Notes receivable were comprised of the following at March 31, 2026 and December 31, 2025:
March 31, 2026 | December 31, 2025 | |||||||
| Notes receivable - current | $ | $ | ||||||
| Notes receivable – long-term | ||||||||
| Total notes receivable | $ | $ | ||||||
Notes
Receivable - On January 8, 2026, in connection with the sale of Nobility Healthcare, the Company received a promissory note from
the Buyer with an estimated fair value of $
NOTE 4. OTHER RECEIVABLES
Other receivables were comprised of the following at March 31, 2026 and December 31, 2025:
March 31, 2026 | December
31, 2025 | |||||||
| Litigation receivables | $ | |||||||
| Allowance for loss on litigation receivables | ( | ) | ( | ) | ||||
| Other | ||||||||
| Total other receivables | $ | $ | ||||||
Litigation
Receivables - As of March 31, 2026, the Company continued to hold litigation receivables of $
| 18 |
NOTE 5. INVENTORIES
Inventories consisted of the following at March 31, 2026 and December 31, 2025:
March 31, 2026 | December 31, 2025 | |||||||
| Raw material and component parts– Video Solutions segment | $ | $ | ||||||
| Work-in-process– Video Solutions segment | ||||||||
| Finished goods – Video Solutions segment | ||||||||
| Finished goods – Entertainment segment | ||||||||
| Subtotal | ||||||||
| Reserve for excess and obsolete inventory– Video Solutions segment | ( | ) | ( | ) | ||||
| Reserve for excess and obsolete inventory – Entertainment segment | ( | ) | ( | ) | ||||
| Total inventories | $ | $ | ||||||
NOTE 6. PREPAID EXPENSES
Prepaid expenses were the following at March 31, 2026 and December 31, 2025:
March 31, 2026 | December 31, 2025 | |||||||
| Prepaid inventory | $ | $ | ||||||
| Prepaid advertising | ||||||||
| Prepaid commissions | ||||||||
| Prepaid offering costs | ||||||||
| Other | ||||||||
| Total prepaid expenses | $ | $ | ||||||
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following as of March 31, 2026 and December 31, 2025:
| March 31, 2026 | ||||||||||||||||
Gross value | Accumulated amortization | Accumulated impairment | Net carrying value | |||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Patents and trademarks (Video Solutions segment) | $ | $ | $ | $ | ||||||||||||
| Sponsorship agreement network (Entertainment segment) | ||||||||||||||||
| SEO content (Entertainment segment) | ||||||||||||||||
| Personal seat licenses (Entertainment segment) | ||||||||||||||||
| Website enhancements (Entertainment segment) | ||||||||||||||||
| Indefinite life intangible assets: | ||||||||||||||||
| Goodwill (Entertainment segment) | ||||||||||||||||
| Trade name and trademarks (Entertainment segment) | ||||||||||||||||
| Patents and trademarks pending (Entertainment segment) | ||||||||||||||||
| Patents and trademarks pending (Video Solutions segment) | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 19 |
| December 31, 2025 | ||||||||||||||||
Gross value | Accumulated amortization | Accumulated impairment | Net carrying value | |||||||||||||
| Amortized intangible assets: | ||||||||||||||||
| Patents and trademarks (Video Solutions segment) | $ | $ | $ | $ | ||||||||||||
| Sponsorship agreement network (Entertainment segment) | ||||||||||||||||
| SEO content (Entertainment segment) | ||||||||||||||||
| Personal seat licenses (Entertainment segment) | ||||||||||||||||
| Website enhancements (Entertainment segment) | ||||||||||||||||
| Indefinite life intangible assets: | ||||||||||||||||
| Goodwill (Entertainment segment) | ||||||||||||||||
| Trade name and trademarks (Entertainment segment) | ||||||||||||||||
| Patents and trademarks pending (Video Solutions segment) | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Patents and trademarks pending will be amortized beginning at the time they are issued by the appropriate authorities. If issuance of the final patent or trademark is denied, then the amount deferred will be immediately charged to expense.
Other intangible assets consist of sponsorship agreement network, SEO content, personal seat licenses, and website enhancements. These assets are recorded at cost and amortized on a straight-line basis over their estimated useful lives.
| Intangible Asset Useful Life | ||
| Patents and trademarks (Video Solutions segment) | ||
| Sponsorship agreement network (Entertainment segment) | ||
| SEO content (Entertainment segment) | ||
| Personal seat licenses (Entertainment segment) | ||
| Software | ||
| Website enhancements (Entertainment segment) |
| 20 |
Amortization
for the three months ended March 31, 2026 and 2025 was $
| Year ending December 31: | ||||
| 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| 2031 and thereafter | ||||
| $ | ||||
Annual impairment test
The
Company performed its annual goodwill and intangible asset impairment test as of December 31, 2025, which resulted in a $
As of March 31, 2026, no events or changes in circumstances were noted that triggered the requirement for an interim goodwill impairment test during the three months ended March 31, 2026.
Indefinite-lived intangible assets
The
Company held indefinite-lived trade names and trademarks with an aggregate carrying value of $
| 21 |
As
a result of the Company’s December 31, 2025 annual impairment test, the Company concluded that the carrying amounts of both trade
names exceeded their estimated fair values and recorded non-cash impairment charges totaling $
In
addition, the Company recorded a non-cash impairment charge of $
NOTE 8. OTHER ASSETS
Other assets were the following at March 31, 2026 and December 31, 2025:
March 31, 2026 | December 31, 2025 | |||||||
| Deposits | $ | $ | ||||||
| Prepaid commissions | ||||||||
| Other | ||||||||
| Total other assets | $ | $ | ||||||
NOTE 9. DEBT OBLIGATIONS
Debt obligations is comprised of the following:
March 31, 2026 | December 31, 2025 | |||||||
| Economic injury disaster loan (EIDL) | $ | $ | ||||||
| Unsecured Promissory note – Entertainment segment | ||||||||
| 2025 Secured Notes | ||||||||
| Total gross principal | ||||||||
| Unamortized debt issuance costs | ( | ) | ||||||
| Debt obligations | ||||||||
| Less: current maturities of debt obligations | ||||||||
| Debt obligations, long-term | $ | $ | ||||||
| 22 |
Future principal payments on debt obligations as of March 31, 2026 are as follows:
| Gross Principal | Unamortized Discount | Net Carrying Value | ||||||||||
| 2026 (April 1, 2026 to December 31, 2026) | $ | $ | $ | |||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| 2029 | ||||||||||||
| 2030 and thereafter | ||||||||||||
| Total | $ | $ | $ | |||||||||
2020 Small Business Administration Notes.
On
May 12, 2020, the Company received $
Under
the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of
Unsecured Promissory Note
On
February 1, 2025, the Company’s Entertainment segment entered into a $
2025 Senior Secured Convertible Note and Committed Equity Financing
During
September 2025 and December 2025, the Company issued senior secured convertible notes (the “2025 Secured Notes”) with an
aggregate original principal amount of $
| 23 |
During
the three months ended March 31, 2026, the holders of the 2025 Secured Notes elected to convert the entire $
Following is an analysis of the 2025 Secured Notes net carrying balance:
| Amount | ||||
| Balance, as of December 31, 2025 | $ | |||
| Amortization of discount | ||||
| Conversion of principal to common stock | ( | ) | ||
| Balance, as of March 31, 2026 | $ | |||
As
a result of the conversions described above, no balance remained outstanding under the 2025 Secured Notes as of March 31, 2026. See Note
15, Common Stock Purchase Warrants, for additional information regarding the
NOTE 10. FAIR VALUE MEASUREMENT
In accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company measures certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the income approach to measure the fair value of its derivative liabilities, using option pricing models that incorporate observable market data and management’s estimates of significant unobservable inputs.
ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| ● | Level 1 — Quoted prices in active markets for identical assets and liabilities |
| ● | Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) |
| ● | Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value) |
| 24 |
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2026 and December 31, 2025:
| March 31, 2026 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2025 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
Level 3 Rollforward
The
Company’s Level 3 liabilities consist of (i) the bifurcated conversion feature associated with the 2025 Senior Secured Convertible
Notes (the “2025 Secured Notes”), which was fully extinguished upon conversion during the three months ended March 31, 2026,
and (ii) warrants originally issued in 2023, which remained outstanding as of March 31, 2026 and had a fair value of $
| Warrant Derivative Liabilities | ||||
| Balance, December 31, 2025 | $ | |||
| Change in fair value recognized in earnings | ||||
| Transition of derivative liability to additional paid-in capital upon conversion of 2025 Secured Notes | ( | ) | ||
| Balance, March 31, 2026 | $ | |||
The
net $
There were no transfers between Level 1, Level 2, or Level 3 of the fair value hierarchy during the three months ended March 31, 2026.
Non-Recurring Fair Value Measurements
On
January 8, 2026, the Company recognized a Level 3 non-recurring fair value measurement in connection with the disposition of Nobility
Healthcare. As part of the consideration, the Company received a note receivable from the buyer, which was initially recorded at its
estimated fair value of $
| 25 |
NOTE 11. ACCRUED EXPENSES
Accrued expenses consisted of the following at March 31, 2026 and December 31, 2025:
| March
31, 2026 | December
31, 2025 | |||||||
| Accrued payroll and related fringes | $ | $ | ||||||
| Accrued taxes | ||||||||
| Accrued interest | ||||||||
| Accrued board of directors’ fees | ||||||||
| Customer deposits | ||||||||
| General accrued expense | ||||||||
| $ | $ | |||||||
NOTE 12. INCOME TAXES
The
effective tax rate for the three months ended March 31, 2026, and 2025 varied from the expected statutory rate due to the Company continuing
to provide a
The Company incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March 31, 2026. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to fully reserve its deferred tax assets at March 31, 2026. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines 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 of March 31, 2026 and December 31, 2025, the Company had the following estimated Federal net operating loss carry-forwards available to offset future taxable income:
| Amount | ||||
| Tax years generated: | ||||
| 2017 and before | $ | |||
| 2018 and after | ||||
| Federal net operating loss carry-forwards available | $ | |||
Such
tax net operating loss carry-forwards expire between 2026 and 2037 relative to Federal net operating loss carry-forwards generated in
tax years 2017 and prior. Federal net operating loss carry-forwards generated in tax years 2018 and after cannot be carried back to prior
years and have an indefinite life since the enactment of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017 further
provides for an annual limitation on usage equivalent to 80% of taxable income. In addition, the Company had research and development
tax credit carry-forwards totaling $
The Company’s 2022 federal tax return was recently examined by the Internal Revenue Service resulting in no proposed adjustments.
| 26 |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments:
Total
lease expense under the Company’s operating leases related to continuing operations was approximately $
| Assets: | ||||
| Operating lease right of use assets | $ | |||
| Prepayment of rent | $ | |||
| Total operating lease right of use asset | $ | |||
| Liabilities: | ||||
| Operating lease obligations-current portion | ||||
| Operating lease obligations-less current portion | ||||
| Total operating lease obligations | $ | |||
Following are the minimum lease payments for each year and in total.
| Year ending December 31: | ||||
| 2026 (April 1, 2026 through December 31, 2026) | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 and thereafter | ||||
| Total undiscounted minimum future lease payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease liability | $ |
During
the three months ended March 31, 2026, the Company incurred capital expenditures of $
| 27 |
Litigation.
From time to time, the Company is notified that the Company may be a party to a lawsuit or that a claim is being made against them. It is its policy not to disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on the Company. After carefully assessing the claim, and assuming the Company determines that they are not at fault or disagrees with the damage or relief demanded, they vigorously defend any lawsuit filed against them. The Company records a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, they 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, they take into consideration factors such as its historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of its prevailing, the availability of insurance, and the severity of any potential loss. The Company reevaluates and update accruals as matters progress over time.
Culp McAuley, Inc. et al.
As
of March 31, 2026, the Company holds an unsatisfied judgment of $
Larry Roberts
In March 2024, the Company filed a complaint against Larry Roberts in the Superior Court of the State of California, County of Orange, Case No. 30-2024-01385012-CU-FR-CJC. The lawsuit arises from the defendant’s alleged theft and misapplication of funds that were intended for the purchase of goods on behalf of the Company. The Company seeks monetary damages based on certain conduct by the defendant. On May 28, 2024, the defendant filed a motion to strike portions of the complaint and a motion for demurrer. On October 4, 2024, the Court sustained in part and overruled in part defendant’s motion for demurrer. The Court further denied the defendant’s motion to strike in its entirety. Discovery is ongoing. A jury trial has been scheduled for October 19, 2026. The Company is not able to provide an estimate of the likelihood of success at this time. The matter remains open.
Pharmaxx Medical, Inc.
The
Company filed a complaint against Pharmaxx Medical, Inc. in the Superior Court of the State of California, County of Riverside, Case
No. CVSW2300198, alleging breach of contract arising from the failure to deliver pharmaceutical gloves. After the court struck the defendant’s
answer, the Company submitted the default package to obtain a default judgment against the defendant. The default package remains pending
with the court. As of March 31, 2026, the Company has recorded a litigation receivable of $
| 28 |
First Insurance Funding Corp. — Johnson County Collection Case
The
Company is a defendant in a collection case filed in the District Court of Johnson County, Kansas limited actions department. This is
a collection lawsuit claiming the Company owed money for insurance premium funding on a cancelled policy totaling $
Kustom 440 — Former Consultant
A former consultant has filed a claim against Kustom 440, Inc., a wholly owned subsidiary of the Company, seeking to compel payment under an alleged consulting agreement. The Company is currently engaged in settlement negotiations. The matter remains open.
Aegis Capital Corp.
As
of March 31, 2026, the Company is subject to a contingent obligation to pay 4% of future Gross Proceeds raised under its Equity Line
of Credit through February 14, 2028, pursuant to a Settlement Agreement entered into with Aegis Capital Corp. (“Aegis”) in
January 2026. The Settlement Agreement resolved a lawsuit filed by Aegis in the U.S. District Court for the Southern District of New
York alleging breach of a right of first refusal, and the lawsuit was subsequently dismissed without prejudice. The Company made aggregate
payments of $
Artist Performance Commitments
In
January 2026, Kustom 440, Inc., a wholly owned subsidiary of the Company, entered into a performance agreement with a headlining artist
for the 2026 Country Stampede music festival scheduled for June 27, 2026.
The Company recorded pre-tax compensation expense related to the grant of stock options and restricted stock issued of $ and $ for the three months ended March 31, 2026 and 2025, respectively.
As of March 31, 2026, the Company had adopted ten separate stock option and restricted stock plans: (i) the 2005 Stock Option and Restricted Stock Plan (the “2005 Plan”), (ii) the 2006 Stock Option and Restricted Stock Plan (the “2006 Plan”), (iii) the 2007 Stock Option and Restricted Stock Plan (the “2007 Plan”), (iv) the 2008 Stock Option and Restricted Stock Plan (the “2008 Plan”), (v) the 2011 Stock Option and Restricted Stock Plan (the “2011 Plan”), (vi) the 2013 Stock Option and Restricted Stock Plan (the “2013 Plan”), (vii) the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”), (viii) the 2018 Stock Option and Restricted Stock Plan (the “2018 Plan”), (ix) the 2020 Stock Option and Restricted Stock Plan (the “2020 Plan”), and (x) the 2022 Stock Option and Restricted Stock Plan (the “2022 Plan”). The 2005 Plan, 2006 Plan, 2007 Plan, 2008 Plan, 2011 Plan, 2013 Plan, 2015 Plan, 2018 Plan, 2020 Plan and 2022 Plan are referred to as the “Plans.” The Company registers all shares of common stock that are issuable under its Plans with the SEC. A total of 4 shares remain available for awards under the various Plans as of March 31, 2026.
| 29 |
Stock option grants. The Company believes that such awards better align the interests of our employees with those of its stockholders. Option awards have been granted with an exercise price equal to the market price of its stock at the date of grant with such option awards generally vesting based on the completion of continuous service and having ten-year contractual terms. These option awards typically provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company has registered all shares of common stock that are issuable under its Plans with the SEC.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model.
| Options | Number
of Shares | Weighted Average Exercise Price | ||||||
| Outstanding at January 1, 2026 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ( | ) | ( | ) | ||||
| Outstanding at March 31, 2026 | $ | |||||||
| Exercisable at March 31, 2026 | $ | |||||||
| Options | Number
of Shares | Weighted Average Exercise Price | ||||||
| Outstanding at January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2025 | $ | |||||||
| Exercisable at March 31, 2025 | $ | |||||||
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The total estimated grant date fair value stock options issued during the three months ended March 31, 2026 was $. Following are certain estimates and assumptions utilized as of the issuance date to determine the grant-date fair value of the stock options issued during 2026:
| Volatility – range | % | |||
| Risk-free rate | % | |||
| Dividend | % | |||
| Contractual term | years | |||
| Exercise price | $ | |||
| Common stock issuable under the options |
The Plans allow for the cashless exercise of stock options. This provision allows the option holder to surrender/cancel options with an intrinsic value equivalent to the purchase/exercise price of other options exercised. There were no shares surrendered pursuant to cashless exercises during the three months ended March 31, 2026 and 2025.
| 30 |
Compensation expense totaled $ and $-- for stock options during the three months ended March 31, 2026 and 2025, respectively. As of March 31, 2026 and 2025, no outstanding or exercisable options had intrinsic value, as all exercise prices exceeded the market price of the Company’s common stock on those dates. At March 31, 2026 and December 31, 2025, the aggregate intrinsic value of options outstanding was approximately $-- and $--, respectively, and the aggregate intrinsic value of options exercisable was approximately $-- and $--, respectively.
| Outstanding options | Weighted average | Exercisable options | Weighted average | |||||||||||||||
| Exercise
price range | Number
of options | remaining contractual life | Number
of options | remaining contractual life | ||||||||||||||
| $ | years | — years | ||||||||||||||||
| Total | years | — years | ||||||||||||||||
Restricted stock grants. The Board of Directors has granted restricted stock awards under the Plans. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over one to four years corresponding to anniversaries of the grant date. Under the Plans, unvested shares of restricted stock awards may be forfeited upon the termination of service to or employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends.
| Number
of Restricted shares | Weighted average grant date fair value | |||||||
| Nonvested balance, January 1, 2026 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ||||||||
| Nonvested balance, March 31, 2026 | ||||||||
| Number
of Restricted shares | Weighted average grant date fair value | |||||||
| Nonvested balance, January 1, 2025 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ||||||||
| Nonvested balance, March 31, 2025 | $ | |||||||
The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of the grant. As of March 31, 2026, there was $ of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next twenty-two months in accordance with their respective vesting scale.
| 31 |
The nonvested balance of restricted stock vests as follows:
| Years ended | Number
of shares | |||
| 2026 (April 1, 2026 to December 31, 2026) | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
NOTE 15. COMMON STOCK PURCHASE WARRANTS
The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2026 and 2025:
| Warrants | Weighted average | |||||||
| Balance, January 1, 2026 | $ | |||||||
| Issuances | ||||||||
| Exercises | ||||||||
| Terminated/Cancelled | ||||||||
| Balance, March 31, 2026 | $ | |||||||
| Warrants | Weighted average | |||||||
| Balance, January 1, 2025 | $ | |||||||
| Issuance February 2025 – Prefunded Warrants | ||||||||
| Exercise February 2025 – Prefunded Warrants | ( | ) | ( | ) | ||||
| Exercise June 2024 - Series B warrants | ( | ) | ( | ) | ||||
| Terminated/Cancelled | ||||||||
| Balance, March 31, 2025 | $ | |||||||
The
total intrinsic value of all outstanding warrants aggregated $
The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase shares of common stock as of March 31, 2026:
| Outstanding and exercisable warrants | ||||||||||
| Exercise price | Number of warrants | Weighted
average remaining contractual life | ||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| $ | years | |||||||||
| years | ||||||||||
| 32 |
September and December 2025 Detachable Purchase Warrants
In connection with the issuance of the 2025 Senior Secured Convertible Notes during September and December 2025 (see
Note 9, Debt Obligations), the Company issued an aggregate
of
February 2025 Purchase Warrants
On
February 13, 2025, the Company issued Series A warrants in connection with an underwritten public offering. The warrants were subject
to stockholder approval and contained reset provisions, and were activated on May 6, 2025. A total of
| Series
A warrants issuance/activation date – May 6, 2025 assumptions | ||||
| Volatility – range | % | |||
| Risk-free rate | % | |||
| Dividend | % | |||
| Remaining contractual term | ||||
| Exercise price | $ | |||
| Common stock issuable under the warrants | ||||
On June 27, 2025, the circumstances allowing for net cash settlement outside the Company’s control were terminated,
and the Series A warrants were reclassified to equity at their then-current fair value of $
| Series
A warrants transition date – June 27, 2025 assumptions |
||||
| Volatility – range | % | |||
| Risk-free rate | % | |||
| Dividend | % | |||
| Remaining contractual term | ||||
| Exercise price | $ | |||
| Common stock issuable under the warrants | ||||
As
of March 31, 2026, all
| 33 |
2024 Purchase Warrants
The
Company has
| March
31, 2026 assumptions | December
31, 2025 assumptions | |||||||
| Volatility – range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend | % | % | ||||||
| Remaining contractual term | ||||||||
| Exercise price | $ | $ | ||||||
| Common stock issuable under the warrants | ||||||||
2023 Purchase Warrants
On April 5, 2023, the Company issued warrants to purchase
NOTE 16 - STOCKHOLDERS’ EQUITY
Reverse Stock Split
On
January 8, 2026, the Company, acting pursuant to a resolution of its Board of Directors, filed with the Secretary of State of the State
of Nevada a certificate of amendment (the “January 8, 2026 Charter Amendment”) to its Articles of Incorporation, as amended,
to effect a
| 34 |
On
April 22, 2026, the Company, acting pursuant to a resolution of its Board of Directors adopted on April 5, 2026, filed with the Secretary
of State of the State of Nevada a certificate of amendment (the “April 22, 2026 Charter Amendment”) to its Articles of Incorporation,
as amended, to effect a
Committed Equity Financing (ELOC)
On
September 15, 2025, the Company entered into a Common Stock Purchase Agreement (the “ELOC Purchase Agreement”) with an institutional
investor (the “ELOC Investor”), providing a committed equity financing facility of up to $
During the three months ended March 31, 2026, the Company issued shares of common stock to the ELOC Investor
under the ELOC Purchase Agreement for aggregate gross proceeds of $
In connection with the ELOC Purchase Agreement, the Company agreed to pay a total commitment fee of
2025 Senior Secured Convertible Notes Conversion
During the three months ended March
31, 2026, the holders of the 2025 Senior Secured Convertible Notes elected to convert the entire $
The bifurcated conversion feature derivative liability had a fair value of $
| 35 |
Nobility Healthcare Disposition
In connection with the disposition of Nobility Healthcare on January 8, 2026 (effective January 1, 2026), the Company
recorded aggregate adjustments of $
February 2025 Public Equity Offering
On
February 14, 2025, the Company closed an underwritten public offering consisting of units and pre-funded units, generating
aggregate net proceeds of $
Stock-Based Compensation
During the three months ended March 31, 2026, the Company recognized stock-based compensation expense of $, which was recorded as an increase to additional paid-in capital.
Nasdaq Notifications
On October 17, 2025, the Company received notice from Nasdaq that it had regained full compliance with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) and Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”). Nasdaq placed the Company under a one-year discretionary panel monitor (the “Discretionary Panel Monitor”). Under the Discretionary Panel Monitor, the Company is not permitted to request additional time to regain compliance with any deficiencies that occur within the one-year period regarding noncompliance with the periodic filing or Bid Price Requirement. Such one-year period expires on July 31, 2026 with regard to the periodic filing rules and September 2, 2026 regarding the Bid Price Requirement. As of March 31, 2026, the Company remained subject to the Discretionary Panel Monitor. The Company is not aware of any current noncompliance with the periodic filing rules or Bid Price Requirement.
| 36 |
Noncontrolling Interests
For information regarding the noncontrolling interest in Nobility Healthcare, see Note 1, Nature of Business and Summary of Significant Accounting Policies and Note 22, Discontinued Operations.
NOTE 17. RELATED PARTY TRANSACTIONS
Transactions with Related Party of TicketSmarter
Note payable – related party is comprised of the following:
March 31, 2026 | December 31, 2025 | |||||||
| Note payable – related party | $ | $ | ||||||
| Unamortized discount | ( | ) | ( | ) | ||||
| Debt obligations | ||||||||
| Less: current maturities of note payable-related party | ||||||||
| Note payable -related party, long-term | $ | $ | ||||||
Accrued
interest – related party was $
Debt obligations mature during the twelve-month periods following March 31, 2026 as follows:
| Gross Principal | Unamortized Discount | Net Carrying Value | ||||||||||
| 2026 | $ | $ | $ | |||||||||
| 2027 | ||||||||||||
| 2028 | ||||||||||||
| 2029 | ||||||||||||
| 2030 and thereafter | ( | ) | ||||||||||
| Total | $ | ( | ) | |||||||||
Goodman Trust Note
The
note payable to the Goodman Trust (the “Goodman Trust”), the beneficiaries of which are the Chief Executive Officer of TicketSmarter,
Inc. (“TicketSmarter”) and his spouse, originated in September and October 2023 when the Goodman Trust advanced a total of
$
The
note was amended four times between August 2024 and June 2025. Pursuant to the June 4, 2025 amendment, all payments under the note were
subordinated to the Company’s $
| 37 |
The
note was recorded at a fair value of $
During
the three months ended March 31, 2026, the Company recognized $
See the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 for additional information regarding the original loan, the four amendments to the note, and the fair value determinations.
Company Related Party Note
In
August 2024 and October 2024, the Company’s Chief Executive Officer made loans to the Company totaling $
NOTE 18. GAIN ON EXTINGUISHMENT OF LIABILITIES
The
Company recorded gains on the extinguishment of liabilities for the three months ended March 31, 2026 and 2025 of $
The gain recognized during the three months ended March 31, 2026 reflects discounts received by the Company in connection with the negotiated settlement of outstanding payables during the period.
The gain recognized during the three months ended March 31, 2025 reflects discounts received by the Company’s Entertainment segment in connection with the negotiated settlement of outstanding payables and contract liabilities during the period, funded by proceeds from the February 2025 underwritten public equity offering. See Note 16, Stockholders’ Equity, for additional information regarding the February 2025 offering.
| 38 |
Three Months ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Numerator for basic and diluted income (loss) per share – Net income (loss) attributable to common stockholders – continuing operations | $ | ( | ) | $ | ||||
| Numerator for basic and diluted income (loss) per share – Net income (loss) attributable to common stockholders – discontinued operations (net of noncontrolling interests) | $ | ( | ) | $ | ||||
| Denominator for basic income (loss) per share – weighted average shares outstanding | ||||||||
| Dilutive effect of shares issuable upon conversion of convertible debt and the exercise of stock options and warrants outstanding | ||||||||
| Denominator for diluted income (loss) per share – adjusted weighted average shares outstanding | ||||||||
| Net income (loss) per share: | ||||||||
| Basic: | $ | ( | ) | $ | ||||
| Continuing operations | ( | ) | ||||||
| Discontinued operations | ( | ) | ||||||
| Diluted: | $ | ( | ) | $ | ||||
| Continuing operations | ( | ) | ||||||
| Discontinued operations | ( | ) | ||||||
Basic income (loss) per share is based upon the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share gives effect to all potentially dilutive securities outstanding during the period. For the three months ended March 31, 2026 and 2025, all shares issuable upon conversion of convertible debt and the exercise of outstanding stock options and warrants were antidilutive and, therefore, were not included in the computation of diluted income (loss) per share.
NOTE 20. OPERATING SEGMENTS
The Company adopted ASU 2023-07 in 2024 and applied the amendment retrospectively to all periods presented in the Company’s condensed consolidated financial statements. Segment financial information is prepared in accordance with U.S. GAAP and its significant accounting policies described in Note 1. Resources are allocated and performance is assessed using segment operating income by its Chief Executive Officer, whom the Company has determined to be its CODM. The Company’s CODM utilizes segment operating income when making decisions about allocating capital and personnel to the segments, predominantly in the annual budget and quarterly forecasting processes. In addition, the Company’s CODM uses operating income, including comparison of actual results to budget and forecast, in assessing the performance of each segment and in evaluating product pricing, distribution strategies and marketing investments. The Company’s CODM reviews balance sheet information at a consolidated level. The Company computes segment operating income based on net sales revenue, less cost of goods sold, SG&A, asset impairment charges and restructuring charges. The SG&A used to compute each segment’s operating income is directly associated with the segment. The Company does not allocate non-operating income and expense, including interest or income taxes, to operating segments.
| 39 |
The
Company operates in
The Company’s former Revenue Cycle Management segment, which included Nobility Healthcare, is presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented and is therefore excluded from the segment information discussed herein. The Company completed the disposition of Nobility Healthcare on January 8, 2026. See Note 22, Discontinued Operations, for additional information.
The Company’s corporate administration activities are reported in the corporate line item. These activities primarily include expense related to certain corporate officers and support staff, certain accounting staff, expense related to the Company’s Board of Directors, stock-based compensation expense for awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Identifiable assets are those assets used by each segment in its operations. Corporate identifiable assets primarily consist of cash, goodwill, property, plant and equipment, accounts receivable, inventories, and other assets not directly attributable to the Video Solutions or Entertainment operating segments.
Geographic Information - The Company generates revenue solely from domestic customers within the United States. All of the Company’s long-lived assets are located within the United States. Accordingly, no geographic segment information is presented.
Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2026, and 2025:
| Three months ended March 31, 2026 | ||||||||||||||||
| Video Solutions | Entertainment | Corporate and other | Total | |||||||||||||
| Net revenues: | ||||||||||||||||
| Product | $ | $ | $ | $ | ||||||||||||
| Service | ||||||||||||||||
| Total segment net revenues | ||||||||||||||||
| Less significant segment expense | ||||||||||||||||
| Cost of Revenue - Product | ||||||||||||||||
| Cost of Revenue – Service and other | ||||||||||||||||
| Research and development expense | ||||||||||||||||
| Selling, advertising and promotional expense | ||||||||||||||||
| Goodwill and intangible asset impairment charge | ||||||||||||||||
| General and administrative expense | ||||||||||||||||
| Total segment operating income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Non-operating (expenses) income: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Gain on the extinguishment of liabilities | ||||||||||||||||
| Total non-operating income (loss) | ( | ) | ||||||||||||||
| Income before income tax benefit (provision) | $ | ( | ) | |||||||||||||
| Depreciation and amortization expense | $ | $ | $ | $ | ||||||||||||
| Total identifiable assets,
net of eliminations | $ | $ | $ | $ | ||||||||||||
| 40 |
| Three months ended March 31, 2025 | ||||||||||||||||
| Video Solutions | Entertainment | Corporate and other | Total | |||||||||||||
| Net revenues: | ||||||||||||||||
| Product | $ | $ | $ | $ | ||||||||||||
| Service | ||||||||||||||||
| Total segment net revenues | ||||||||||||||||
| Less significant segment expense | ||||||||||||||||
| Cost of Revenue - Product | ||||||||||||||||
| Cost of Revenue – Service and other | ||||||||||||||||
| Research and development expense | ||||||||||||||||
| Selling, advertising and promotional expense | ||||||||||||||||
| General and administrative expense | ||||||||||||||||
| Total segment operating income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Non-operating (expenses) income: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||
| Gain on extinguishment of debt – related party | ||||||||||||||||
| Change in fair value of derivative liabilities | ||||||||||||||||
| Gain on the extinguishment of liabilities | ||||||||||||||||
| Other non-operating income (loss) | ||||||||||||||||
| Total non-operating income (loss) | ||||||||||||||||
| Income before income tax benefit (provision) | $ | |||||||||||||||
| Depreciation and amortization expense | $ | $ | $ | $ | ||||||||||||
| Total identifiable assets,
net of eliminations | $ | $ | $ | $ | ||||||||||||
| 41 |
Total identifiable assets as of March 31, 2025 included amounts related to the discontinued Revenue Cycle Management segment (Nobility Healthcare), which were included in the “Corporate and other” category. Following the disposition of Nobility Healthcare on January 8, 2026, no discontinued operations assets are included in identifiable assets as of March 31, 2026. See Note 22, Discontinued Operations, for additional information.
The
segments recorded non-cash items affecting gross profit and operating income (loss) through the establishment of inventory reserves based
on estimates of excess and/or obsolete current and non-current inventory. The Company recorded a reserve for excess and obsolete inventory
in the Video Solutions segment of $
The segment net revenues reported above represent 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.
Note 21. DEFERRED REVENUE
The Company recognizes deferred revenue when consideration is received or receivable in advance of the satisfaction of the related performance obligations. Deferred revenue is presented as a current liability to the extent the associated performance obligations are expected to be satisfied within twelve months of the balance sheet date, and as a non-current liability for the portion expected to be satisfied thereafter. Deferred revenue balances arise from the following sources across the Company’s operating segments:
Video Solutions Segment - Deferred revenue within the Video Solutions segment consists principally of extended warranty contracts, prepaid cloud-based evidence management and storage subscriptions marketed under the EVO Web and FleetVu platforms, and prepaid installation services. Extended warranty and cloud subscription arrangements generally have contractual terms ranging from three to five years. Revenue associated with these arrangements is recognized on a straight-line basis over the respective contract term as the performance obligations are satisfied.
Entertainment Segment- Deferred revenue within the Entertainment segment consists of advance ticket sales associated with the annual Country Stampede music festival. Amounts received from consumers for Country Stampede tickets in advance of the festival date are deferred until the performance obligation is satisfied upon completion of the festival, which generally occurs in the second quarter of the fiscal year.
During
the three months ended March 31, 2026, the Company recognized $
| March 31, 2026 | ||||||||||||||||
| December 31, 2025 | Additions/Reclass | Recognized Revenue | March 31, 2026 | |||||||||||||
| Deferred revenue, current | $ | $ | $ | $ | ||||||||||||
| Deferred revenue, non-current | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2025 | ||||||||||||||||
| December 31, 2024 | Additions/Reclass | Recognized Revenue | December 31, 2025 | |||||||||||||
| Deferred revenue, current | $ | $ | $ | $ | ||||||||||||
| Deferred revenue, non-current | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 42 |
The following table presents the deferred revenue balance as of March 31, 2026, disaggregated by type and operating segment:
| Video Solutions | Entertainment | Total | ||||||||||
| Extended warranty contracts | $ | $ | $ | |||||||||
| Cloud subscription and evidence management services | ||||||||||||
| Prepaid installation services | ||||||||||||
| Advance ticket sales - Country Stampede | ||||||||||||
| Total deferred revenue | $ | $ | $ | |||||||||
As of March 31, 2026, the Company expects to recognize the remaining deferred revenue balance as follows:
| March 31, 2026 | ||||
| 2026(1) | $ | |||
| 2027(2) | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 and thereafter | ||||
| Total | $ | |||
| (1) | ||
| (2) |
Note 22. DISCONTINUED OPERATIONS
On
January 8, 2026, Digital Ally Healthcare, Inc., a wholly-owned subsidiary of the Company, completed the sale of its
For
the three months ended March 31, 2026, the Company recognized a total loss from discontinued operations of $
The
$
| Amount | ||||
| Cash received at closing | $ | |||
| Initial fair value of promissory note received | ||||
| Derecognition of non-controlling interest carrying amount | ( | ) | ||
| Net consideration | ( | ) | ||
| Carrying amount of Nobility Healthcare’s net assets at disposition(1) | ( | ) | ||
| Loss on sale | $ | ( | ) | |
| (1) |
| 43 |
The $
The
$
Activity in the note receivable for the three months ended March 31, 2026 consisted of the following:
| Amount | ||||
| Initial fair value at origination (January 8, 2026) | $ | |||
| Accretion of original issue discount | ||||
| Provisional earn-out reduction to principal | ( | ) | ||
| Adjustment to unamortized discount on the note | ( | ) | ||
| Net carrying value at March 31, 2026 | $ | |||
The assets and liabilities of Nobility Healthcare were classified as held for sale as of December 31, 2025, in accordance with ASC 205-20. Following the disposition on January 8, 2026, no held-for-sale assets or liabilities remain as of March 31, 2026. The following table summarizes the major classes of assets and liabilities of Nobility Healthcare that were classified as held for sale as of December 31, 2025:
| March
31, 2026 | December
31, 2025 | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Current assets of revenue-cycle management business held-for-sale | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill and other intangible assets, net | ||||||||
| Operating lease right of use assets, net | ||||||||
| Non-current assets of revenue-cycle management business held-for-sale | ||||||||
| Total assets held-for-sale | $ | $ | ||||||
| Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating lease obligation – short term | ||||||||
| Current liabilities of revenue-cycle management business held-for-sale | ||||||||
| Operating lease obligation – long term | ||||||||
| Long-term liabilities of revenue-cycle management business held-for-sale | ||||||||
| Total liabilities held-for-sale | $ | $ | ||||||
| 44 |
The following table presents the results of Nobility Healthcare included in ‘Income (loss) from discontinued operations, net of tax’ for the three months ended March 31, 2026 and 2025. Following the sale of Nobility Healthcare on January 8, 2026 (effective January 1, 2026), no operating results from Nobility Healthcare are included for the three months ended March 31, 2026. The loss from discontinued operations for the three months ended March 31, 2026 reflects the loss on disposal and provisional earn-out adjustment described above.
| March
31, 2026 | March
31, 2025 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Income from operations | ||||||||
| Loss on disposal of Nobility Healthcare | ( | ) | ||||||
| Provisional earn-out adjustment | ( | ) | ||||||
| Other income (expense) | ||||||||
| Income tax expense (benefit) | ||||||||
| Net income (loss) from discontinued operations | $ | ( | ) | $ | ||||
The following table summarizes the cash flows of Nobility Healthcare included in the Company’s condensed consolidated statements of cash flows within discontinued operations for the three months ended March 31, 2026 and 2025. For the three months ended March 31, 2026, no operating cash flows from Nobility Healthcare are reported, as the Company disposed of Nobility Healthcare on January 8, 2026 (effective January 1, 2026), and the loss from discontinued operations for the period reflects primarily non-cash disposition items.
March 31, 2026 | March 31, 2025 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of Nobility Healthcare | ||||||||
| Provisional earn-out adjustment | ||||||||
| Provision for doubtful accounts receivable | ||||||||
| Change in operating assets and liabilities: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable – trade | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Operating lease right of use assets | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Deferred revenue | ||||||||
| Operating lease obligations | ( | ) | ||||||
| Net cash used in operating activities – discontinued operation | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of leasehold improvements | ( | ) | ||||||
| Proceeds from improvement allowance | ||||||||
| Net cash used in investing activities – discontinued operation | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Payments of contingent consideration promissory notes | ||||||||
| Net cash used in financing activities – discontinued operation | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| 45 |
Note 23. SUBSEQUENT EVENTS
Reverse Stock Split
On April 22, 2026, subsequent to the March 31, 2026 balance sheet date, the Company effected a
Proposed Sale of Legacy Video Solutions Segment
On April 17, 2026, the Company and Cycurion, Inc. (Nasdaq: CYCU) entered into a revised, non-binding Memorandum of
Understanding (the “MOU”) establishing terms for the sale of the Company’s legacy Video Solutions segment to Cycurion for an
aggregate purchase price of $
Committed Equity Financing (ELOC)
Subsequent
to March 31, 2026, the Company exercised its right to direct the ELOC Investor to purchase a total of shares of its common stock.
Such ELOC exercises generated gross proceeds of $
***********************
| 46 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This quarterly report on Form 10-Q (the “Report”) of Kustom Entertainment, Inc. (the “Company”, “we”, “us”, or “our”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. 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 years 2025 and 2024; (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 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; (7) our ability to produce our products in a cost-effective manner; (8) competition from larger, more established companies with far greater economic and human resources; (9) our ability to attract and retain quality employees; (10) risks related to dealing with governmental entities as customers; (11) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (12) characterization of our market by new products and rapid technological change; (13) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVu products; (14) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (15) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (16) 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; (17) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (18) our ability to generate more recurring cloud and service revenues; (19) risks related to our license arrangements; (20) the fluctuation of our operation results from quarter to quarter; (21) 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; (22) the issuance or sale of substantial amounts of our common stock, or the perception that such sales may occur in the future, which may have a depressive effect on the market price of our securities; (23) potential dilution from the issuance of common stock underlying outstanding options and warrants; (24) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (25) the volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; (26) our ability to integrate and realize the anticipated benefits from acquisitions; (27) our ability to maintain the listing of our common stock on Nasdaq.
Current Trends and Recent Developments for the Company
Name change
The Company changed its name from Digital Ally, Inc. to Kustom Entertainment, Inc., reflecting the strategic shift to live entertainment as the Company’s primary line of business.
Reverse stock splits
Effective January 8, 2026, the Company effected a 1-for-3 reverse stock split of its common stock. Subsequently, effective April 22, 2026, the Company effected a 1-for-5 reverse stock split to comply with the Minimum Bid Price Requirement. All share and per-share amounts presented in this Report have been retroactively adjusted to reflect both reverse stock splits.
Disposition of Nobility Healthcare
Effective January 1, 2026, pursuant to a Unit Purchase Agreement, the Company completed the sale of its 51% membership interest in Nobility Healthcare, exiting the revenue cycle management business entirely. Total consideration stated in the Agreement was $1,450,000, consisting of (i) $100,000 in cash paid at closing, (ii) closing credits of $209,501 related to prior advances from the Buyer and net working capital adjustments, and (iii) a promissory note issued by the Buyer to the Seller in the principal amount of $1,140,499, recorded at an estimated fair value of $1,117,303 on the date of disposition. The principal amount of the note is subject to quarterly earn-out adjustments during the twelve-month measurement period following the January 8, 2026 issue date, with the first installment payment scheduled for July 28, 2026 and the earn-out mechanism terminating January 8, 2027. The disposition has been accounted for as a discontinued operation, and all prior-period results of Nobility Healthcare have been reclassified accordingly. For the three months ended March 31, 2026, the Company recognized a loss from discontinued operations of $(4,371,588), consisting of (i) a $(1,556,254) loss on sale, (ii) a $(2,457,415) loss on deconsolidation, and (iii) a $(357,919) adjustment to the carrying value of the note receivable based on post-closing performance of the divested business. See Note 22, Discontinued Operations to the condensed consolidated financial statements for additional information.
| 47 |
Extinguishment of senior secured convertible notes
During January 2026, the holder of the Company’s Senior Secured Convertible Notes (originally issued in September 2025 and December 2025) converted the entire $1,070,000 aggregate outstanding principal balance into 111,608 shares of the Company’s common stock across eight conversion tranches, fully extinguishing the notes. In connection with the conversions, the $854,827 of remaining unamortized debt discount was eliminated against additional paid-in capital in accordance with ASC 470-20, and the bifurcated conversion feature derivative liability, with an aggregate fair value of $1,142,191 at the dates of conversion, was reclassified from derivative liabilities to additional paid-in capital. As of March 31, 2026, the Company has no outstanding convertible debt.
Segment Overview
Video Solutions Operating Segment
Within our Video Solutions 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 II, and the FirstVu HD; our patented and revolutionary VuLink product, which integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and commercial markets; EVO Web Portal, which is our cloud-based evidence management system for the law enforcement market; the EVO Fleet, FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video products that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVu, which is our cloud-based evidence management system for commercial fleets.
Revenue from our Video Solutions segment is derived from the sale of video recording products and related services to law enforcement and commercial customers, as well as from the sale of our Shield™ disinfectant and personal protective equipment products. This segment generates revenues through 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.
Entertainment Operating Segment
We provide live entertainment and events ticketing services through our wholly owned subsidiary, TicketSmarter, Inc. (“TicketSmarter”), which was formed through the completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC on September 1, 2021. Through its online marketplace, TicketSmarter.com, TicketSmarter offers ticket sales, resale, and partnership services for over 125,000 live events nationwide, spanning concerts, sporting events, theatre, and performing arts.
Our Entertainment segment encompasses all services provided through TicketSmarter and TicketSmarter.com. Entertainment segment revenues include ticketing service charges, generally calculated as a percentage of the face value of the underlying ticket, as well as ticket sales from Company-held inventory, both of which are recognized upon the sale of the underlying tickets. Direct expenses include the cost of tickets purchased for resale and held as inventory, credit card fees, ticketing platform expenses, website maintenance, and other administrative costs
| 48 |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor do 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 other than the following:
We are a party to operating leases and license agreements that represent commitments for future payments and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.
Comparison of the Three Months Ended March 31, 2026 and 2025
Summary Financial Data
Summarized financial information for the Company’s reportable business segments is provided for the three months ended March 31, 2026, and 2025:
| Three Months Ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Net Revenues: | ||||||||
| Video Solutions | $ | 1,108,479 | $ | 922,281 | ||||
| Entertainment | 3,205,757 | 2,202,432 | ||||||
| Total Net Revenues | $ | 4,314,236 | $ | 3,124,713 | ||||
| Gross Profit (loss): | ||||||||
| Video Solutions | $ | 385,530 | $ | 555,761 | ||||
| Entertainment | 218,517 | 578,075 | ||||||
| Total Gross Profit | $ | 604,047 | $ | 1,133,836 | ||||
| Operating Income (loss): | ||||||||
| Video Solutions | $ | (38,946 | ) | $ | 167,280 | |||
| Entertainment | (399,038 | ) | (304,578 | ) | ||||
| Corporate | (859,003 | ) | (844,752 | ) | ||||
| Total Operating Income (Loss) | $ | (1,296,987 | ) | $ | (982,050 | ) | ||
| Depreciation and Amortization: | ||||||||
| Video Solutions | $ | 42,366 | $ | 53,669 | ||||
| Entertainment | 20,668 | 340,597 | ||||||
| Total Depreciation and Amortization | $ | 63,034 | $ | 394,266 | ||||
| Assets (net of eliminations): | ||||||||
| Video Solutions | $ | 10,458,285 | $ | 12,786,363 | ||||
| Entertainment | 3,073,751 | 4,898,381 | ||||||
| Corporate | 5,601,831 | 12,571,592 | ||||||
| Total Identifiable Assets | $ | 19,133,867 | $ | 30,256,336 | ||||
Total identifiable assets as of March 31, 2025 included amounts related to the discontinued Revenue Cycle Management segment (Nobility Healthcare), which were included in the “Corporate and other” category. Following the disposition of Nobility Healthcare on January 8, 2026, no discontinued operations assets are included in identifiable assets as of March 31, 2026. See Note 22, Discontinued Operations, for additional information.
The segments recorded non-cash items affecting gross profit and operating income (loss) through the establishment of inventory reserves based on estimates of excess and/or obsolete current and non-current inventory. The Company recorded a reserve for excess and obsolete inventory in the Video Solutions segment of $1,751,603 and $1,849,124, and a reserve for the Entertainment segment of $71,223 and $69,817, as of March 31, 2026 and December 31, 2025, respectively.
| 49 |
The segment net revenues reported above represent 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.
Results of Operations
Revenues
Revenues by Type and by Operating Segment
Our operating segments generate two types of revenues:
Product revenues primarily include video solutions 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 entertainment operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our Entertainment 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 Entertainment 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.
The following table presents revenues by type and segment:
| Three Months Ended March 31, | ||||||||||||
| 2026 | % Change | 2025 | ||||||||||
| Product revenues: | ||||||||||||
| Video Solutions | $ | 226,120 | 316.9 | % | $ | 54,231 | ||||||
| Entertainment | 336,106 | (49.6 | )% | 667,119 | ||||||||
| Total product revenues | 562,226 | (22.1 | )% | 721,350 | ||||||||
| Service and other revenues: | ||||||||||||
| Video Solutions | 882,359 | 1.6 | % | 868,050 | ||||||||
| Entertainment | 2,869,651 | 86.9 | % | 1,535,313 | ||||||||
| Total service and other revenues | 3,752,010 | 56.1 | % | 2,403,363 | ||||||||
| Total revenues | $ | 4,314,236 | 38.1 | % | $ | 3,124,713 | ||||||
Our Video Solutions 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 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. |
| 50 |
| ● | 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 Entertainment Segment sells our products and services to customers in the following manner:
| ● | Our Entertainment segment generates product revenues from the sale of tickets directly to consumers for a particular event that the Entertainment 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.
Product revenues by operating segment is as follows:
| Three Months Ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Product Revenues: | ||||||||
| Video Solutions | $ | 226,120 | $ | 54,231 | ||||
| Entertainment | 336,106 | 667,119 | ||||||
| Total Product Revenues | $ | 562,226 | $ | 721,350 | ||||
Product revenues for the three months ended March 31, 2026 and 2025 were $562,226 and $721,350, respectively, a decrease of $159,124 (22.1%), due to the following factors:
| ● | Revenues generated by the Entertainment operating segment began with the Company’s September 2021 acquisition of TicketSmarter. The Entertainment operating segment generated $336,106 in product revenues for the three months ended March 31, 2026, compared to $667,119 for the three months ended March 31, 2025. This product revenue relates to the resale of tickets purchased for live events, sporting events, concerts, and theatre, then sold through various platforms to customers. The decrease in revenues is attributable to TicketSmarter’s continued strategic focus on higher-margin events to improve its gross margins, resulting in a reduction in the scope of primary ticket sales activity during the period. |
| ● | The Company’s Video Solutions operating segment generated product revenues totaling $226,120 during the three months ended March 31, 2026, compared to $54,231 for the three months ended March 31, 2025, an increase of $171,889. The increase reflects improved inventory availability following the replenishment of the product supply chain funded by the February 2025 public equity offering, which enabled the Company to fulfill a portion of its previously existing backlog orders during the first quarter of 2026. Notwithstanding this improvement, our Video Solutions operating segment continues to experience pressure on its product revenues as our in-car and body-worn systems face increased competition from competitors that have released new products with advanced features, together with price-cutting and other competitive actions. In addition, our law enforcement revenues have continued to be affected by adverse marketplace effects related to our recent financial condition. |
| ● | Our Video Solutions operating segment management has continued to focus on migrating commercial customers from a hardware sale model to a service fee model. Accordingly, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and a portion of 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 previously introduced a monthly subscription agreement plan for our body-worn cameras and related equipment that allows 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 traction, resulting in decreased product revenues and increased service revenues. We expect this program to continue to generate traction, resulting in recurring revenues over a span of three to five years. |
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Service and other revenues by operating segment is as follows:
| Three months ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Service and Other Revenues: | ||||||||
| Video Solutions | $ | 882,359 | $ | 868,050 | ||||
| Entertainment | 2,869,651 | 1,535,313 | ||||||
| Total Service and Other Revenues | $ | 3,752,010 | $ | 2,403,363 | ||||
Service and other revenues for the three months ended March 31, 2026 and 2025 were $3,752,010 and $2,403,363, respectively, an increase of $1,348,647 (56.1%), due to the following factors:
| ● | Cloud revenues generated by the Video Solutions segment were $657,747 and $594,742 for the three months ended March 31, 2026 and 2025, respectively, representing an increase of $63,005 (10.6%). The increase reflects continued customer migration from local storage to cloud-based evidence management solutions, sustained subscription renewal activity, and the conversion of customers from one-time hardware purchases to multi-year cloud subscription arrangements consistent with management’s strategic shift toward a recurring-revenue service model. Cloud revenues remain a key component of the Video Solutions segment, with future growth dependent on new product introductions, customer conversion activity, and overall public-sector spending trends. | |
| ● | Revenues from extended warranty services generated by the Video Solutions segment were $171,529 and $228,430 for the three months ended March 31, 2026 and 2025, respectively, representing a decrease of $56,901 (24.9%). Extended warranty services continue to provide a predictable and recurring revenue stream tied to the installed base of video solutions hardware. The decrease reflects lower extended warranty attachment activity tied to reduced product shipment volumes in prior periods and the natural runoff of older multi-year warranty contracts. Management expects extended warranty revenue to stabilize as the installed base is refreshed through ongoing hardware shipments funded by recent capital raises. | |
| ● | The Entertainment segment generated service revenues of $2,869,651 and $1,535,313 for the three months ended March 31, 2026 and 2025, respectively, representing an increase of $1,334,338 (86.9%). The increase was primarily attributable to higher transaction volumes on the TicketSmarter platform, as well as increased activity related to ticket resale services and associated transaction fees. TicketSmarter earns service revenues by facilitating the buying and selling of tickets for live events, including concerts, sporting events, and other entertainment venues, through its online marketplace. The increase reflects continued expansion of platform usage, increased consumer engagement, and improved monetization of ticketing transactions. While service revenues increased significantly period over period, management continues to focus on optimizing pricing, managing marketing spend, and improving gross margins within the Entertainment segment, which may result in continued variability in service revenues depending on event mix, market conditions, and strategic prioritization of profitability over top-line growth. |
Total revenues for the three months ended March 31, 2026 and 2025 were $4,314,236 and $3,124,713, respectively, representing an increase of $1,189,523 (38.1%), due to the reasons noted above.
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Cost of Product Revenue
Overall cost of product revenue sold for the three months ended March 31, 2026 and 2025 was $782,248 and $675,639, respectively, an increase of $106,609 (15.8%). Overall cost of goods sold for products as a percentage of product revenues for the three months ended March 31, 2026 and 2025 was 139.1% and 93.7%, respectively. Cost of products sold by operating segment is as follows:
| Three Months Ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Cost of Product Revenues: | ||||||||
| Video Solutions | $ | 401,591 | $ | 64,552 | ||||
| Entertainment | 380,657 | 611,087 | ||||||
| Total Cost of Product Revenues | $ | 782,248 | $ | 675,639 | ||||
The increase in Video Solutions segment cost of product revenues to $401,591 for the three months ended March 31, 2026 from $64,552 for the three months ended March 31, 2025 was primarily attributable to higher product sales volumes following the replenishment of the product supply chain funded by the February 2025 public equity offering, which enabled the Company to fulfill a portion of its previously existing backlog orders during the first quarter of 2026. Cost of product revenues as a percentage of product revenues for the Video Solutions segment increased to approximately 177.6% for the three months ended March 31, 2026 from approximately 119.0% for the three months ended March 31, 2025, reflecting changes in inventory reserve activity and the continued impact of fixed manufacturing and overhead costs on the segment’s product revenue base.
The decrease in Entertainment segment cost of product revenues reflects lower absolute costs, with cost of product revenues decreasing to $380,657 for the three months ended March 31, 2026 from $611,087 for the three months ended March 31, 2025. This represents a decrease of $230,430 (37.7%), which correlates with the decrease in Entertainment segment product revenues during the period. Cost of product revenues as a percentage of product revenues increased to approximately 113.3% for the three months ended March 31, 2026 compared to approximately 91.6% for the three months ended March 31, 2025, primarily driven by changes in ticket inventory mix and write-offs of ticket inventory sold below cost or unsold following event dates.
The Company recorded a reserve for excess and obsolete inventory in the Video Solutions segment of $1,751,603 and $1,849,124 as of March 31, 2026 and December 31, 2025, respectively, representing a decrease of $97,521 (5.3%). The decrease in the reserve balance was primarily attributable to the disposal and utilization of inventory that had been fully reserved in prior periods, as well as continued inventory management and lower on-hand inventory levels during the period. The Company also recorded a reserve for excess and obsolete inventory in the Entertainment segment of $71,223 and $69,817 as of March 31, 2026 and December 31, 2025, respectively, representing a slight increase of $1,406 (2.0%). The reserve relates primarily to ticket inventory, where certain items may sell below cost or become unsellable following the related event date and therefore require write-off. The Company evaluates inventory reserves on a regular basis, considering factors such as historical sales activity, expected future demand, inventory aging, and realizable value. Management believes the recorded reserves for excess and obsolete inventories are appropriate based on inventory levels and operating conditions as of March 31, 2026.
Cost of Service Revenue
Overall cost of service revenues for the three months ended March 31, 2026 and 2025 was $2,927,941 and $1,315,238, respectively, representing an increase of $1,612,703 (122.6%). Cost of service revenues as a percentage of total service revenues increased to approximately 78.0% for the three months ended March 31, 2026 compared to approximately 54.7% for the three months ended March 31, 2025. Cost of service revenues by operating segment is as follows:
| Three months ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Cost of Service Revenues: | ||||||||
| Video Solutions | $ | 321,358 | $ | 301,968 | ||||
| Entertainment | 2,606,583 | 1,013,270 | ||||||
| Total Cost of Service Revenues | $ | 2,927,941 | $ | 1,315,238 | ||||
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The Video Solutions segment cost of service revenues remained relatively stable, increasing slightly to $321,358 for the three months ended March 31, 2026 from $301,968 for the three months ended March 31, 2025, an increase of $19,390 (6.4%). Cost of service revenues as a percentage of service revenues for the Video Solutions segment increased to approximately 36.4% for the three months ended March 31, 2026 compared to approximately 34.8% for the three months ended March 31, 2025. The modest increase reflects higher cloud storage and service delivery costs partially offset by stable revenue performance across the Company’s cloud-based solutions and extended warranty services.
The increase in Entertainment segment cost of service revenues was primarily driven by higher transaction volumes and increased service activity within the TicketSmarter platform, including payment processing, fulfillment, and other transaction-based costs. Cost of service revenues increased to $2,606,583 for the three months ended March 31, 2026 from $1,013,270 for the three months ended March 31, 2025, an increase of $1,593,313 (157.2%). Cost of service revenues as a percentage of service revenues for the Entertainment segment increased to approximately 90.8% for the three months ended March 31, 2026 compared to approximately 66.0% for the three months ended March 31, 2025. The increase in cost as a percentage of service revenues reflects changes in transaction mix, higher variable processing costs, and continued investments to support platform scale. Management is focused on right-sizing the business and improving operational efficiency to support long-term profitability and operational stability.
Gross Profit
Overall gross profit for the three months ended March 31, 2026 and 2025 was $604,047 and $1,133,836, respectively, representing a decrease of $529,789, or 46.7%. Gross profit by operating segment was as follows:
| Three months ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Gross Profit: | ||||||||
| Video Solutions | $ | 385,530 | $ | 555,761 | ||||
| Entertainment | 218,517 | 578,075 | ||||||
| Total Gross Profit | $ | 604,047 | $ | 1,133,836 | ||||
The decrease in gross profit reflects increases in cost of revenue that outpaced revenue growth across both the Video Solutions segment and Entertainment segment for the three months ended March 31, 2026. Cost of revenue as a percentage of overall revenues increased to approximately 86.0% for the three months ended March 31, 2026 compared to approximately 63.7% for the three months ended March 31, 2025, resulting in a corresponding decline in gross margin. This increase was driven primarily by lower product and service margins within the Entertainment segment, including higher variable processing and fulfillment costs on the TicketSmarter platform and ticket inventory sold below cost or written off when unsold following event dates, as well as elevated cost ratios within the Video Solutions segment reflecting inventory reserve activity and continued pricing pressure. During the three months ended March 31, 2026, the Company continued to implement cost-containment and margin improvement initiatives, including workforce reductions, the completed divestiture of the Revenue Cycle Management segment, and a continued transition toward a service and subscription-based revenue model within the Video Solutions segment. Management’s longer-term objective is to improve gross margins through a more favorable revenue mix, increased adoption of higher-margin service offerings, and operational efficiencies across the organization. We plan to continue initiatives focused on more efficient management of our supply chain, including outsourcing production where appropriate, optimizing purchase quantities, and implementing more effective purchasing practices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2026 and 2025 were $1,901,034 and $2,115,886, respectively, representing a decrease of $214,852 (10.2%). Selling, general and administrative expenses consist primarily of research and development expenses, selling, advertising and promotional expenses, general and administrative expenses, and goodwill and intangible asset impairment charges. The significant components of selling, general and administrative expenses are as follows:
| Three Months ended March 31, | ||||||||
| 2026 | 2025 | |||||||
| Research and development expense | $ | 143,089 | $ | 84,417 | ||||
| Selling, advertising and promotional expense | 274,411 | 96,381 | ||||||
| General and administrative expense | 1,483,534 | 1,935,088 | ||||||
| Total | $ | 1,901,034 | $ | 2,115,886 | ||||
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Research and development expense. Our research and development expenses totaled $143,089 and $84,417 for the three months ended March 31, 2026 and 2025, respectively, representing an increase of $58,672, or 69.5%. The increase reflects continued investment in the development of new products and enhancements to existing products within the Video Solutions segment. Research and development activities include engineering costs, product design, testing, and related development efforts.
Selling, advertising and promotional expenses. Selling, advertising and promotional expenses totaled $274,411 and $96,381 for the three months ended March 31, 2026 and 2025, respectively, representing an increase of $178,030 (184.7%). The increase in selling, advertising and promotional expenses reflects higher marketing and promotional activity, including expenditures related to the TicketSmarter platform and the 2026 Country Stampede music festival scheduled for June 2026.
General and administrative expense. General and administrative expenses totaled $1,483,534 and $1,935,088 for the three months ended March 31, 2026 and 2025, respectively, representing a decrease of $451,554 (23.3%). The decrease in general and administrative expenses in the three months ended March 31, 2026 compared to the same period in 2025 is primarily attributable to a decrease in administrative salaries and continued reductions in headcount as the Company continues to right-size its expenses in this area relative to its revenues.
Operating Loss
For the reasons previously stated, our operating loss was $1,296,987 and $982,050 for the three months ended March 31, 2026 and 2025, respectively, representing an increase in operating loss of $314,937 (32.1%). Operating loss as a percentage of revenues was 30.1% in 2026 as compared to 31.4% in 2025.
Interest Income
Interest income increased to $76,806 for the three months ended March 31, 2026, from $31,975 in 2025, primarily reflecting interest accretion on the promissory note received as partial consideration in connection with the January 2026 sale of Nobility Healthcare.
Interest Expense
We incurred interest expense of $67,450 and $792,273 during the three months ended March 31, 2026 and 2025, respectively, representing a decrease of $724,823 (91.5%). The decrease is primarily attributable to the extinguishment of the senior secured promissory notes in 2025 that carried significant debt discount amortization, as well as the conversion of the 2025 Senior Secured Convertible Notes to common stock during the three months ended March 31, 2026, which eliminated future interest expense on those instruments.
Other income (expense)
The Company recognized no other income for the three months ended March 31, 2026, compared to $16,700 for the three months ended March 31, 2025, which related to income associated with a warehouse sublease at the corporate headquarters that ceased during 2025.
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Gain on Extinguishment of Debt - related party
The Company did not recognize any gain on extinguishment of debt - related party during the three months ended March 31, 2026, compared to a gain of $1,249,372 during the three months ended March 31, 2025. The prior-period gain arose from the March 20, 2025 modification of the TicketSmarter Related Party Note. Following a subsequent modification in June 2025, management changed its estimate regarding the capacity in which the noteholder was acting and reclassified the $1,249,372 to additional paid-in capital as a deemed capital contribution during the three months ended June 30, 2025. See Note 17, Related Party Transactions, for additional information.
Gain on Extinguishment of Liabilities
The Company recorded a gain on the extinguishment of liabilities of $63,259 and $2,220,097 for the three months ended March 31, 2026 and 2025, respectively, representing a decrease of $2,156,838 (97.2%).
The gain recognized during the three months ended March 31, 2026 reflects discounts received by the Company in connection with the negotiated settlement of outstanding payables during the period.
The gain recognized during the three months ended March 31, 2025 reflects income related to the Video Solutions and Entertainment segments’ ability to negotiate down payables and contract liabilities during the period, utilizing funds generated by the closing of the February 2025 public equity offering on February 13, 2025.
Change in Fair Value of Derivative Liabilities
The change in fair value of derivative liabilities for the three months ended March 31, 2026 and 2025 totaled a loss of $289,355 during the three months ended March 31, 2026 as compared to a gain of $2,515,891 during the three months ended March 31, 2025.
The loss recognized during the three months ended March 31, 2026 consists of a $289,516 loss on the bifurcated conversion feature embedded in the 2025 Senior Secured Convertible Notes (the “2025 Secured Notes”) issued in September 2025 and December 2025, partially offset by a $161 gain on the Company’s 2023 warrants resulting from the decline in their fair value over the period. Because the conversion price of the 2025 Secured Notes was variable and did not meet the fixed-for-fixed requirement under ASC 815-40, the conversion feature was bifurcated from the host debt instrument and accounted for as a derivative liability at fair value, with changes in fair value recorded as a gain or loss in the condensed consolidated statement of operations. During the three months ended March 31, 2026, the holders of the 2025 Secured Notes elected to convert the entire $1,070,000 outstanding principal balance into 111,608 shares of the Company’s common stock. The $289,516 loss reflects the change in fair value of the bifurcated conversion feature through the dates of conversion, after which the aggregate fair value of $1,142,191 was reclassified from derivative liabilities to additional paid-in capital. Following the conversions, no balance remains outstanding under the 2025 Secured Notes and the related bifurcated derivative liability was fully extinguished.
The gain recognized during the three months ended March 31, 2025 related primarily to the Series A and Series B detachable warrants issued in connection with the Company’s June 2024 capital raise, the terms of which required derivative liability treatment due to net cash settlement provisions outside the control of the Company under certain circumstances. The holders fully exercised their Series B warrants during the three months ended March 31, 2025, which contributed to a decline in the market value of the Company’s common stock and a corresponding decrease in the estimated fair value of the remaining Series A warrants.
The Company has also classified as derivative liabilities 184 warrants issued in 2023, which remained outstanding as of March 31, 2026 with an aggregate fair value of $169. These warrants are marked to market at each reporting date, with changes in fair value recorded in the condensed consolidated statement of operations.
Income (loss) before Income Tax Benefit
As a result of the above, we reported a loss before income tax benefit from continuing operations of $(1,513,727) for the three months ended March 31, 2026, compared to income before income tax benefit from continuing operations of $4,259,712 for the three months ended March 31, 2025, a decrease of $5,773,439.
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Income Tax Benefit
We recorded an income tax benefit of $0 for the three months ended March 31, 2026 and 2025, respectively. The effective tax rate for both periods 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 of March 31, 2026 and December 31, 2025 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 of March 31, 2026.
We had approximately $168,405,000 of federal net operating loss carryforwards and $1,685,000 of research and development tax credit carryforwards as of March 31, 2026 available to offset future net taxable income.
Net Loss from continuing operations
As a result of the above, we reported a net loss from continuing operations of $(1,513,727) for the three months ended March 31, 2026, compared to net income from continuing operations of $4,259,712 for the three months ended March 31, 2025, a decrease of $5,773,439.
Net Income (Loss) from Discontinued Operations
The Company recognized a loss from discontinued operations of $(4,371,588) for the three months ended March 31, 2026, compared to income from discontinued operations of $7,370 for the three months ended March 31, 2025. The Q1 2026 loss consists of three components: (i) a $(1,556,254) loss on sale, calculated as the difference between the carrying value of Nobility Healthcare’s net assets and the consideration exchanged at disposition; (ii) a $(2,457,415) loss on deconsolidation, representing the derecognition of parent-level investment basis and intercompany balances that no longer eliminate in consolidation upon loss of control; and (iii) a $(357,919) adjustment to the carrying value of the note receivable based on post-closing performance of the divested business, recognized in connection with the quarterly earn-out adjustment mechanism defined in the Unit Purchase Agreement. See Note 22, Discontinued Operations to the condensed consolidated financial statements for additional information.
Net Income (Loss) Attributable to Noncontrolling Interests – Discontinued Operations
The Company previously held a 51% equity interest in its consolidated subsidiary, Nobility Healthcare, with the remaining 49% held by third-party venture partners. Nobility Healthcare was sold on January 8, 2026 (effective January 1, 2026), and its results have been classified as discontinued operations for all periods presented. As a result, the noncontrolling interest related to Nobility Healthcare is included within net loss from discontinued operations, and no separate noncontrolling interest is reported in continuing operations for either period. As of March 31, 2026, the Company has no remaining noncontrolling interests in any consolidated subsidiary.
Net Loss Attributable to Common Stockholders
As a result of the above, we reported a net loss attributable to common stockholders of $(5,885,315) for the three months ended March 31, 2026, compared to net income attributable to common stockholders of $4,263,471 for the three months ended March 31, 2025, a decrease of $10,148,786.
Basic and Diluted Income/(Loss) per Share
The basic and diluted loss per share from continuing operations was $(3.44) for the three months ended March 31, 2026, compared to basic and diluted income per share from continuing operations of $2,107.72 for the three months ended March 31, 2025. The basic and diluted loss per share from discontinued operations was $(9.95) for the three months ended March 31, 2026, compared to basic and diluted income per share from discontinued operations of $1.86 for the three months ended March 31, 2025, resulting in a net basic and diluted loss per share attributable to common stockholders of $(13.39) for the three months ended March 31, 2026, compared to net basic and diluted income per share attributable to common stockholders of $2,109.58 for the three months ended March 31, 2025. All outstanding stock options, common stock purchase warrants, and shares issuable upon conversion of convertible debt were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the three months ended March 31, 2026 and 2025. All share and per-share amounts have been retroactively adjusted to reflect the 1-for-5 reverse stock split effective April 22, 2026.
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Liquidity and Capital Resources
Overall:
Management’s Liquidity Plan: The Company has incurred net losses and negative cash flows from operating activities since inception. The Company incurred an operating loss of $1,296,987 for the three months ended March 31, 2026, continued to incur negative cash flows from operations, and had an accumulated deficit of $147,612,336 as of March 31, 2026. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements. In response, management has implemented and continues to implement plans intended to mitigate these conditions, including (i) continued access to the Company’s committed equity financing facility (the “ELOC”) providing up to $25,000,000 over a 36-month term, (ii) the January 8, 2026 divestiture of Nobility Healthcare, which eliminated the operating losses and working capital requirements of the Revenue Cycle Management segment, (iii) ongoing cost-reduction initiatives, including headcount reductions and facility consolidations in the Video Solutions segment, and (iv) continued evaluation of additional debt and equity financing alternatives. There can be no assurance that the Company will be successful in restoring positive cash flows and profitability, or that it will be able to raise additional financing on terms acceptable to the Company.Notwithstanding these measures, substantial doubt about the Company’s ability to continue as a going concern has not been alleviated as of the date of issuance of these condensed consolidated financial statements.
Cash, cash equivalents: As of March 31, 2026, we had cash and cash equivalents of $1,224,321, compared to $757,369 as of December 31, 2025, representing a net increase of $466,952. The changes in cash during the three months ended March 31, 2026 resulted from the following cash flow activities from continuing operations:
| ● | Operating activities: | $1,171,110 of net cash used in operating activities from continuing operations for the three months ended March 31, 2026, compared to $5,600,450 of net cash used in operating activities from continuing operations for the three months ended March 31, 2025. Net cash used in operating activities was primarily impacted by the Company’s net loss from continuing operations, changes in operating assets and liabilities, and non-cash items including depreciation, amortization, change in fair value of derivative liabilities, and non-cash interest expense. The prior-period comparative reflected significant non-cash adjustments, including a $(2,515,891) gain on change in fair value of derivative liabilities, a $(2,220,097) gain on extinguishment of liabilities, a $(1,249,372) gain on extinguishment of debt - related party, and $672,490 of non-cash interest expense, together with a $4,423,032 decrease in accounts payable funded by proceeds from the February 2025 public equity offering. Following the sale of Nobility Healthcare on January 8, 2026 (effective January 1, 2026), no cash flows from discontinued operations are reflected in the three months ended March 31, 2026, compared to $154,311 of net cash used in operating activities of discontinued operations during the three months ended March 31, 2025. | |
| ● | Investing activities: | $77,727 of net cash used in investing activities from continuing operations for the three months ended March 31, 2026, compared to $75,528 of net cash used in investing activities from continuing operations for the three months ended March 31, 2025. Investing activities during the three months ended March 31, 2026 consisted of capital expenditures for property, plant and equipment and purchases of intangible assets, partially offset by $100,000 of proceeds received in connection with the Nobility Healthcare disposition. There were no cash flows from investing activities of discontinued operations during the three months ended March 31, 2026, compared to $9,919 of net cash used in investing activities of discontinued operations during the three months ended March 31, 2025. |
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| ● | Financing activities: | $1,715,789 of net cash provided by financing activities from continuing operations for the three months ended March 31, 2026, compared to $9,148,502 of net cash provided by financing activities from continuing operations for the three months ended March 31, 2025. Financing activities during the three months ended March 31, 2026 primarily consisted of $1,726,662 of net proceeds from issuances of common stock under the ELOC, partially offset by principal payments on debt obligations of $10,873. Financing activities during the three months ended March 31, 2025 primarily consisted of net proceeds of $14,308,300 from the February 2025 public equity offering and $600,000 of proceeds from an unsecured promissory note, partially offset by repayments of senior secured promissory notes of $3,600,000 and merchant advances of $1,922,750, along with other debt obligations. No financing cash flows from discontinued operations were recognized in either period. |
The net result of these activities was an increase in cash of $466,952 for the three months ended March 31, 2026.
Working Capital
As of March 31, 2026, the Company had $1,224,321 of cash and cash equivalents and a net negative working capital position of $(63,091), compared to a net negative working capital position of $(2,270,311) as of December 31, 2025 (excluding amounts classified as held for sale in connection with the discontinued Revenue Cycle Management segment), representing an improvement of $2,207,220. The improvement in working capital was primarily driven by proceeds from issuances of common stock under the ELOC, the conversion of the 2025 Senior Secured Convertible Notes into common stock, and the extinguishment of the associated warrant derivative liabilities upon conversion.
Accounts receivable and other receivables represented $3,654,344 of working capital at March 31, 2026. Management intends to collect outstanding receivables on a timely basis and reduce overall receivable balances during 2026, which is expected to provide additional cash flow to support continuing operations. Inventory represented $2,148,228 of working capital as of March 31, 2026. The Company is actively managing inventory levels, and management’s objective is to reduce inventory during 2026 through sales activities. A reduction in inventory levels is expected to generate additional cash flow to support the Company’s continuing operations.
Lease Commitments and Other Contractual Obligations:
Total lease expense under the Company’s operating leases related to continuing operations was approximately $68,596 during the three months ended March 31, 2026. The following sets forth the operating lease right-of-use assets and liabilities associated with continuing operations as of March 31, 2026:
| Assets: | ||||
| Operating lease right of use assets | $ | 1,020,828 | ||
| Prepayment of rent | $ | 20,592 | ||
| Total operating lease right of use asset | $ | 1,041,420 | ||
| Liabilities: | ||||
| Operating lease obligations-current portion | 248,841 | |||
| Operating lease obligations-less current portion | 771,987 | |||
| Total operating lease obligations | $ | 1,020,828 | ||
Following are the minimum lease payments for each year and in total.
| Year ending December 31: | ||||
| 2026 (April 1, 2026 through December 31, 2026) | $ | 236,403 | ||
| 2027 | 332,285 | |||
| 2028 | 263,789 | |||
| 2029 | 268,927 | |||
| 2030 and thereafter | 90,218 | |||
| Total undiscounted minimum future lease payments | 1,191,623 | |||
| Imputed interest | (170,794 | ) | ||
| Total operating lease liability | $ | 1,020,828 | ||
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During the three months ended March 31, 2026, the Company incurred capital expenditures of $159,657, consisting primarily of purchases of property, plant and equipment. The Company does not currently have any material commitments for capital expenditures beyond normal course of business activity.
In January 2026, Kustom 440, Inc., a wholly owned subsidiary of the Company, entered into a non-cancellable artist performance agreement for the 2026 Country Stampede music festival with aggregate payment obligations totaling $750,000. As of March 31, 2026, the Company had paid the initial $187,500 deposit, with remaining contractual payment obligations of $562,500 consisting of $187,500 due no later than May 27, 2026 and $375,000 payable following the June 27, 2026 performance. See Note 13, Commitments and Contingencies, for additional details.
The Company has also agreed to pay 4% of future Gross Proceeds raised under its Equity Line of Credit through February 14, 2028, pursuant to a Settlement Agreement entered into with Aegis Capital Corp. in January 2026. The Company’s estimate with respect to the maximum reasonably possible future obligation under this arrangement is approximately $900,000, based upon the remaining undrawn commitment of the facility. This obligation is strictly contingent upon the Company’s discretionary future use of the facility. See Note 13, Commitments and Contingencies, for additional details.
Debt obligations - We have the following outstanding debt related to continuing operations as of March 31, 2026, which requires future principal payments:
| March 31, 2026 | ||||
| Economic injury disaster loan (EIDL) | $ | 140,210 | ||
| Unsecured Promissory note – Entertainment segment | 515,000 | |||
| — | ||||
| Total gross principal | 655,210 | |||
| Unamortized debt issuance costs | — | |||
| Debt obligations | 655,210 | |||
| Less: current maturities of debt obligations | 518,575 | |||
| Debt obligations, long-term | $ | 136,635 | ||
Future principal payments on debt obligations as of March 31, 2026 are as follows:
| Gross Principal | Unamortized Discount | Net Carrying Value | ||||||||||
| 2026 (April 1, 2026 to December 31, 2026) | $ | 517,669 | $ | — | $ | 517,669 | ||||||
| 2027 | 3,677 | — | 3,677 | |||||||||
| 2028 | 3,817 | — | 3,817 | |||||||||
| 2029 | 3,963 | — | 3,963 | |||||||||
| 2030 and thereafter | 126,084 | — | 126,084 | |||||||||
| Total | $ | 655,210 | $ | — | $ | 655,210 | ||||||
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The table above excludes the related party note payable to a trust affiliated with a TicketSmarter officer with a net carrying value of $411,698 as of March 31, 2026 ($0 current, $411,698 long-term). See Note 17, Related Party Transactions, for additional details.
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 not to 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.
While the ultimate resolution is unknown, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect on 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 Note 13, Commitments and Contingencies, to the condensed consolidated financial statements and Part II, Item 1, “Legal Proceedings,” of this Quarterly Report on Form 10-Q for information on our litigation.
Critical Accounting Estimates
Our significant accounting policies are summarized in Note 1, Nature of Business and Summary of Significant Accounting Policies, to our condensed 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 and estimates 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; | |
| ● | Fair Value of Warrant Derivative Liabilities and Bifurcated Embedded Derivatives; | |
| ● | Stock-based Compensation Expense; and | |
| ● | Accounting for Income Taxes. | |
| ● | Discontinued Operations |
Revenue Recognition / Allowances for Doubtful Accounts.
Revenue is recognized for the shipment of products or delivery of service in accordance with ASC 606 by applying the following five-step model:
(i) Identify the contract with the customer;
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(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 Entertainment 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 our online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from entertainment operations, and consist 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, and 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.
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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 liabilities 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 since we commenced deliveries during 2006.
For our Entertainment 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. This leads to minimal risk for uncollectible accounts, and we consider a specific reserve for bad debts based on individual customer circumstances. We continue to monitor collectability trends and assess appropriate reserve levels based on our operating history within this segment.
Allowance for Excess and Obsolete Inventory.
We record valuation reserves on inventory for estimated excess or obsolete items. The amount of the reserve represents the difference between the cost of the inventory and its estimated net realizable value based on assumptions regarding future demand, inventory aging, and market conditions. Management performs a detailed review of inventory balances on a quarterly basis to identify inventory that may be excess or obsolete and uses judgment to estimate appropriate reserve levels. We also adjust the carrying value of inventory when its estimated net realizable value is below cost.
Inventories consisted of the following at March 31, 2026 and December 31, 2025:
March 31, 2026 | December 31, 2025 | |||||||
| Raw material and component parts– Video Solutions segment | $ | 2,685,620 | $ | 2,829,039 | ||||
| Work-in-process– Video Solutions segment | 26,173 | — | ||||||
| Finished goods – Video Solutions segment | 1,063,069 | 1,149,538 | ||||||
| Finished goods – Entertainment segment | 196,192 | 270,856 | ||||||
| Subtotal | 3,971,054 | 4,249,433 | ||||||
| Reserve for excess and obsolete inventory– Video Solutions segment | (1,751,603 | ) | (1,849,124 | ) | ||||
| Reserve for excess and obsolete inventory – Entertainment segment | (71,223 | ) | (69,817 | ) | ||||
| Total inventories | $ | 2,148,228 | $ | 2,330,492 | ||||
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 45.9% of the gross inventory balance at March 31, 2026, compared to 45.2% of the gross inventory balance at December 31, 2025. We had $1,822,826 and $1,918,941 in reserves for obsolete and excess inventories at March 31, 2026 and December 31, 2025, respectively. The slight decrease in the inventory reserve is primarily attributable to write-offs of inventory that had been fully reserved in prior periods, as well as continued inventory management and lower on-hand inventory levels during the period. Additionally, the Company maintains a reasonable reserve for inventory held at the Entertainment segment, within which some inventory items sell below cost or go unsold, thus having to be fully written off following the event date. We believe the reserves are appropriate given our inventory levels as of March 31, 2026.
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If actual future demand or market conditions are less favorable than those projected by management, or if significant engineering changes to our products occur 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 changes 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 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.
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We performed our annual goodwill and intangible asset impairment test as of December 31, 2025 on a full quantitative basis, given our prior-year impairment history and continued operating losses across certain segments. The Revenue Cycle Management segment (Nobility Healthcare) was classified as discontinued operations prior to the measurement date and was excluded from the annual impairment analysis. The fair value of each continuing reporting unit was estimated using a weighting of the income and market valuation approaches. The income approach applied a fair value methodology to each reporting unit based on discounted cash flows, requiring significant judgments including estimation of future cash flows, long-term revenue growth rates, and determination of our weighted average cost of capital risk-adjusted to reflect the specific risk profile of each reporting unit. The weighted average cost of capital used in our December 31, 2025 impairment test ranged from 18.4% to 22.7%. We also applied a market approach using revenue multiples of comparable publicly traded companies. The income and market approaches were equally weighted for all reporting units.
We consider a reporting unit’s fair value to be substantially in excess of the reporting unit’s carrying value at a 20% premium or greater. Based on our December 31, 2025 annual impairment test, the Video Solutions segment’s fair value was substantially in excess of its carrying value, with an indicated equity fair value of $2,580,000 compared to a carrying value of approximately $595,000. The Video Solutions segment carries no goodwill. The Entertainment segment was determined to be impaired.
As a result of our December 31, 2025 annual impairment test, we recorded total non-cash goodwill and intangible asset impairment charges of $2,533,667 for the year ended December 31, 2025, all attributable to the Entertainment segment. The impairment charges consisted of (i) a $1,428,000 goodwill impairment charge, reducing the Entertainment segment goodwill balance to $4,377,507; (ii) a $746,667 full write-off of the Sponsorship Agreement Network (SAN) intangible asset, which failed the ASC 360 recoverability test based on undiscounted cash flows of $621,000 compared to the $746,667 carrying value; (iii) a $189,000 impairment charge related to the TicketSmarter trade name, reducing its carrying value to $210,000; and (iv) a $170,000 impairment charge related to the Country Stampede trade name, reducing its carrying value to $130,000. The goodwill impairment was primarily driven by the Entertainment segment’s continued operating losses, the fixed cost structure of festival operations, and the structural cost challenges within certain Entertainment segment revenue streams.
As of March 31, 2026, management evaluated whether any triggering events or changes in circumstances occurred during the three months ended March 31, 2026 that would indicate the carrying value of goodwill or long-lived assets may not be recoverable. Based on that evaluation, no triggering events were identified and no interim impairment test was performed. Accordingly, no goodwill or intangible asset impairment charges were recorded for the three months ended March 31, 2026. The Company’s remaining goodwill balance of $4,377,507 and indefinite-lived trade name carrying values of $210,000 (TicketSmarter) and $130,000 (Country Stampede) at March 31, 2026 are unchanged from December 31, 2025.
Warranty Reserves.
Historically, the Company recorded an assurance-type warranty liability related to hardware products sold. As the Company has continued its transition to a cloud-based, subscription model — where devices are typically provided as part of the service arrangement rather than sold outright — the volume of products subject to assurance-type warranties has become insignificant. For subscription deployments, the Company’s obligations primarily consist of maintenance, support, and service-level commitments, which are accounted for under ASC 606 as service obligations, with any service-level credits treated as variable consideration, rather than as assurance-type warranties. Based on historical claims experience and expected future costs, anticipated assurance-type warranty expenses are not material. Accordingly, the Company’s warranty reserve was $0 as of both March 31, 2026 and December 31, 2025, reflecting the factors noted above.
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.
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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, 2026 and December 31, 2025, we have fully reserved all of our deferred tax assets. We determined that it was appropriate to maintain a full valuation allowance on our net deferred tax assets at March 31, 2026 and December 31, 2025 based on our assessment of recoverability and continued operating losses. 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 of March 31, 2026 and December 31, 2025 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.
Discontinued Operations.
Certain of the Company’s significant accounting estimates relate to businesses that have been classified as discontinued operations. Assets and liabilities of discontinued operations are measured and reported in accordance with U.S. GAAP and are presented separately from continuing operations in the condensed consolidated financial statements. Management applies the same accounting policies and estimation methodologies to discontinued operations as those applied to continuing operations, including estimates related to revenue recognition, accounts receivable collectability, inventory valuation, impairment of long-lived assets, and contingent liabilities, where applicable. The results of discontinued operations are excluded from continuing operations and presented separately in the consolidated statements of operations.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year. We do not believe that our Video Solutions segment’s business is seasonal in nature, however; the Entertainment segment experiences variability in revenues across quarters, with the Country Stampede music festival generating revenues in the second quarter and TicketSmarter platform activity driven by event scheduling throughout the year.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) under the Exchange Act. The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of such disclosure controls and procedures for this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2026 to provide reasonable assurance that material information required to be disclosed by the Company in this Report was recorded, processed, summarized and communicated to the Company’s management as appropriate and within the time periods specified in SEC rules and forms.
As part of our plan to remediate our controls which were not effective, we are performing a full review of our internal control procedures. We have implemented, and plan to continue to implement, new controls and new processes. We have hired and plan to continue to hire additional qualified personnel and establish more robust processes to support our internal control over financial reporting, including clearly defined roles and responsibilities. The Company anticipates time being required to complete the implementation and to assess and ensure the sustainability of these controls. The effectiveness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The information regarding certain legal proceedings in which we are involved as set forth in Note 13 – Commitments and Contingencies of the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 of this Quarterly Report on Form 10-Q) is incorporated by reference into this Item 1.
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In addition to such legal proceedings, we are faced with or involved in various other claims and legal proceedings arising in the normal course of our businesses. At this time, we do not believe any material losses under such other claims and proceedings to be probable. While the ultimate outcome of such claims or legal proceedings cannot be predicted with certainty, it is in the opinion of management, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the three months ended March 31, 2026 that were not disclosed by the Company on a Current Report on Form 8-K.
Item 3. Defaults upon Senior Securities.
There were no defaults upon senior securities during the three months ended March 31, 2026 that were not disclosed by the Company on a Current Report on Form 8-K.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
| (a) | Exhibits: |
| 101.INS | Inline XBRL Instance Document |
| 101.SCH | Inline XBRL Schema Document |
| 101.CAL | Inline XBRL Calculation Linkbase Document |
| 101.DEF | Inline XBRL Definition Linkbase Document |
| 101.LAB | Inline XBRL Label Linkbase Document |
| 101.PRE | Inline XBRL Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit) |
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 14, 2026
| KUSTOM ENTERTAINMENT, INC. | ||
| By: | /s/ Stanton E. Ross | |
| Name: | Stanton E. Ross | |
| Title: | Chief Executive Officer | |
| By: | /s/ Thomas J. Heckman | |
| Name: | Thomas J. Heckman | |
| Title: | Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) | |
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