KUST 10-K & 10-Q changes, risk factors and insider trading

Video Solutions Operating Segment – Within our videoVideo solutionsSolutions operating segmentSegment, we supply technology-based products utilizing our portable 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 positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video video systems for law enforcement and commercial markets; the FirstVU body-worn camera line, consisting of the FirstVu Pro, FirstVu,FirstVu II, and and the FirstVU HD; our patented and revolutionary VuLink product integrates our body-worn cameras with our in-car systems by providing hands-free hands-free automatic activation for both law enforcement and commercial markets; EVO Web Portal, which is our cloud-based evidence management system for for Law enforcement and commercial 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 and VuLink,FleetVu, which areis our cloud-based evidence management systems. We further diversified and broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu™ which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria.

Our entertainment operatingEntertainment segmentSegment consists of entertainment services provided through TicketSmarter and its online platform, TicketSmarter.com. TicketSmarter.com. Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold. Entertainment direct expenses include the cost of tickets purchased for resale by the Company and held as inventory, credit card fees, ticketing platform expenses, website maintenance fees, asalong well aswith other administrative costs.

We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 14, Operating Lease, and Note 15, “Commitments and Contingencies,” to our consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.

Product revenues primarily includesinclude 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 entertainmentEntertainment segmentSegment until their sale.

Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video solutionsVideo segment.Solutions Segment. Our entertainmentEntertainment operating segment’sSegments’ secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services provided to medical providers throughout the country.

Our video solutionsVideo operatingSolutions segmentSegment sells our products and services to customers in the following manner:

Our entertainmentEntertainment operating segmentSegment sells our products and services to customers in the following manner:

Product revenues for the years ended December 31, 2024 2025 and 20232024 were $5,404,317$4,337,276 and $9,347,945,$5,404,317, respectively, representing a decrease of $3,943,628 $1,067,041 (42.2%19.7%), duedriven toby the following factors:

Service and other revenues for the years ended December 31, 20242025 and 20232024 were $14,246,485$9,416,879 and $18,900,399,$8,114,835, respectively, arepresenting decreasean increase of $4,653,914 (25%),$1,302,044, dueor to16.0%, driven by the following factors:

Total revenues for the years ended December 31, 2024,2025 and 20232024 were $19,650,802$13,754,155 and $28,248,344,$13,519,152, respectively, arepresenting decreasean increase of $8,597,542 $235,003 (30%1.7%), due to the reasons noted above..

The decrease in entertainmentVideo operatingSolutions segmentSegment cost of product sold directly correlatesrevenues to the lower product revenues$1,523,613 for the year ended December 31, 2024.2025 Costfrom of Product Revenues were $4,118,846 and $5,149,923 $1,780,284 for the year ended December 31, 2024 was primarily attributable to lower product volumes and 2023,changes ain decreaseinventory reserve activity, including ofreduced $1,031,077charges (20%).related to excess and obsolete inventory compared to the prior year. Cost of product soldrevenues as a percentage of product revenues for the entertainmentvideo solutions segment increased to 121%approximately for the year ended December 31, 2024 as compared to 102%129% for the year ended December 31, 2023.2025 from approximately 89% for the year ended December 31, 2024, reflecting the decline in product revenues during the period and the impact of fixed manufacturing and overhead costs.

Overall gross profit for the years ended December 31, 20242025 and 20232024 was $5,489,332 $1,349,055 and $5,762,484,$3,124,018, respectively, representing a decrease of $273,152$1,774,963, (5%).or 56.8%. Gross profit by operating segment was as follows:

The decrease in gross profit is commensurate with the decreasedecline in overall revenues offsetand bythe a decreaseincrease in cost of goods soldrevenue across ourboth videothe Video Solutions Segment and entertainmentEntertainment segment for the year ended December 31, 2024. There was an overall decrease in the cost of sales as a percentage of overall revenues to 72% for the year ended December 31, 2024 from 80%Segment for the year ended December 31, 2023.2025. ThisCost isof primarilyrevenue drivenas bya largepercentage head-countof reductionsoverall inrevenues increased ourto workapproximately force90% duringfor the year ended December 31, 2025 compared to approximately 77% for the year ended December 31, 2024, 2024,resulting in a focuscorresponding ondecline rightin sizinggross margin. This increase was driven primarily by lower product margins within the Entertainment Segment, including ticket inventory sold below cost or written off when unsold following event dates, as well as continued pricing pressure within the video solutions operating segment. During the year ended December 31, 2025, the Company implemented several cost-containment and margin improvement initiatives, including workforce reductions, right-sizing of recent acquisitions to increase profitabilityacquisitions, and a continued transition totoward a service and subscription-based revenue model inwithin the Video Solutions Segment. Management’s longer-term our video solutions segment. Our goalobjective is to improve ourgross margins overthrough a more favorable revenue mix, increased adoption of higher-margin service offerings, and operational efficiencies across the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, EVO Fleet, FLT-250, DVM-250, DVM-250 Plus and our cloud evidence storage and management offering, provided that they gain traction in the marketplace.organization. We plan to continue ourinitiatives initiativefocused toon more efficient management of our supply chain, chain throughincluding outsourcing production, quantityproduction purchaseswhere appropriate, optimizing purchase quantities, and implementing more effective purchasing practices.

Selling, general and administrative expenses were $20,690,872 and $28,003,037 for the yearyears ended December 31, 20242025 and 2023,2024 were $12,231,476 and $14,506,944, respectively, representing a decrease of $7,312,165$2,275,468 (26%15.7%). TheSelling, decreasegeneral wasand administrative expenses consist primarily attributableof toresearch theand reductiondevelopment in newexpenses, selling, advertising sponsorshipsand beingpromotional entered intoexpenses, bygeneral theand Companyadministrative offsetexpenses, by theand goodwill and intangible asset impairment charge.charges. The Our selling, general and administrative expenses as a percentage of sales increased to 105% for the year ended December 31, 2024 compared to 99% in the same period in 2023. The significant components of selling, general and administrative expenses are as follows:

Research and development expense. Our research and development expenses totaled $1,339,673$551,447 and $2,618,746$1,339,673 for the yearyears ended December 31, 31, 20242025 and 2023,2024, respectivelyrespectively, which representsrepresenting a decrease of $1,279,073$788,226, (49%).or We58.8%. haveThe Company focused on controlling our expenditures onrelated bringingto the development of new products to market, including updates and improvementsenhancements to currentexisting products induring responsethe toyear. our decline in revenues. The decrease in researchResearch and development expenseactivities reflects the large cut-back in ourinclude engineering costs, staffproduct design, testing, and researchrelated activitiesdevelopment in order to right-size our expenses in this area with our revenues.efforts.

Selling, advertising and promotional expenses. Selling, advertising and promotional expenseexpenses totaled $2,144,494$721,690 and $7,137,529$2,120,965 for the years years ended December 31, 20242025 and 2023,2024, respectively, representing a decrease of $4,993,035$1,399,275 (70%66%). The decrease in selling, advertising and promotional promotional expenses reflects the large cut-back in selling staff and promotional and advertising activities in order to right-size our expenses expenses in this area with our revenues. In addition, the decrease is attributable to the reduction in new sponsorships being entered into by the Company and its subsidiary TicketSmarter.

General and administrative expense. General and administrative expenses totaled $12,376,705$8,424,672 and $18,246,762$10,538,306 for the yearyears ended December December 31, 20242025 and 2023,2024, respectivelyrespectively, which representsrepresenting a decrease of $5,870,057$2,113,634 (32%20.1%). The decrease in general and administrative expenses in the year ended December 31, 2024 2025 compared to the same period in 20232024 is primarily attributable to a decrease in administrative salaries and reductions in headcount in order to right-size our expenses in this area with our revenues. The decrease in general and administrative expenses was offset by a substantial increase legal and professional expenses for the year ended December 31, 2024 compared to the same period in 2023 due to the failed merger with CloverLeaf and various capital raises we have undertaken.

Goodwill and intangible asset impairment charge. We performed an impairment test as ofDuring the last day of thethird fiscal third quarter of 2024 as2024, management determined that a triggering event events had occurredoccurred, resultingincluding from thean additional decline in demand for our services, prolonged economic uncertainty, the factfailure thatof thea planned split-off transaction did notto occur when and as expectedexpected, and a further decrease in our stock price. Therefore,As a result, we performed an interim impairment test as of September 30, 20242024. Based on that interim test, we recorded a non-cash goodwill impairment charge of $307,000 related to the entertainment segment and a non-cash trademark impairment charge of $201,000 related to the entertainment segment, for ourtotal reportingcontinuing operations unitsimpairment withcharges remainingof goodwill.$508,000 for the year ended December 31, 2024. An additional non-cash goodwill impairment charge of $4,322,000 related to the revenue cycle management segment was recorded within discontinued operations during the same period. No additional impairment was identified in the December 31, 2024 annual roll-forward assessment.

For the reasons previously stated, our operating loss was $15,201,540$10,882,421 and $22,240,553$11,382,926 for the years ended December 31, 20242025 and 2023,2024, respectively, representing an improvement of $7,039,013$500,505 (31.6%4.4%). Operating loss as a percentage of revenues improvedwas toapproximately 77%79% infor 2024the asyear ended December 31, 2025 compared to 78%approximately in84% 2023.for the year ended December 31, 2024.

Interest income decreasedincreased to $69,509$116,545 for the year ended December 31, 2024,2025 from $95,717$69,509 in 2023,2024, whichrepresenting reflectsan ourincrease overallof decline$47,036 in our cash and cash equivalent levels in 2024 compared to 2023.(67.7%).

We incurred interest expensesexpense of $3,815,323$1,102,352 and $3,134,253$3,816,317 during the years ended December 31, 20242025 and 2023,2024, respectively.respectively, Therepresenting a increase isdecrease attributableof to$2,713,965 (71.1%). Interest expense primarily consists of stated interest and the amortization of debt discounts associated with the convertible debt, revolving loan agreementsarrangements, and merchant advances.

Other income (expense) decreasedincreased to $346,024 for the year ended December 31, 2025 from $26,733 forduring the year ended December 31, 2024, fromrepresenting $144,735an duringincrease theof year$319,291 ended(1,194.4%). DecemberOther 31,income 2023,(expense) whichincludes reflectsitems such as income related to afacility warehousesubleases, subleasegains withinor thelosses corporateon headquartersasset duringdisposals, 2023and whichother ceasednon-operating in 2024 upon the sale of the building.items.

The Company recognized a loss on litigation of $1,959,396$0 and $1,792,308$1,959,396 during the years ended December 31, 20242025 and 2023,2024, respectively. This isrelates in connection withto the ongoing lawsuit with Culp McCauley, McAuley, Inc. Consideringand primarily the losscollectability of the default judgment. Based on amounts recorded in 2024 and prior yearsyears, the Company has had reduced its net exposure to zero relativerelated to this matter atto zero as of December 31, 2024.2025.

During the year ended December 31, 2025, the Company did not recognize any gain or loss on the disposal of intangible assets. During the year ended December 31, 2024, the Company’s video solutions segment disposed of its personal protection product lineline, which held various EPA licenses licenses, resulting in a loss on disposal of intangible assets of $125,561. This loss was partially offset by a gain onof $5,582 recognized by the Company’s entertainment segment related to the disposal of certain personal seat licenses by the Company’s entertainment segment which resulted in a gain of $5,582 during the yearsame ended December 31, 2024.period.

The change in fair value of the warrant derivative liabilities for the years ended December 31, 20242025 and 2023,2024, respectively totaled a gain of $3,331,616 during the year ended December 31, 2025 as compared to a loss of $1,240,407 during the year ended December 31, 2024 as compared to a gain of $1,846,642 during the year ended December 31, 2023.2024.

The Effective January 8, 2026, the Company changed its name from Digital Ally, Inc. to Kustom Entertainment, Inc.,Inc. and its Nasdaq trading symbol from “DGLY” to “KUST,” reflecting the strategic shift to live entertainment as the Company’s primary line of business.

Effective January 8, 2026, the Company effected a 1-for-3 reverse stock split of its common stock. Subsequently, effectiveEffective April 22, 2026, the Company effected a 1-for-5 reverse stock split to comply with the Nasdaq Minimum Bid Price Requirement. All share and per-share amounts presented presented in this Report have been retroactively adjusted to reflect both reverse stock splits.

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 cyclerevenue-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$209,501, 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.$1,117,303. 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. ForDuring the three months ended March 31, 2026, the Company recognized a loss from discontinuedon operationsthe disposition of $(4,371,588),$4,013,669, consisting of (i) a $(1,556,254)$1,556,254 loss on sale,sale (ii)and a $(2,457,415)$2,457,415 loss on deconsolidation, anddeconsolidation. (iii)An ainitial $(357,919)provisional earn-out adjustment of $357,919 to the carrying value of the note receivablewas basedalso onrecorded post-closingduring performancethe period. During the three months ended June 30, 2026, the Company recorded an additional provisional earn-out adjustment of $81,134; cumulative provisional principal reductions of $429,886 reduced the face amount of the divestednote business. to $710,613. See Note 22, Discontinued Operations to the condensed consolidated financial statements for additional information.Operations.

During January 2026, the holder of the Company’s Senior2025 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,stock, fully extinguishing the notes. In connection with the conversions, the $854,827 of remaining unamortized debt discount of $854,827 was eliminated against additional paid-in capital in accordance with ASC 470-20,capital, 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 MarchJune 31,30, 2026, the Company has no outstanding convertible debt.

SegmentBusiness Overview

OurFollowing Entertainmentthe dispositions described above, the Company’s continuing operations consist of one reportable segment: encompassesEntertainment. allThrough TicketSmarter, services provided through TicketSmarterInc. and TicketSmarter.com.its online marketplace, TicketSmarter.com, the Company offers ticket sales, resale, and partnership services for live events nationwide, spanning concerts, sporting events, theatre, and performing arts. Entertainment segment revenues include ticketing ticketing service charges, generally calculated as a percentage of the face value of the underlying ticket, as well as ticket sales fromof tickets held in Company-heldCompany inventory, both of which are recognized upon the sale of the underlying tickets. Through Kustom 440, Inc., the Company creates and produces live entertainment experiences, including the annual Country Stampede music festival, generating ticket, camping, sponsorship, and related revenues, which are deferred until the related event is held. Direct expenses include the cost of tickets purchased for resale and held as in inventory, artist and production costs for Company-produced events, credit card fees, ticketing platform expenses, and website maintenance, and other administrative costsmaintenance.

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 our financial conditions,condition, changes in the financial conditions,condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expensesexpenses, other than the following:

We are a party to operating leases and license agreements that represent commitments for future paymentspayments, and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services. In addition, we are obligated to pay 4% of future gross proceeds raised under our committed equity facility through February 2028 pursuant to a settlement agreement with Aegis Capital Corp.; these amounts become payable only if and as we elect to draw on the facility. See Note 13, Commitments and Contingencies.

Comparison of the Three Months Ended MarchJune 31,30, 2026 and 2025

SummarizedThe financialfollowing information forsummarizes the Company’s reportableconsolidated business segments is providedresults for the three and six months ended MarchJune 31,30, 2026,2026 and 2025:

Total identifiable assets as of MarchJune 31,30, 2025 included amounts related to the discontinued Video Solutions and Revenue Cycle Management segment (Nobility Healthcare), businesses, which were included in the “Corporate and other” category. Following the disposition of Nobility Healthcare onin January 8,2026 2026,and the classification of the Video Solutions business as held for sale, no discontinued operations assets areof includedNobility inHealthcare remain as of June 30, 2026, and Corporate identifiable assets as of MarchJune 31,30, 2026.2026 include assets of the Video Solutions business held for sale of $7,147,595. See Note 22, Discontinued Operations, for additional information.

The segmentsCompany recordedrecords non-cash items affecting gross profit (loss) 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 Entertainment segment of $1,751,603$72,203 and $1,849,124, and a reserve for the Entertainment segment of $71,223 and $69,817,$69,817 as of March 31,June 30, 2026 and December 31, 2025, respectively.respectively, relating primarily to ticket inventory that may sell below cost or become unsellable following the related event date. The inventory reserve of the Video Solutions business, of $2,172,575 and $1,849,124 as of June 30, 2026 and December 31, 2025, respectively, is included within assets of the Video Solutions business held for sale and is excluded from segment information.

The segment net revenues reported above represent sales to external customers. Segment gross profitloss represents net revenues less cost of revenues. revenues. Segment operating income (loss),loss, which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses.

Revenues by Type and by Operating Segment

Our operatingcontinuing segmentsoperations generate two types of revenues:

The following table presents revenues by type and segment:

OurWe Entertainment Segment sellssell our products and services to customers in the following manner:

Product revenues for the three months ended MarchJune 31,30, 2026 and 2025 were $562,226$2,644,529 and $721,350,$1,740,828, respectively, an increase of $903,701 (51.9%), and $2,980,635 and $2,445,416 for the six months ended June 30, 2026 and 2025, respectively, aan decrease increase of $159,124$535,219 (22.1%21.9%), due to the following factors:

Total revenues for the three months ended MarchJune 31,30, 2026 and 2025 were $4,314,236$5,381,310 and $3,124,713,$2,859,073, respectively, representing an increase of $1,189,523 $2,522,237 (38.1%88.2%), and $8,587,067 and $5,061,504 for the six months ended June 30, 2026 and 2025, respectively, an increase of $3,525,563 (69.7%), due to the reasons noted above.

Cost of Product Revenue

The Company recorded a reserve for excess and obsolete inventory in the Video SolutionsEntertainment segment of $1,751,603$72,203 and $1,849,124$69,817 as of March 31,June 30, 2026 and December 31, 2025, respectively, representingan a decreaseincrease of $97,521$2,386 (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%3.4%). 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 MarchJune 31,30, 2026. The inventory reserve of the Video Solutions business, of $2,172,575 as of June 30, 2026, is included within assets of the Video Solutions business held for sale.

Gross ProfitLoss