Item 1. Business
Item 1.
Business.
References to “Kustom Entertainment,”
the “Company,” “we,” “us” and “our” refer to Kustom Entertainment, Inc.
Overview
We
were incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. From that date until November 30, 2004, when we entered into a
Plan of Merger with Digital Ally, Inc., a Nevada corporation formerly known as Trophy Tech Corporation (the “Predecessor Registrant”),
we had not conducted any operations and were a closely held company. In conjunction with the merger, we were renamed Digital Ally, Inc.
On
January 2, 2008, our common stock commenced trading on the Nasdaq Capital Market. We conduct our business from 6366 College Blvd., Overland
Park, Kansas 66211. Our telephone number is (913) 814-7774. Our website address is www.digitalallyinc.com. The contents of, or information
accessible through, our website are not part of this Annual Report on Form 10-K.
We make our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and all amendments to those reports, as well as beneficial ownership filings available free of charge on our website as soon as reasonably
practicable after we file such reports with, or furnish such reports to, the SEC. Our filings with the SEC are available to the public
through the SEC’s website at www.sec.gov.
On
August 23, 2022 (the “Effective Time”), the Predecessor Registrant merged with and into its wholly owned subsidiary, DGLY
Subsidiary Inc., a Nevada corporation (the “Registrant”), pursuant to an agreement and plan of merger, dated as of August
23, 2022 (the “Merger Agreement”), between the Predecessor Registrant and the Registrant, with the Registrant as the surviving
corporation in the merger (such transaction, the “Merger”). At the Effective Time, Articles of Merger were filed with the
Secretary of State of the State of Nevada, pursuant to which the Registrant was renamed “Digital Ally, Inc.” and, by operation
of law, succeeded to the assets, continued the business and assumed the rights and obligations of the Predecessor Registrant immediately
prior to the Merger. Under the Nevada Revised Statutes, shareholder approval was not required in connection with the Merger Agreement
or the transactions contemplated thereby.
At
the Effective Time, pursuant to the Merger Agreement, (i) each outstanding share of Predecessor Registrant’s common stock, par
value $0.001 per share (the “Predecessor Common Stock”) automatically converted into one share of common stock, par value
$0.001 per share, of the Registrant (“Registrant Common Stock”), (ii) each outstanding option, right or warrant to acquire
shares of Predecessor Common Stock converted into an option, right or warrant, as applicable, to acquire an equal number of shares of
Registrant Common Stock under the same terms and conditions as the original options, rights or warrants, and (iii) the directors and
executive officers of the Predecessor Registrant were appointed as directors and executive officers, as applicable, of the Registrant,
each to serve in the same capacity and for the same term as such person served with the Predecessor Registrant immediately before the
Merger.
For
the purposes of this Annual Report on Form 10-K, unless the context otherwise requires,
(i) the term “our,” or “us” refers to the Predecessor Registrant and its subsidiaries with respect to the period
prior to the Effective Time and to the Registrant and its subsidiaries with respect to the period on and after the Effective Time; (ii)
as of any period prior to the Effective Time, references to the “directors” mean the directors of the Predecessor Registrant,
and, as of any period at and after the Effective Time, the directors of the Registrant, (iii) as of any period prior to the Effective
Time, references to “stockholders” mean the holders of Predecessor Common Stock, and, as of any period at and after the Effective
Time, the holders of Registrant Common Stock, and (iv) as of any period prior to the Effective Time, references to “Common Stock”
means the Predecessor Common Stock, and, as of any period at and after the Effective Time, Registrant Common Stock.
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On
January 8, 2026, the Company amended its Articles of Incorporation to change its corporate name from Digital Ally, Inc. to Kustom Entertainment,
Inc. The Company’s common stock continues to trade on the Nasdaq Capital Market under the symbol “KUST.” This change
in corporate name did not affect the Company’s legal structure, subsidiaries, assets, liabilities, or obligations.
The
business of Kustom Entertainment, Inc. (together with its wholly owned subsidiaries, including Digital Ally International, Inc.,
Shield Products, LLC, Digital Ally Healthcare, LLC, TicketSmarter, Inc., Worldwide Reinsurance, Ltd., Digital Connect, Inc., BirdVu
Jets, Inc., Kustom 440 and Kustom, collectively, the “Company”) is conducted through two reportable operating segments:
(1) the video solutions segment (the “Video Solutions Segment”) and (2) the entertainment segment (the “Entertainment Segment”). The Video Solutions Segment represents the Company’s legacy operations and includes the development,
manufacture and sale of digital video imaging and storage products, disinfectant and related safety products for use in law
enforcement, security and commercial applications. Revenues are derived from a combination of product sales and recurring service
revenues, including subscription-based cloud storage and extended warranty offerings. The Entertainment Segment operates a secondary
ticketing platform through TicketSmarter.com, acting as an intermediary between ticket buyers and sellers. The Company also acquires
tickets from primary sellers for resale through various distribution platforms. In addition, this segment includes live event
production and promotion activities, including the Country Stampede music festival and other entertainment events. The Company
previously reported a Revenue Cycle Management Segment, which primarily reflected the operations of Nobility Healthcare, LLC (“Nobility Healthcare”).
Following the sale of Nobility Healthcare on January 8, 2026, the results of this business have been classified as discontinued
operations, and the segment is no longer reported. Accounting guidance on segment reporting establishes standards for reporting
information regarding operating segments in annual financial statements and requires selected financial information for those
segments to be presented. The following table sets forth the Company’s total revenue and revenue derived from each reportable
operating segment:
Years Ended December 31,
2025
2024
Net Revenues:
Video Solutions
$ 5,100,757
$ 5,755,391
Entertainment
8,653,398
7,763,761
Total Net Revenues
$ 13,754,155
$ 13,519,152
Additional
information regarding each reportable operating segment is also included in Note 22, Operating Segments of “Notes to Consolidated
Financial Statements”.
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.
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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.
Revenue
Cycle Management Segment (Discontinued Operations)
The
Company entered the revenue cycle management business (the “Revenue Cycle Management Segment”) in the second quarter of
2021 through the formation of its wholly owned subsidiary, Digital Ally Healthcare, Inc. (“Digital Ally Healthcare”),
and its majority-owned subsidiary, Nobility Healthcare. Through this segment, the Company
provided end-to-end revenue cycle management services to medical providers throughout the United States, focusing on claim
reimbursement billing, insurance and benefits verification, medical treatment documentation and coding, and collection
services.
Nobility
Healthcare completed its first acquisition on June 30, 2021, when it acquired a private medical billing company, and subsequently completed
additional acquisitions of private medical billing companies. The segment served a diverse customer base across multiple medical specialties,
including radiology, oncology, orthopedics, pediatrics, internal medicine and cardiology.
The
Revenue Cycle Management Segment operated in a highly competitive environment. Competition included internal revenue cycle management
departments within healthcare organizations, as certain providers elected to make internal investments to perform these services in-house.
The segment also faced competition from other revenue cycle management providers offering similar services, including software vendors,
traditional consulting firms and information technology-based service providers. The Revenue Cycle Management Segment’s ability
to compete effectively primarily depends on trade secrets and operational know-how and did not depend heavily on proprietary technology
or patents.
On
January 8, 2026, the Company completed the sale of Nobility Healthcare. As a result, the operations of the Revenue Cycle Management
Segment have been classified as discontinued operations in the Company’s consolidated financial statements for all periods presented.
Refer
to Note 22 – Operating Segments and Note 23 – Discontinued Operations in the Notes to Consolidated
Financial Statements for additional information regarding the Company’s segments and discontinued operations, including net sales,
operating earnings and total assets by segment.
In-Car
Digital Video Mirror System for Law Enforcement – EVO-HD, DVM-800 and DVM-800 Lite
In-car
video systems for patrol cars are a necessity and have generally become standard. Current systems are primarily digital based systems
with cameras mounted on the windshield and the recording device generally in the trunk, headliner, dashboard, console or under the seat
of the vehicle.
The
Company launched its in-car digital video platform under the name EVO-HD during the second quarter of 2019. The EVO-HD is a revolutionary
in-car system that delivers versatility and reliability for law enforcement.
With
built-in, patented auto-activation technology, EVO-HD captures multiple recording angles in sync from a FirstVu PRO or FirstVu HD body-worn
camera and up to four HD in-car cameras – all from a single trigger. The EVO-HD maximizes space and offers top-end reliability
when paired with remote service capabilities. An internal cell modem will allow for connectivity to EVO Web Portal, powered by Amazon
Web Services (“AWS”) and real time metadata when in the field.
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The
Company offers the DVM-800, a continuation in the family of highly successful digital video mirrored (DVM) systems developed by the Company.
The DVM-800 is a time-tested, compact, powerful and easy-to-use solution designed for law enforcement. The DVM-800 system has built-in
road and driver facing cameras and can record up to two external HD cameras. The DVM-800 is compatible with the patented VuLink®
auto-activation technology and can be paired with a FirstVu HD body-worn camera.
The
Company also offers the DVM-800 Lite, an entry level system that is a self-contained video recorder, microphone and digital storage
system that is integrated into a rear-view mirror and is designed for law enforcement. The system can record up to two internal HD
cameras.
In-Car
Digital Video “Event Recorder” System – EVO Fleet, DVM-250 Plus and FLT-250 for Commercial Fleets
The
Company provides commercial fleets and commercial fleet managers with digital video tools that they need to increase driver safety,
track assets in real-time and minimize the company’s liability risk while enabling fleet managers to operate the fleet at an
optimal level. We market a product designed to address these commercial fleet markets with our EVO Fleet, DVM-250 Plus and FLT-250
event recorders that provide various types of commercial fleets with features and capabilities that are fully customizable and
consistent with their specific application and inherent risks.
The
DVM-250 Plus is a part of the DVM family and is designed for commercial fleets featuring built-in digital audio and video recording technology
and other features to provide commercial fleet managers unmatched driver and asset management – all while aiming to deliver the
return on investment that matters most: the safety and security of drivers and passengers. The DVM-250 Plus is designed to capture events,
such as wrecks and erratic driving or other abnormal occurrences, for evidentiary or training purposes. The commercial fleet markets
may find our units attractive from both a feature and a cost perspective compared to other providers. Due to our marketing efforts, commercial
fleets are beginning to adopt this technology, and in particular, the ambulance and taxi-cab markets.
The
FLT-250 offers the same great features of the DVM-250 Plus in a new compact, non-mirrored form factor that allows for multiple mounting
options in any vehicle type for commercial fleets. The non-mirror-based aspect of this product allowed the FLT-250 to become more attractive
for our potential customers, as it is a much simpler plug and play option compared to mirror-based products.
In
the fourth quarter of 2022, Digital Ally released the EVO Fleet, offering a full-featured solution utilizing the latest in telematics
technology, including immediate driver-assist feedback by recognizing pedestrians, distracted or drowsy driving, and lane shifting. We
believe that, due to the new technology, including the A.I. interface, live tracking capabilities, up to four streams of video, and video
on command, this product will become a very prominent product in the market and for our current and potential customers.
The
Company offers a suite of data management web-based tools to assist fleet managers in the organization, archival, and management of videos
and telematics information. Within the suite, there are powerful mapping and reporting tools that are intended to optimize efficiency,
serve as training tools for teams on safety, and, ultimately, generate a significant return on investment for the organization.
The
EVO-HD has become the platform for a new family of in-car video solution products for the commercial markets. The innovative EVO-HD technology
replaces the current in-car mirror-based systems with a miniaturized system that can be custom-mounted in the vehicle, while offering
numerous hardware configurations to meet the varied needs and requirements of our commercial customers. In its commercial market application,
the EVO-HD can support up to four HD cameras, with two cameras having pre-event and ECA capabilities to allow customers to review entire
shifts. An internal cell modem will allow for connectivity to the FleetVu Manager cloud-based system for commercial fleet tracking and
monitoring, which is powered by AWS and real time metadata when in the field.
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Body-Worn
Digital Video System – FirstVu Pro, FirstVu II, and FirstVu HD for Law Enforcement and Private Security
The
Company launched two next generation body-worn cameras and docking stations, refreshing the Company’s complete ecosystem of evidence
recording devices. The latest body worn camera launched by the Company is the FirstVu Pro, the Company’s flagship product in its
family of next generation of technology. The light weight, one-piece unit captures full HD video and audio, while offering industry leading
features such as live streaming, a full-color touchscreen display, an advanced image sensor with IR LEDs, proprietary image distortion
reduction, IP67 rated resisting dust and wind and is water submersible for 30 minutes at a depth of 3 feet. It is also MIL-STD-810G compliant
capable of handling drops, shock, and vibration, and will function flawlessly in a wide temperature range.
In
addition to the FirstVu Pro, Digital Ally also added the FirstVu II to its family of next generation technology. The FirstVu II is a
one-piece device offering industry leading technology such as an articulating camera head, a full-color display, an advanced image sensor,
and GPS. It can be used in law enforcement, private and event security and commercial segments.
The
Company still carries the FirstVu HD, the two-piece body-worn camera which allows for multiple mounting options while minimizing space
and weight. It can be used in law enforcement, private and event security and commercial segments. This system is also a derivative of
our in-car video systems but is much smaller and lighter and more rugged and water-resistant to handle a hostile outdoor environment.
The FirstVu HD can be used in many applications in addition to law enforcement and private security and is designed specifically to be
clipped to an individual’s pocket or other outer clothing. The unit is self-contained and requires no external battery or storage
devices. Our FirstVu HD integrates with our in-car video systems through our patented VuLink system allowing for automatic activation
of both systems.
With
the newly introduced body-worn cameras, the company also introduced two new QuickVu docking stations (QuickVu 8 and QuickVu 24) compatible
with the FirstVu PRO and FirstVu II body-worn cameras. The QuickVu docking stations provide a comprehensive and elegant solution for
storing and charging body cameras while uploading video evidence to the cloud. QuickVu also allows for rapid reviewing of footage right
from the interactive touchscreen display and is available in eight or twenty-four individual docking bays. For docking with the FirstVu
HD body-worn cameras, the company offers a 12-bay docking station and Mini-Docks. The 12-bay docking station includes a 1TB local memory
hard drive which simultaneously uploads 4 hours of video from 12 FirstVu HD cameras within a 15-minute shift change and push configuration
updates. The Mini-Dock is a single unit, portable smart dock that uploads video evidence to VuVault from a FirstVu HD body camera.
Auto-activation
and Interconnectivity Between In-car Video Systems and Body-worn Camera Products – VuLink for Law Enforcement
Recognizing
a critical limitation in law enforcement camera technology, we pioneered the development of our VuLink ecosystem that provides intuitive
auto-activation functionality as well as coordination between multiple recording devices. The United States Patent and Trademark Office
(the “USPTO”) has recognized these pioneering efforts by granting us multiple patents with claims covering a variety of triggers,
including emergency lights and sirens, extreme acceleration or braking, g-force or any 12-volt relay. Additionally, the awarded patent
claims cover automatic coordination between multiple recording devices. Prior to our VuLink ecosystem, officers had to manually activate
each device while responding to emergency scenarios, a requirement that both decreased the usefulness of the existing camera systems
and diverted officers’ attention during critical moments.
EVO
Web and FleetVu Manager
EVO
Web is a web-based software, powered by and hosted on the AWS GovCloud platform, which enables police departments and security agencies
to manage digital video evidence quickly and easily. EVO Web is capable of playing back, reviewing, downloading, archiving, unit configuration
and management, running customizable reports and maintaining a chain of custody logs. AWS is the most secure cloud platform on the market
with features that go beyond simply storing and reviewing video evidence. AWS GovCloud platform is trusted by the Department of Justice,
Defense Digital Services for the US Air Force, U.S. Department of Treasury, and U.S. Department of Homeland Security. Our products that
are compatible with EVO Web include: FirstVu Pro, FirstVu II, FirstVu HD, QuickVu, EVO-HD, DVM-800 and DVM-800 Lite.
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FleetVu
Manager is a web-based software that provides commercial fleet managers with tools to increase driver safety, track assets in real-time
and minimize their companies’ liability risks. FleetVu Manager is able to generate driver reports, identify at risk behaviors before
an incident takes place, and enable commercial fleet managers to manage the entire fleet through a single, easy to use platform. Our
products compatible with FleetVu Manager include EVO Fleet, DVM-250 Plus and FLT-250.
Our
Entertainment Operating Segment Products and Services
Through
our entertainment operating segment, we provide customers with access to live event tickets via our online marketplace, TicketSmarter.com.
With over 48 million tickets available across more than 125,000 live events, TicketSmarter operates as a national ticketing marketplace
offering tickets for sports, concerts, and theatre events throughout the United States. TicketSmarter serves as the official ticket resale
partner of more than 35 collegiate conferences, over 300 universities, and hundreds of events and venues nationwide.
Established
in late 2022, Kustom 440 further supports our entertainment segment through the production and promotion of live music, sports, and private
events at third-party venues across the country. Kustom 440 provides end-to-end event services, including artist booking, ticketing,
staging, vendor sourcing, on-site operations, and day-of production management, for events ranging from small corporate gatherings to
large-scale, multi-day stadium productions.
Revenues
within our entertainment operating segment are derived primarily from service charges calculated as a percentage of the face value of
tickets sold, as well as from the sale of tickets obtained through direct purchase or received in exchange for sponsorship and partnership
arrangements with venues, events, and rights holders. Direct expenses include the cost of tickets purchased for resale and held as inventory,
credit card fees, ticketing platform expenses, website maintenance fees, and other associated administrative costs.
Market
and Industry Overview – Video Solutions Operating Segment
Our
Video Solutions segment has historically focused on serving domestic and international law-enforcement agencies. Over time, we have
expanded our market presence to include the commercial fleet and mass-transit industries and have also entered the event-security
market, where we provide integrated hardware and software solutions that support private-security operations at large public
gatherings, such as NASCAR races, football games, concerts, and other live events.We continue to broaden our focus to include
private-security, homeland-security, mass-transit, healthcare, retail, education, consumer, and other commercial markets. Our
products have been deployed in a variety of private security settings, including cruise-ship operations, demonstrating the
versatility and adaptability of our technology. Our EVO Fleet, DVM-250 Plus, and FLT-250 video systems, along with our FleetVu
Manager platform, continue to gain traction within the commercial-fleet and ambulance-service markets. In addition, our body-worn
camera solutions are used across law-enforcement, private-security, and event-security applications. Through the acquisitions
completed in 2021 and 2022, we plan to leverage our expanded relationships within live-event, stadium, arena, and medical markets to
further strengthen our presence and expand our revenue opportunities.
Market
and Industry Overview – Entertainment Operating Segment
Our
Entertainment Segment refers to the sale of event tickets primarily through our online and mobile platforms. We will buy inventory of
event tickets to then sell tickets through various platforms, including our own. Our resale services refer to the sale of tickets by
a holder, who originally obtained the tickets directly from a venue or entity, through our platform in which we then collect services
fees on the transaction. This is commonly referred to as secondary ticketing. We work directly with consumers looking to buy or sell
event tickets for particular shows, concerts, games, and other events, allowing a simple and effective platform to move tickets. We also
offer production and promotion of live music events in third-party venues throughout the country. These services begin with the logistical
matters of an event, including artist booking and research, ticketing, staging, on-site operations, vendor sourcing, and day of production.
Competition
- Video Solutions Operating Segment
Our
Video Solutions Segment, consisting of law enforcement and security surveillance markets, is extremely competitive. Competitive factors
in these industries include ease of use, quality, portability, versatility, reliability, accuracy and cost. There are direct competitors
with technology and products in the law enforcement and surveillance markets for all of our products, including those that are in development.
Many of these competitors have significant advantages over us, including greater financial, technical, marketing and manufacturing resources,
more extensive distribution channels, larger customer bases and faster response times to adapt new or emerging technologies and changes
in customer requirements. Our primary competitors in the in-car video systems market include L-3 Mobile-Vision, Inc., Coban Technologies,
Inc., Enforcement Video, LLC d/b/a WatchGuard Video (“WatchGuard”), Kustom Signals, Panasonic System Communications Company,
International Police Technologies, Inc. and a number of other competitors who sell, or may in the future sell, in-car video systems to
law enforcement agencies. Our primary competitors in the body-worn camera market include Axon Enterprises, Inc. (“Axon”),
Reveal Media, WatchGuard, and VieVU, Inc., which was acquired by Axon in 2018. We face similar and intense competitive factors for our
event recorders in the commercial fleet and private security markets as we do in the law enforcement and security surveillance markets.
There can be no assurance that we will be able to compete successfully in these markets. Further, there can be no assurance that new
and existing companies will not enter the law enforcement and security surveillance markets in the future. The commercial fleet security
and surveillance markets likewise are also very competitive. There are direct competitors for our FLT-250 and DVM-250 Plus “event
recorders,” which may have greater financial, technical marketing, and manufacturing resources than we do. Our primary competitors
in the commercial fleet sector include Lytx, Inc. (previously DriveCam, Inc.), Samsara and SmartDrive Systems, among others.
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Competition
– Entertainment Operating Segment
Our Entertainment Segment operates in a highly competitive market across multiple service lines. The continued growth of online
and mobile ticketing has lowered barriers to entry, enabling an increasing number of technology-based companies to offer ticketing services
and marketplace platforms. Our ticketing operations compete with numerous established online and mobile platforms serving a broad range
of live event categories, many of which have greater name recognition, larger customer bases, and more substantial financial and marketing
resources than we currently possess.
The
expansion of the digital ticketing market has enabled resale marketplaces to reach significantly larger audiences while offering consumers
greater convenience and selection. We seek to differentiate our platform through strategic partnerships and sponsorships with collegiate
conferences, universities, venues, and events throughout the United States, with the objective of establishing TicketSmarter as a preferred
destination for live event ticket purchases.
The
event production operations conducted through Kustom 440 face competition from a broad spectrum of producers and promoters, ranging from
independent and regional festival production companies to large-scale national concert production firms and established venue operators.
There can be no assurance that we will be able to compete successfully against current or future competitors in either of these service
areas.
Intellectual
Property – Video Solutions Operating Segment
Our Video Solutions Segment’s ability to compete effectively will depend on our success in protecting our proprietary technology,
both in the United States and abroad. We have filed for patent protection in the United States and certain other countries to cover certain
design aspects of our products.
Some
of our patent applications are still under review by the USPTO and, therefore, we have not yet been issued all the patents that we applied
for in the United States. We were issued several patents in recent years, including a patent on our VuLink product that provides automatic
triggering of our body-worn camera and our in-car video systems. No assurance can be given which, or any, of the patents relating to
our existing technology will be issued from the United States or any foreign patent offices. Additionally, no assurance can be given
that we will receive any patents in the future based on our continued development of our technology, or that our patent protection within
and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive
products utilizing our technologies.
We
have entered into supply and distribution agreements with several companies that produce certain of our products, including our FirstVu
Pro & FirstVu II body cameras, QuickVu docking stations, EVO Fleet, DVM-250 and DVM-800 products. These supply and distribution agreements
contain certain confidentiality provisions that protect our proprietary technology, as well as those of the third-party manufacturers.
In
addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to achieve
and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality and invention
agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be honored or that we will
be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others
will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade
secrets and know-how.
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Intellectual
Property – Entertainment Operating Segment
Our Entertainment Segment’s ability to compete effectively primarily depends on our trade secrets and know-how and does not
depend heavily on any proprietary technology or patents.
Human
Capital
As
of December 31, 2025, Kustom Entertainment, Inc, and its subsidiaries, had approximately 30 full-time employees spread throughout the
country, representing the core values and objectives of the Company. These employees are spread amongst our operating segments as follows:
As of
December 31, 2025
Employee headcount:
Video Solutions
22
Entertainment
8
Total Employee Headcount
30
Our
employees are our most important assets, and they set the foundation for our ability to achieve our strategic objectives. All of our employees
contribute to Kustom Entertainment’s success and, in particular, the employees in our manufacturing, sales, research and development,
and quality assurance departments are instrumental in driving operational execution and strong financial performance, advancing innovation
and maintaining a strong quality and compliance program.
Our
employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We strive to create
a culture and work environment that enables us to attract, train, promote, and retain a diverse group of talented employees who together
can help us gain a competitive advantage. Our key programs and initiatives that are focused on attracting, developing and retaining our diverse
workforce include:
●
Compensation
Programs and Employee Benefits: the main objective of Kustom Entertainment’s compensation program is to provide a compensation
package that will attract, retain, motivate and reward superior employees who must operate in a highly competitive and technologically
challenging environment. We seek to do this by linking annual changes in compensation to overall Company performance, as well as
each individual’s contribution to the results achieved. The emphasis on overall Company performance is intended to align the
employee’s financial interests with the interests of shareholders. Kustom Entertainment also seeks fairness in total compensation
with reference to external comparisons, internal comparisons and the relationship between management and non-management remuneration.
The structure of our compensation programs balances incentive earnings for both short-term and long-term performance. Specifically:
●
We provide employee wages
that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location.
●
We align our executives’
long-term equity compensation with our shareholders’ interests by linking realizable pay with stock performance.
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●
Annual increases and incentive
compensation are based on merit, which is communicated to employees at the time of hiring and documented through our talent management
process as part of our annual review procedures and upon internal transfer and/or promotion.
●
All employees are eligible
for health insurance, paid and unpaid leaves, short-term disability, worker’s compensation, long-term disability, a retirement
plan and life and disability/accident coverage. We also offer a variety of voluntary benefits that allow employees to select the
options that meet their needs.
SOURCES
AND AVAILABILITY OF RAW MATERIAL
The
Company purchases its raw materials from multiple suppliers and maintains a minimum of two suppliers for most of its material requirements.
The largest supplier in the fiscal years ended December 31, 2025 and 2024 represented less than 5% of total purchases. Due to a diminishing
number of sources for certain components and packaging materials, combined with rising prices for semiconductors and other key components,
the Company has been obligated to pay higher prices, resulting in increased costs of goods sold. Additionally, recently enacted or proposed
tariffs on imported goods, including components and raw materials sourced from foreign suppliers, have introduced further pricing uncertainty
and may continue to exert upward pressure on the Company’s cost of goods sold. The Company continues to monitor developments in
trade policy and evaluate opportunities to mitigate the impact of tariffs through supplier diversification, alternative sourcing arrangements,
and other cost management strategies. There can be no assurance, however, that such measures will fully offset the financial impact of
tariff-related cost increases.
Recent
Developments
Non-Binding
Memorandum of Understanding for Potential Divestiture - On January 22, 2026, the Company entered into a non-binding Memorandum
of Understanding (“MOU”) with Cycurion, Inc. (“Cycurion”) regarding the contemplated divestiture of the
Company’s Video Solutions Segment. The MOU outlines the parties’ intent to pursue a transaction pursuant to which
Cycurion acquires the Video Solutions business for consideration expected to range between approximately $6.0 million and $8.5
million, consisting of a combination of cash and preferred equity of Cycurion. The MOU is non-binding and subject to the negotiation
and execution of definitive agreements, the completion of due diligence, receipt of any required approvals, and satisfaction of
customary closing conditions. There can be no assurance that a definitive agreement will be entered into or that the contemplated
transaction will be completed on the terms described, or at all. Accordingly, the potential transaction is not reflected in the
Company’s consolidated financial statements as of December 31, 2025.
Sale
of Revenue Cycle Management Business Segment - On January 8, 2026, Digital Ally Healthcare (the “Seller”) entered
into and closed a Unit Purchase Agreement with Nobility LLC, (the “Buyer”), and Nobility Healthcare,
Pursuant
to the Agreement, the Buyer purchased all of the Seller’s units of ownership interest in Nobility Healthcare, for Closing Funds
(as defined in the Agreement) and a promissory note, totaling $1,450,000, due upon closing. The Note issued by the Buyer at closing is
in the principal amount of $1,140,499 to the Seller. Nobility Healthcare has historically issued a total of one hundred thousand (100,000)
Units with Seller owning fifty-one thousand (51,000) of such Units. The Buyer is an affiliate of the owner of the remaining forty-nine
thousand (49,000) Units. The Closing Funds are equal to the sum of (i) $100,000 in immediately available funds to be paid to the Seller
at closing and (ii) certain credits totaling $209,501, which closing credits consist of (a) $200,000, the total of two advances made
by the Buyer to the Seller on December 18, 2024 and January 15, 2025 and (b) $9,501 due to the Buyer from Nobility Healthcare for net
working capital advances paid to the Buyer upon signing. The effective date of the Agreement was January 1, 2026. The Parties made customary
representations, warranties and covenants in the Agreement. There is no material relationship between the Company or its affiliates and
any of the other Parties to the Agreement, other than in connection with Nobility Healthcare.
Item 1A.
Risk Factors.
Not
applicable.
10