KUSTOM ENTERTAINMENT, INC. 10-Q

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 ThermoVu TM 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. 51 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. 52 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 53 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 54 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. 55 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. 56 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. 57 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. 58 ● 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 59 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 60 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; 61 (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. 62 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. 63 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. 64 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. 65 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. 66 Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable.