Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 are 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, and our ability to achieve profitability as an entertainment company; (2) substantial doubt about our ability to continue as a going concern; (3) our ability to fund our operations, including through our committed equity financing facility, which depends in part on the market price and trading volume of our common stock; (4) our ability to maintain the listing of our common stock on Nasdaq; (5) dilution from sales of common stock under our committed equity facility and from the issuance of common stock underlying outstanding options and warrants; (6) the seasonality and concentration of our live-events business, including the dependence of our results on the annual Country Stampede music festival; (7) weather, artist availability and performance, public-safety incidents, and other events or conditions that could disrupt or reduce attendance at live events; (8) competition in the ticketing and live-entertainment industries from larger, more established companies with far greater economic and human resources; (9) our ability to acquire ticket inventory on favorable terms and the risk that ticket inventory sells below cost or becomes unsellable following the related event date; (10) our ability to collect the promissory notes received in connection with the dispositions of Nobility Healthcare and the Video Solutions business, including the effects of related earn-out adjustments; (11) risks related to the separation of the Video Solutions business following its sale, including transition matters; (12) our ability to complete the proposed acquisition of TFL, LLC, including obtaining the financing required to fund the cash portion of the purchase price, and, if completed, to integrate TFL's operations and realize the expected benefits of the acquisition; (13) our ability to attract and retain quality employees; (14) the fluctuation of our operating results from quarter to quarter, including as a result of event timing; (15) 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; (16) the volatility of our stock price due to a number of factors, including a relatively limited public float; and (17) 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.

Current Trends and Recent Developments for the Company

Name change

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

Reverse stock splits

Effective January 8, 2026, the Company effected a one-for-three reverse stock split of its common stock. Effective April 22, 2026, the Company effected a one-for-five reverse stock split. Effective October 1, 2026, the Company effected a one-for-ten reverse stock split. Each of the reverse stock splits was effected to comply with the Nasdaq Minimum Bid Price Requirement. All share and per-share amounts presented in this Report have been retroactively adjusted to reflect all three reverse stock splits.

Disposition of Nobility Healthcare

On January 8, 2026, effective January 1, 2026, the Company completed the sale of its 51% membership interest in Nobility Healthcare, exiting the revenue-cycle management business entirely, for total consideration of $1,450,000, including a promissory note recorded at an estimated fair value of $1,117,303. The Company recognized a loss on the disposition of $4,013,669 during the three months ended March 31, 2026 and net earn-out adjustments reducing the carrying value of the note by $416,201 during the nine months ended September 30, 2026, including an increase of $22,852 during the three months ended September 30, 2026. In July 2026, the Company received the first scheduled installment of $141,098, and the carrying value of the note was $616,724 as of September 30, 2026. See Note 22, Discontinued Operations.

Sale of Video Solutions business

On June 24, 2026, the Company entered into an APA with Cycurion providing for the sale of its legacy Video Solutions business. On July 23, 2026, the parties amended the agreement to extend the closing date and to replace the warrants originally contemplated with shares of Cycurion's Series H Preferred Stock, and Cycurion paid the Company a non-refundable extension payment of $250,000, which was credited against the cash consideration at closing. The sale was completed on August 3, 2026, completing the Company's transformation into a pure entertainment company. Total consideration consisted of $1,250,000 in cash, a $4,250,000 secured promissory note recorded at its estimated fair value of $3,558,970, Series H Preferred Stock with an aggregate stated value of $600,000, recorded at its estimated fair value of $378,621, and a revenue-based earn-out and clawback arrangement. The Company recognized a gain on the sale of $5,065,766, net of costs to sell, within discontinued operations during the three months ended September 30, 2026. The Series H Preferred Stock is carried at fair value, and a loss of $237,320 on its remeasurement to $141,301 as of September 30, 2026 is included in other income (expense) in continuing operations. The Video Solutions business is presented as a discontinued operation for all periods presented, and no assets or liabilities of the business remain on the balance sheet as of September 30, 2026. See Note 22, Discontinued Operations.

Proposed Acquisition of TFL, LLC

On August 31, 2026, the Company entered into the Purchase Agreement with TFL and the Sellers, pursuant to which the Company agreed to acquire all of the outstanding equity interests of TFL, a live event ticketing technology and ticket inventory distribution business headquartered in Overland Park, Kansas. The aggregate consideration consists of (i) $89.6 million in cash, subject to customary adjustments for TFL's closing net debt and transaction expenses, and (ii) $22.4 million of restricted common stock, with the number of shares determined by reference to the volume-weighted average trading price of the Company's common stock over the ten trading days preceding the closing, of which the Holdback Shares will be issued only upon achievement of a specified target EBITDA for the period from the closing date through December 31, 2027. The Company also agreed to repay up to $35.0 million of TFL's indebtedness at closing, and $1.5 million of the purchase price will be placed in escrow to secure purchase price adjustments and the Sellers' indemnification obligations. The closing is subject to customary conditions, including required third-party consents, approval by the Company's stockholders, which was obtained on October 5, 2026, and the Company obtaining sufficient financing. The Purchase Agreement provided that either party could terminate if the closing had not occurred by October 15, 2026, the outside date specified in the Purchase Agreement, subject to extension as provided therein. On November 6, 2026, the Company, TFL, and the Sellers' Representative entered into an amendment to the Purchase Agreement extending the outside date to December 18, 2026. The amendment also requires the Company to pay the Sellers' transaction expenses incurred after October 15, 2026 if the acquisition has not closed by the outside date, and to reimburse up to $200,000 of the Sellers' audit costs if the Purchase Agreement is terminated. As the outside date has not yet been reached and the Purchase Agreement has not been terminated as of the date these condensed consolidated financial statements were issued, no contingent amount was accrued as of September 30, 2026. As of the date of this Quarterly Report on Form 10-Q, the acquisition has not closed and the Company has not completed the financing for the cash portion of the purchase price. The Company can provide no assurance that it will be able to complete the acquisition or the related financing, or as to the terms of the financing if completed. See Note 13, Commitments and Contingencies, and Note 23, Subsequent Events.

Annual Meeting of Stockholders

At the Company's annual meeting of stockholders held on October 5, 2026, stockholders approved all of the following proposals:

	(i)	approved the election of four Directors of the Company;
	(ii)	approved the ratification of the appointment of Victor Mokuolu CPA PLLC as the Company's independent registered public accounting firm for the year ending December 31, 2026:
	(iii)	approved an amendment to the Company's articles of incorporation increasing the number of authorized shares of capital stock to 1,200,000,000, consisting of 1,000,000,000 shares of common stock and 200,000,000 shares of preferred stock;
	(iv)	approved for purposes of Nasdaq Listing Rules 5635(g) the potential issuance of shares of common stock pursuant to the Unit Purchase Agreement in connection with the proposed acquisition of TFL, LLC;
	(v)	approved for purposes of Nasdaq Listing Rules 5635(b), the potential issuance of shares of common stock in connection with the proposed acquisition of TFL, LLC, which could result in a "change in control" of the Company;
	(vi)	approved for purposes of Nasdaq Listing Rules 5635(d) the potential issuance of shares of common stock pursuant to the Unit Purchase Agreement in connection with the proposed acquisition of TFL, LLC;
	(vii)	approved for purposes of Nasdaq Listing Rules 5635(b) and (d) the potential issuance of shares of common stock pursuant to the Unit Purchase Agreement in connection with payment of the cash portion of the proposed acquisition of TFL, LLC;
	(viii)	approved authority for the Board of Directors to effect one or more reverse stock splits of the common stock at a ratio of between one-for-two and one-for-one hundred within twelve months of the meeting.
	(ix)	approved the 2026 Kustom Entertainment, Inc. Stock Option and Restricted Stock Plan;
	(x)	approved the non-binding advisory vote on the compensation of our named executive officers:
	(xi)	approved the frequency of the advisory (non-binding) vote on executive compensation to be every three years.

On November 3, 2026, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to effect the increase in authorized shares, effective November 4, 2026, which is not reflected in the condensed consolidated balance sheet as of September 30, 2026.

Country Stampede music festival

The Company held its annual Country Stampede music festival on June 26-28, 2026, its first full festival cycle as an entertainment-focused company. Upon completion of the festival, the Company recognized $1,844,798 of previously deferred advance ticket and camping sales, together with the related production costs, including a $750,000 headline-artist performance guarantee. Advance sales for the 2027 festival totaled $598,456 as of September 30, 2026 and are included in deferred revenue.

Extinguishment of senior secured convertible notes

During January 2026, the holders of the 2025 Secured Notes converted the entire $1,070,000 outstanding principal balance into 11,161 shares of common stock, fully extinguishing the notes. See Note 9, Debt Obligations. As of September 30, 2026, the Company has no outstanding convertible debt.

Committed equity financing

During the nine months ended September 30, 2026, the Company issued 363,200 shares of common stock under its committed equity facility for aggregate gross proceeds of $5,642,981, of which $4,979,698 was received in cash. Approximately $19.4 million remained available under the facility as of September 30, 2026, subject to the terms and conditions of the facility. See Note 16, Stockholders' Equity.

Business Overview

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

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 our financial condition, changes in financial condition, 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. In addition, we are obligated to pay 4% of future gross proceeds raised under our committed equity facility through February 2028 pursuant to a settlement agreement with Aegis Capital Corp.; these amounts become payable only if and as we elect to draw on the facility. We are also party to the Unit Purchase Agreement for the acquisition of TFL, LLC, under which, if the transaction closes, we would pay $89.6 million in cash, subject to adjustment, repay up to $35.0 million of TFL's indebtedness, and issue $22.4 million of common stock, the closing of which is conditioned on our obtaining sufficient financing. See Note 13, Commitments and Contingencies.

Comparison of the Three and Nine Months Ended September 30, 2026 and 2025

Summary Financial Data

Following the classification of the Video Solutions business and the Revenue Cycle Management business as discontinued operations, the Company's continuing operations consist of a single reportable segment: Entertainment.

The following summarizes the Company's consolidated results for the three and nine months ended September 30, 2026 and 2025:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2026				2025				2026				2025
Net Revenues:
Entertainment		$	2,711,390			$	1,729,773			$	11,298,457			$	6,791,278
Gross profit (loss):
Entertainment			208,949				189,673				(749,248	)			(784,717	)
Operating loss:
Entertainment			(896,042	)			(626,250	)			(3,401,121	)			(3,498,713	)
Corporate			(1,613,251	)			(526,951	)			(2,994,049	)			(2,290,810	)
Total operating loss			(2,509,293	)			(1,153,201	)			(6,395,170	)			(5,789,523	)
Depreciation and amortization:
Entertainment			49,966				336,549				131,498				1,064,726
Corporate			30,250				160				30,250				1,371

		As of September 30, 2026				As of September 30, 2025
Assets (net of eliminations):
Entertainment		$	2,622,302			$	4,538,676
Corporate			12,936,777				20,537,365
Total identifiable assets		$	15,559,079			$	25,076,041

Total identifiable assets as of September 30, 2025 included amounts related to the discontinued Video Solutions and Revenue Cycle Management businesses, which were included in the Corporate category; no assets of either business remain as of September 30, 2026. The Company recorded a reserve for excess and obsolete ticket inventory of $66,933 and $69,817 as of September 30, 2026 and December 31, 2025, respectively; during the three months ended June 30, 2026, the Company changed the method used to estimate the reserve. See Note 5, Inventories, Note 20, Operating Segments, and Note 22, Discontinued Operations.

Results of Operations

Revenues

Revenues by Type

Our continuing operations generate two types of revenues:

Product revenues consist of the sale of tickets that have been purchased, or received through our sponsorships and partnerships, and held in inventory until their sale to the end consumer, together with revenues from live events and festivals produced by the Company, including the annual Country Stampede music festival and related ticket, camping, sponsorship, merchandise, and other festival revenues, which are deferred and recognized upon completion of the related event.

Service and other revenues consist of service fees collected on transactions completed through our ticketing platform, TicketSmarter.com, recorded net of amounts due to sellers.

The following table presents revenues by type:

		Three Months Ended September 30,
		2026				2025				$ Change				% Change
Product revenues		$	575,067			$	434,793			$	140,274				32.3	%
Service and other revenues			2,136,323				1,294,980				841,343				65.0	%
Total revenues		$	2,711,390			$	1,729,773			$	981,617				56.7	%

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
Product revenues		$	3,555,702			$	2,880,210			$	675,492				23.5	%
Service and other revenues			7,742,755				3,911,068				3,831,687				98.0	%
Total revenues		$	11,298,457			$	6,791,278			$	4,507,179				66.4	%

Product revenues for the three months ended September 30, 2026 and 2025 were $575,067 and $434,793, respectively, an increase of $140,274 (32.3%), and $3,555,702 and $2,880,210 for the nine months ended September 30, 2026 and 2025, respectively, an increase of $675,492 (23.5%). The nine-month increase reflects the recognition of $1,844,798 upon completion of the 2026 Country Stampede music festival, compared to $1,380,616 upon completion of the 2025 festival, an increase of $464,182, together with increased ticket inventory sales volume and improved sell-through of inventory acquired through sponsorships and partnerships. The third-quarter increase reflects ticket inventory sales, as the festival is held and recognized in the second quarter of each year.

Service and other revenues for the three months ended September 30, 2026 and 2025 were $2,136,323 and $1,294,980, respectively, an increase of $841,343 (65.0%), and $7,742,755 and $3,911,068 for the nine months ended September 30, 2026 and 2025, respectively, an increase of $3,831,687 (98.0%). The increases reflect higher transaction volumes on the TicketSmarter platform, increased consumer engagement, and improved monetization of ticketing transactions, supported by increased customer acquisition and marketing investment. Management continues to focus on optimizing pricing, managing marketing spend, and improving gross margins, which may result in continued variability in service revenues depending on event mix, market conditions, and the strategic prioritization of profitability over top-line growth.

Total revenues for the three months ended September 30, 2026 and 2025 were $2,711,390 and $1,729,773, respectively, an increase of $981,617 (56.7%), and $11,298,457 and $6,791,278 for the nine months ended September 30, 2026 and 2025, respectively, an increase of $4,507,179 (66.4%), due to the reasons noted above.

Cost of Revenue

Cost of product revenue consists of the cost of tickets purchased and held in inventory for resale, including write-offs of ticket inventory sold below cost or unsold following the related event date, together with the direct costs of live events and festivals produced by the Company, including artist guarantees and fees, staging, security, site and other production costs, event merchandise, and ticket refunds for Company-produced events.

Cost of service revenue consists of customer acquisition and marketing costs supporting the Company's online ticketing platform, including paid search and social media advertising and affiliate and partner fees, together with payment processing, fulfillment, and other transaction-based costs, including refunds.

The following table presents cost of revenue by type:

		Three Months Ended September 30,
		2026				2025				$ Change				% Change
Cost of product revenue		$	575,084			$	428,523			$	146,561				34.2	%
Cost of service revenue			1,927,357				1,111,577				815,780				73.4	%
Total cost of revenue		$	2,502,441			$	1,540,100			$	962,341				62.5	%

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
Cost of product revenue		$	4,943,729			$	4,357,017			$	586,712				13.5	%
Cost of service revenue			7,103,976				3,218,978				3,884,998				120.7	%
Total cost of revenue		$	12,047,705			$	7,575,995			$	4,471,710				59.0	%

Cost of product revenue for the three months ended September 30, 2026 and 2025 was $575,084 and $428,523, respectively, an increase of $146,561 (34.2%), and $4,943,729 and $4,357,017 for the nine months ended September 30, 2026 and 2025, respectively, an increase of $586,712 (13.5%). The third-quarter increase reflects higher ticket inventory sales volume. The nine-month increase primarily reflects the production costs of the 2026 Country Stampede music festival, including a $750,000 headline-artist performance guarantee together with staging, security, site, and other festival production costs, which were higher than the comparable 2025 festival costs, and higher ticket inventory sales volume. Cost of product revenue as a percentage of product revenues was approximately 100.0% for the three months ended September 30, 2026 compared to approximately 98.6% for the three months ended September 30, 2025, and improved to approximately 139.0% from approximately 151.3% for the nine-month periods, reflecting improved sell-through and pricing on ticket inventory and product revenue growth outpacing festival cost growth. Cost of product revenue exceeded product revenues in the nine-month periods, driven by the festival's production cost structure and by write-offs of ticket inventory sold below cost or unsold following event dates.

Cost of service revenue for the three months ended September 30, 2026 and 2025 was $1,927,357 and $1,111,577, respectively, an increase of $815,780 (73.4%), and $7,103,976 and $3,218,978 for the nine months ended September 30, 2026 and 2025, respectively, an increase of $3,884,998 (120.7%). The increases were primarily attributable to increased customer acquisition and marketing investment, principally paid search advertising, supporting the growth in platform transaction volume, together with higher affiliate and partner fees and payment processing and other transaction-based costs that scale with platform activity. Cost of service revenue as a percentage of service revenues was approximately 90.2% and 85.8% for the three months ended September 30, 2026 and 2025, respectively, and approximately 91.7% and 82.3% for the nine-month periods; the increases in the cost ratio reflect the acceleration of customer acquisition spending during the current-year period, while management monitors return on marketing investment and remains focused on improving platform margins.

Total cost of revenue for the three months ended September 30, 2026 and 2025 was $2,502,441 and $1,540,100, respectively, an increase of $962,341 (62.5%), and $12,047,705 and $7,575,995 for the nine months ended September 30, 2026 and 2025, respectively, an increase of $4,471,710 (59.0%), due to the reasons noted above.

Gross Profit (Loss)

The following table presents gross profit (loss):

		Three Months Ended September 30,
		2026				2025				$ Change				% Change
Gross profit		$	208,949			$	189,673			$	19,276				10.2	%

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
Gross loss		$	(749,248	)		$	(784,717	)		$	35,469				4.5	%

Gross profit for the three months ended September 30, 2026 and 2025 was $208,949 and $189,673, respectively, an improvement of $19,276 (10.2%), and gross loss was $(749,248) and $(784,717) for the nine months ended September 30, 2026 and 2025, respectively, an improvement of $35,469 (4.5%).

The improvement in the three-month period reflects higher ticket inventory sales and platform transaction volume, partially offset by the decline in service margin resulting from accelerated customer acquisition and marketing investment described under Cost of Revenue above. The improvement in the nine-month period reflects the contribution of the 2026 Country Stampede music festival and the change in the method of estimating the inventory valuation reserve described in Note 5, Inventories, partially offset by the festival's production cost structure, including the $750,000 headline-artist performance guarantee, continued write-offs of ticket inventory sold below cost or unsold following event dates, and the decline in service margin.

Cost of revenue as a percentage of total revenues was approximately 92.3% for the three months ended September 30, 2026 compared to approximately 89.0% for the three months ended September 30, 2025, and improved to approximately 106.6% from approximately 111.6% for the nine-month periods; cost of revenue continued to exceed total revenues in the nine-month periods. Management's objective is to reach positive gross margins through festival sponsorship growth, ticket inventory management, pricing discipline on marketplace transactions, and continued cost-containment initiatives.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2026 and 2025 were $2,718,242 and $1,342,874, respectively, representing an increase of $1,375,368 (102.4%), and $5,645,922 and $5,004,806 for the nine months ended September 30, 2026 and 2025, respectively, representing an increase of $641,116 (12.8%). The significant components of selling, general and administrative expenses are as follows:

		For the Three Months Ended September 30,								For the Nine months Ended September 30,
		2026				2025				2026				2025
Research and development expense			-				-				-				-
Selling, advertising and promotional expense			356,207				34,557				869,752				206,049
General and administrative expense			2,362,035				1,308,317				4,776,170				4,798,757
Total		$	2,718,242			$	1,342,874			$	5,645,922			$	5,004,806

Research and development expenses. Continuing operations have no research and development expenses in any period presented; research and development activities historically related to the Video Solutions business, whose results are reported within discontinued operations.

Selling, advertising and promotional expenses. Selling, advertising and promotional expenses totaled $356,207 and $34,557 for the three months ended September 30, 2026 and 2025, respectively, representing an increase of $321,650 (930.8%), and $869,752 and $206,049 for the nine months ended September 30, 2026 and 2025, respectively, representing an increase of $663,703 (322.1%). The increases reflect higher marketing and promotional activity, primarily related to the 2026 Country Stampede music festival held in June 2026, together with marketing for the TicketSmarter platform.

General and administrative expense. General and administrative expenses totaled $2,362,035 and $1,308,317 for the three months ended September 30, 2026 and 2025, respectively, representing an increase of $1,053,718 (80.5%), and $4,776,170 and $4,798,757 for the nine months ended September 30, 2026 and 2025, respectively, representing a decrease of $22,587 (0.5%). The third-quarter increase is primarily attributable to $624,583 of non-cash expense for common stock issued for consulting services, acquisition-related costs and a collaborative arrangement, together with professional fees associated with the proposed acquisition of TFL, LLC. For the nine-month period, these costs were more than offset by a decrease in administrative salaries and continued reductions in headcount, together with lower professional fees, as the Company continues to right-size its expenses relative to its revenues following the dispositions described above.

Operating Loss

For the reasons previously stated, our operating loss was $(2,509,293) and $(1,153,201) for the three months ended September 30, 2026 and 2025, respectively, representing an increase in operating loss of $1,356,092 (117.6%), and $(6,395,170) and $(5,789,523) for the nine months ended September 30, 2026 and 2025, respectively, representing an increase of $605,647 (10.5%). Operating loss as a percentage of revenues was 92.5% for the three months ended September 30, 2026 as compared to 66.7% for the three months ended September 30, 2025, and improved to 56.6% from 85.2% for the nine-month periods.

Interest Income

Interest income increased to $105,184 for the three months ended September 30, 2026, from $17,887 for the three months ended September 30, 2025, and to $237,471 for the nine months ended September 30, 2026, from $95,808 for the nine months ended September 30, 2025, primarily reflecting interest on the promissory notes received as partial consideration in connection with the January 2026 sale of Nobility Healthcare and the August 2026 sale of the Video Solutions business, including amortization of the related discounts.

Interest Expense

We incurred interest expense of $50,894 and $90,697 during the three months ended September 30, 2026 and 2025, respectively, representing a decrease of $39,803 (43.9%), and $146,992 and $960,250 for the nine months ended September 30, 2026 and 2025, respectively, representing a decrease of $813,258 (84.7%). The decrease is primarily attributable to the 2025 repayment of the senior secured promissory notes and merchant advances, which carried significant debt discount amortization, together with the conversion of the 2025 Secured Notes to common stock during the three months ended March 31, 2026, which eliminated future interest expense on those instruments. Interest expense in 2026 consists primarily of non-cash amortization of the discount on the note payable - related party and interest and discount amortization on the EIDL loan and the unsecured promissory notes.

Other Income

The Company recognized other income of $21,425 and $217,136 for the three months ended September 30, 2026 and 2025, respectively, and $41,917 and $252,603 for the nine months ended September 30, 2026 and 2025, respectively.

Change in Fair Value of Investment in Equity Securities

The Company recorded a loss of $237,320 for the three and nine months ended September 30, 2026 on the remeasurement to fair value of the preferred stock received as partial consideration in the sale of the Video Solutions business. There was no comparable item in the prior-year periods. See Note 8, Other Assets, and Note 10, Fair Value Measurement.

Loss on Litigation Settlement

During the three months ended June 30, 2026, the Company recorded a charge of $984,000 in respect of the settlement of litigation with a former consultant of Kustom 440, Inc., comprising $600,000 payable in cash and $384,000 representing the fair value of 30,000 shares of the Company's common stock issuable to the plaintiff, which were issued on August 7, 2026. There was no comparable charge in the prior-year periods. See Note 13, Commitments and Contingencies.

Gain on Extinguishment of Liabilities

The Company recorded gains on the extinguishment of liabilities of $-0- and $13,275 for the three months ended September 30, 2026 and 2025, respectively, and $63,259 and $2,243,991 for the nine months ended September 30, 2026 and 2025, respectively. The 2026 gain was recognized during the three months ended March 31, 2026 and reflects discounts received in connection with the negotiated settlement of outstanding payables. The 2025 gains principally reflect discounts received in connection with the negotiated settlement of outstanding payables and contract liabilities during the three months ended March 31, 2025.

Change in Fair Value of Derivative Liabilities

The change in fair value of derivative liabilities was a gain of $10 and a gain of $839 for the three months ended September 30, 2026 and 2025, respectively, and a loss of $(289,351) and a gain of $3,373,919 for the nine months ended September 30, 2026 and 2025, respectively. The 2026 nine-month loss relates primarily to the increase in the fair value of the bifurcated conversion feature of the 2025 Secured Notes through the dates of conversion during the three months ended March 31, 2026, at which point the aggregate fair value of $1,142,191 was reclassified to additional paid-in capital; the remaining warrant derivative liability of $4 at September 30, 2026 consists of a Series B warrant measured at the closing market price of the common stock. The 2025 gains related primarily to declines in the fair value of the warrant derivative liabilities associated with the February 2025 public equity offering and the June 2024 offering. See Note 10, Fair Value Measurement, and Note 15, Common Stock Purchase Warrants.

Income (loss) before Income Tax Benefit

As a result of the above, we reported a loss before income taxes from continuing operations of $(2,670,888) for the three months ended September 30, 2026, compared to $(994,761) for the three months ended September 30, 2025, and a loss of $(7,710,186) for the nine months ended September 30, 2026, compared to a loss of $(783,452) for the nine months ended September 30, 2025.

Income Tax Benefit

We recorded no income tax expense or benefit for any period presented. The effective tax rate varied from the expected statutory rate due to our continuing to provide a 100% valuation allowance on net deferred tax assets, which we have determined to maintain as of September 30, 2026 because of recurring operating losses. We had approximately $159,790,000 of federal net operating loss carryforwards and $1,685,000 of research and development tax credit carryforwards as of September 30, 2026 available to offset future net taxable income. See Note 12, Income Taxes.

Net Loss From Continuing Operations

As a result of the above, we reported a net loss from continuing operations of $(2,670,888) for the three months ended September 30, 2026, compared to $(994,761) for the three months ended September 30, 2025, an increase of $1,676,127, and a net loss from continuing operations of $(7,710,186) for the nine months ended September 30, 2026, compared to $(783,452) for the nine months ended September 30, 2025, an increase of $6,926,734. The nine-month 2025 period included significant non-recurring gains, including a $3,373,919 gain on the change in fair value of derivative liabilities and a $2,243,991 gain on extinguishment of liabilities.

Net Income (Loss) From Discontinued Operations

The Company recognized income from discontinued operations of $5,017,203 for the three months ended September 30, 2026, compared to $31,419 for the three months ended September 30, 2025, and a loss from discontinued operations of $(375,582) for the nine months ended September 30, 2026, compared to a loss of $(402,012) for the nine months ended September 30, 2025. The loss for the nine months ended September 30, 2026 consists of the following components: (i) the $(4,013,669) first-quarter loss on the disposition of Nobility Healthcare; (ii) $(416,201) of cumulative provisional earn-out adjustments to the note receivable, including a gain of $22,852 recognized during the three months ended September 30, 2026; (iii) $(1,011,478) of operating losses of the Video Solutions business, of which $(71,415) was recorded during the three months ended September 30, 2026; and (iv) the $5,065,766 gain on the sale of the Video Solutions business, net of costs to sell, recognized during the three months ended September 30, 2026. The 2025 amounts represent the operating results of both businesses prior to their dispositions. See Note 22, Discontinued Operations.

Net Income (Loss) Attributable to Noncontrolling Interests - Discontinued Operations

Net income attributable to noncontrolling interests, representing the 49% interest in Nobility Healthcare held by third parties, was $58,525 and $118,133 for the three and nine months ended September 30, 2025, respectively, and is included within discontinued operations. The Company has no noncontrolling interests as of September 30, 2026.

Net Loss Attributable to Common Stockholders

As a result of the above, we reported net income attributable to common stockholders of $2,346,315 for the three months ended September 30, 2026, compared to a net loss of $(1,021,867) for the three months ended September 30, 2025, an improvement of $3,368,182, reflecting primarily the gain on the sale of the Video Solutions business, and a net loss of $(8,085,768) for the nine months ended September 30, 2026, compared to $(1,303,597) for the nine months ended September 30, 2025, an increase in net loss of $6,782,171, reflecting primarily the loss on the disposition of Nobility Healthcare and the non-recurrence of the 2025 gains described above, partially offset by the gain on the sale of the Video Solutions business.

Basic and Diluted Income/(Loss) per Share

The basic and diluted loss per share from continuing operations was $(5.13) for the three months ended September 30, 2026, compared to $(86.38) for the three months ended September 30, 2025, and $(35.44) for the nine months ended September 30, 2026, compared to $(126.31) for the nine months ended September 30, 2025. The basic and diluted income (loss) per share from discontinued operations was $9.64 and $(2.35) for the three months ended September 30, 2026 and 2025, respectively, and $(1.73) and $(83.86) for the nine months ended September 30, 2026 and 2025, respectively, resulting in net basic and diluted income per share attributable to common stockholders of $4.51 and a net loss per share of $(88.73) for the three months ended September 30, 2026 and 2025, respectively, and a net loss per share of $(37.16) and $(210.17) for the nine months ended September 30, 2026 and 2025, respectively. All outstanding stock options, common stock purchase warrants, and other potentially dilutive securities were considered antidilutive and therefore excluded from the calculation of diluted income (loss) per share for all periods presented. See Note 16, Stockholders' Equity, regarding the reverse stock splits.

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 a net loss of $8,085,768 for the nine months ended September 30, 2026, including a loss from continuing operations of $7,710,186, used $4,833,195 of cash in operating activities of continuing operations, and had an accumulated deficit of $149,812,789 as of September 30, 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 ELOC providing up to $25,000,000 over a 36-month term, under which approximately $19.4 million remained available as of September 30, 2026, subject to the terms and conditions of the facility and applicable Nasdaq rules, (ii) the sale of the Video Solutions business, completed on August 3, 2026, under which the Company received cash consideration of $1,250,000 together with a $4,250,000 secured promissory note and preferred stock of the buyer, (iii) the January 2026 divestiture of Nobility Healthcare, which eliminated the operating losses and working capital requirements of the Revenue Cycle Management business, and (iv) ongoing cost-reduction initiatives. Management's plans are not entirely within the Company's control, including the availability of the ELOC, which depends in part on the market price and trading volume of the Company's common stock and continued listing on Nasdaq, and 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 September 30, 2026, we had cash and cash equivalents of $1,715,820, compared to $757,369 as of December 31, 2025, representing a net increase of $958,451. The changes in cash during the nine months ended September 30, 2026 resulted from the following cash flow activities:

		Nine months ended September 30,
		2026				2025
Net cash used in operating activities - continuing operations		$	(4,833,195	)		$	(7,728,061	)
Net cash used in operating activities - discontinued operations			(150,571	)			(1,268,370	)
Net cash provided by (used in) investing activities - continuing operations			1,132,584				(284,750	)
Net cash used in investing activities - discontinued operations			(12,074	)			(64,569	)
Net cash provided by financing activities - continuing operations			4,821,707				9,684,796
Net increase in cash and cash equivalents		$	958,451			$	339,046

	●	Operating activities:	$4,833,195 of net cash used in operating activities from continuing operations for the nine months ended September 30, 2026, compared to $7,728,061 for the nine months ended September 30, 2025. Net cash used in operating activities in 2026 reflects the net loss from continuing operations, adjusted for non-cash items including common stock issued for services and in settlement of litigation, the change in fair value of derivative liabilities and of the investment in equity securities, stock-based compensation and non-cash interest, and changes in operating assets and liabilities. The prior-period comparative reflected significant non-cash adjustments, including a $(3,373,919) gain on change in fair value of derivative liabilities, a $(2,243,991) gain on extinguishment of liabilities, and $751,570 of non-cash interest expense, together with significant reductions in accounts payable funded by proceeds from the February 2025 public equity offering. Net cash used in operating activities of discontinued operations was $150,571 for the nine months ended September 30, 2026, compared to $1,268,370 for the nine months ended September 30, 2025.
	●	Investing activities:	$1,132,584 of net cash provided by investing activities from continuing operations for the nine months ended September 30, 2026, compared to $284,750 of net cash used in investing activities from continuing operations for the nine months ended September 30, 2025. Investing activities during the nine months ended September 30, 2026 consisted of $1,250,000 of proceeds from the sale of the Video Solutions business, $100,000 of proceeds received in connection with the Nobility Healthcare disposition and $118,436 of principal collected on the Nobility Healthcare promissory note, partially offset by $287,120 of capital expenditures for property, plant and equipment and $48,732 of purchases of intangible assets. Net cash used in investing activities of discontinued operations was $12,074 for the nine months ended September 30, 2026, compared to $64,569 for the nine months ended September 30, 2025.

●

Financing activities:

$4,821,707 of net cash provided by financing activities for the nine months ended September 30, 2026, compared to $9,684,796 for the nine months ended September 30, 2025. Financing activities during the nine months ended September 30, 2026 consisted of $4,979,698 of net proceeds from issuances of common stock under the ELOC and $250,000 of proceeds from an unsecured promissory note, partially offset by $360,347 of payments of equity issuance costs, $45,000 of principal payments on the unsecured promissory notes and $2,644 of payments on the EIDL loan. The prior-year period consisted primarily of $14,308,300 of net proceeds from the February 2025 public equity offering and $610,000 of net proceeds from the September 2025 senior secured convertible notes, partially offset by $3,600,000 of repayments of senior secured promissory notes and $1,922,750 of repayments of merchant advances.

The net result of these activities was an increase in cash of $958,451 for the nine months ended September 30, 2026.

Working Capital

As of September 30, 2026, the Company had $1,715,820 of cash and cash equivalents and a net negative working capital position of $(1,290,000), compared to a net negative working capital position of $(1,496,587) as of December 31, 2025. Excluding amounts classified as held for sale, the Company's working capital position as of December 31, 2025 was $(4,487,145), representing an improvement of $3,197,145 as of September 30, 2026. The improvement in working capital was primarily driven by proceeds from issuances of common stock under the ELOC, the cash and the current portion of the promissory notes received in the sales of the Video Solutions business and Nobility Healthcare, and the conversion of the 2025 Secured Notes into common stock, including the extinguishment of the associated derivative liabilities upon conversion, partially offset by the accrued litigation settlement.

Accounts receivable, other receivables, and the current portion of notes receivable represented $1,327,147 of working capital at September 30, 2026. Management intends to collect outstanding receivables on a timely basis, which is expected to provide additional cash flow to support continuing operations. Inventories, consisting of ticket inventory, represented $206,547 of working capital as of September 30, 2026. The Company actively manages ticket inventory levels against event dates, as unsold ticket inventory is written off following the related event date.

Lease Commitments and Other Contractual Obligations:

Total lease expense under the Company's operating leases related to continuing operations was $64,957 and $195,681 during the three and nine months ended September 30, 2026, respectively. As of September 30, 2026, operating lease obligations totaled $819,655, of which $200,240 is current, with undiscounted minimum future lease payments of $946,842, including $64,142 payable during the remainder of 2026. See Note 13, Commitments and Contingencies.

During the nine months ended September 30, 2026, the Company incurred capital expenditures of $287,120, 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.

The Company has 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. During the nine months ended September 30, 2026, the Company paid $245,347 under this arrangement. The Company's estimate with respect to the maximum reasonably possible future obligation under this arrangement is approximately $774,000, based upon the remaining undrawn commitment of the facility as of September 30, 2026. This obligation is strictly contingent upon the Company's discretionary future use of the facility. See Note 13, Commitments and Contingencies, for additional details.

The Company is also party to a Unit Purchase Agreement for the acquisition of TFL, LLC under which, if the transaction closes, the Company would pay $89.6 million in cash, subject to adjustment, repay up to $35.0 million of TFL's indebtedness and issue $22.4 million of common stock; closing is conditioned on, among other things, the Company obtaining sufficient financing. See Note 13, Commitments and Contingencies, and Note 23, Subsequent Events.

Debt obligations - As of September 30, 2026, debt obligations related to continuing operations totaled $735,852, net of unamortized discount of $132,587, of which $601,055 is current, consisting of the EIDL loan of $138,439 and unsecured promissory notes of $730,000. Principal payments of $480,898 are due during the remainder of 2026 and $253,677 during 2027. See Note 9, Debt Obligations. The foregoing excludes the related party note payable to a trust affiliated with a TicketSmarter officer with a net carrying value of $439,011 as of September 30, 2026 ($0 current, $439,011 long-term). See Note 17, Related Party Transactions, for additional details.

Litigation

We are party to various lawsuits and claims arising in the ordinary course of business. 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. During 2026, we settled the Kustom 440 former-consultant matter, recording a charge of $984,000 in the second quarter, and obtained a default judgment of $1,120,004 against Pharmaxx Medical, Inc. in the third quarter, for which no gain has been recognized; we are a defendant in the Noota Music matter, which seeks approximately $350,000, and the First Insurance Funding collection case, which claims $165,890, and have recorded no liability for either. 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 critical accounting estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2025. During the nine months ended September 30, 2026, we changed the method used to estimate the inventory valuation reserve for ticket inventory, as described in Note 5, Inventories, and began applying estimates of the fair value of notes receivable and other consideration received in connection with the dispositions of Nobility Healthcare and the Video Solutions business, including the earn-out adjustments to the Nobility Healthcare note, as described in Note 3, Notes Receivable, Note 10, Fair Value Measurement, and Note 22, Discontinued Operations. There have been no other material changes to our critical accounting estimates.

Inflation and Seasonality

Inflation has not materially affected us during the past fiscal year. Our business is seasonal: the Country Stampede music festival generates revenues in the second quarter, and TicketSmarter platform activity is driven by event scheduling throughout the year.