NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business:

Kustom Entertainment, Inc. (formerly Digital Ally, Inc.) was originally incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. and had no operations until 2004. On November 30, 2004, Vegas Petra, Inc. entered into a Plan of Merger with Digital Ally, Inc., at which time the merged entity was renamed Digital Ally, Inc.

On January 8, 2026, the Company changed its legal name from Digital Ally, Inc. to Kustom Entertainment, Inc. pursuant to a Certificate of Amendment to its Articles of Incorporation filed with the Secretary of State of the State of Nevada. The name change became effective on January 8, 2026, and the Company began trading on the Nasdaq Capital Market (“Nasdaq”) under its new name at the start of trading on January 8, 2026. In connection with the name change, the Company also changed its Nasdaq trading symbol from “DGLY” to “KUST.” The name change and symbol change did not affect the Company’s assets, liabilities, operations, or capital structure, and stockholders were not required to take any action with respect to their stock certificates. The Company’s board of directors (the “Board of Directors”) also approved a conforming amendment to the Company’s Amended and Restated Bylaws solely to reflect the new corporate name. Unless the context otherwise requires, references in these condensed consolidated financial statements to the “Company,” “Digital Ally,” “Digital,” “Kustom” or similar terms refer to Kustom Entertainment, Inc. and its consolidated subsidiaries.

The Company formed Digital Ally International, Inc. in August 2009 to facilitate the export sales of its digital video imaging and storage products. The Company formed TicketSmarter, Inc. on September 1, 2021, upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its global ticketing operations. The Company formed Kustom Entertainment, Inc. and Kustom 440, Inc. in 2022 to create and produce live entertainment experiences directly for consumers.

The business of the Registrant, Kustom Entertainment, Inc. (formerly Digital Ally, Inc.), together with its wholly owned subsidiaries Digital Ally International, Inc., Digital Ally Healthcare, LLC, TicketSmarter, Inc., and Kustom 440, Inc., collectively referred to as the “Company,” is conducted through one reportable operating segment: entertainment (“Entertainment”). The Entertainment segment generates revenue through the production of live events and concerts, including the Company’s annual Country Stampede music festival. This segment also acts as an intermediary between ticket buyers and sellers through the Company’s secondary ticketing platform, TicketSmarter.com, and includes the acquisition of tickets from primary sellers for resale through various platforms.

The Company previously operated two additional reportable segments. The Revenue Cycle Management (“Revenue Cycle Management”) segment reflected the operations of Nobility Healthcare, LLC (“Nobility Healthcare”); following the sale of Nobility Healthcare on January 8, 2026, effective January 1, 2026, the results of the revenue cycle management business have been classified as discontinued operations for all periods presented and are no longer reported as a separate segment; its assets and liabilities were presented as held for sale as of December 31, 2025 only and were disposed of upon completion of the sale. The Video Solutions (“Video Solutions”) segment is the Company’s legacy business that produces digital video imaging, storage products, and related security and commercial applications, including both service and product revenues through subscription models offering cloud-based services and warranty solutions, as well as hardware sales for video and safety solutions. During the three months ended June 30, 2026, the Company entered into an agreement to sell the Video Solutions business, which was accordingly classified as held for sale and as a discontinued operation; its results have been classified as discontinued operations for all periods presented and it is no longer reported as a separate segment. The sale was completed on August 3, 2026, subsequent to the end of the reporting period. See Note 22, Discontinued Operations, and Note 23, Subsequent Events.

Going Concern Matters and Management’s Plans

The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses and negative cash flows from operating activities since inception. The Company incurred a net loss of $10,432,083 for the six months ended June 30, 2026, including a loss from continuing operations of $5,039,298, which includes a charge of $984,000 in respect of a litigation settlement described in Note 13, Commitments and Contingencies, used $3,832,974 of cash in operating activities of continuing operations, and had an accumulated deficit of $152,159,104 and a working capital deficit of $2,052,762 as of June 30, 2026. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these condensed consolidated financial statements are issued.

During the six months ended June 30, 2026, the Company generated net proceeds of $4,004,659 from the issuance of common stock under its committed equity facility (the “ELOC”), which provides for the purchase of up to $25,000,000 of common stock over a 36-month term and under which approximately $19.36 million remained available as of the date of this report. Availability under the facility is subject to its terms and conditions, depends in part on the market price and trading volume of the Company’s common stock, and is subject to applicable Nasdaq rules. Management expects to continue accessing the capital markets until the Company achieves consistent positive cash flow from operations; however, there can be no assurance as to the timing or availability of such financing.

The Company completed two divestitures intended to eliminate operating losses and working capital requirements associated with its non-core businesses. Effective January 1, 2026, the Company sold its 51% membership interest in Nobility Healthcare, exiting the revenue cycle management business. On August 3, 2026, subsequent to the end of the reporting period, the Company completed the sale of its Video Solutions business, receiving cash consideration of $1,250,000, including a non-refundable extension payment of $250,000 received in July 2026, together with a $4,250,000 secured promissory note bearing interest at 7% per annum over a three-year term and shares of preferred stock of the buyer. The Company also continued its cost-reduction initiatives during the period, including reductions in administrative headcount and professional fees.

The Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital to fund its operational plans, meet its customary payment obligations, and otherwise execute its business plan. There can be no assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing when needed and obtain it on terms acceptable or favorable to the Company. Management’s plans are not entirely within the Company’s control. Notwithstanding the measures described above, substantial doubt about the Company’s ability to continue as a going concern has not been alleviated as of the date these condensed consolidated financial statements are issued.

The following is a summary of the Company’s Significant Accounting Policies:

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information in accordance with ASC 270-10-50, Interim Reporting, and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026.

The balance sheet as of December 31, 2025 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. The December 31, 2025 balance sheet has been recast to present the assets and liabilities of the Video Solutions business as held for sale, as described above.

For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2025. Unless otherwise indicated, the information in these notes relates to the Company’s continuing operations.

Basis of Consolidation:

The accompanying condensed consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Digital Ally International, Inc., Digital Ally Healthcare, LLC, TicketSmarter, Inc., and Kustom 440, Inc. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates:

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to, determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair value of warrants and options, the fair value of notes receivable and other consideration received in connection with dispositions, the recognition of revenue, inventory valuation reserve, allowances for doubtful accounts and other receivables, incremental borrowing rate on leases, the valuation allowance for deferred tax assets, and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.

Fair Value of Financial Instruments:

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and subordinated notes payable approximate fair value because of the short-term nature of these items.

Revenue Recognition:

The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

The Company generates revenue from both product and service offerings. Revenue from continuing operations is generated by the Entertainment business. Revenue from each of the Video Solutions business and the Revenue Cycle Management business, for periods prior to its sale on January 8, 2026, is reported within income (loss) from discontinued operations for all periods presented. The Company reports all revenues on a gross basis, except for certain service revenues within the Entertainment business and the Revenue Cycle Management service fees, and all revenues are reported net of sales taxes.

Entertainment

The Company reports ticketing revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the underlying ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.

The Company sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of the sale, therefore controlling the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.

The Company also acts as an intermediary between buyers and sellers through online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As the Company does not control the ticket prior to the transfer, the Company acts as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment is due at the time of sale.

Video Solutions (Discontinued Operations)

Revenue of the Video Solutions business, which is reported within income (loss) from discontinued operations for all periods presented, consists of product and service revenue. Product revenue is recognized when control of the product is transferred to the customer, which typically occurs at shipment; customers do not have a right to return products other than for warranty reasons. Service and other revenue is comprised of revenues from extended warranties, repair services, cloud revenue, and software revenue; revenue for extended warranty, cloud services, and other software-based products is recognized on a straight-line basis over the contract or service period, and repair services revenue is recognized upon customer acceptance. In arrangements with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on its relative standalone selling price.

Revenue Cycle Management (Discontinued Operations)

The Revenue Cycle Management business, which was sold on January 8, 2026, is reported within income (loss) from discontinued operations for all periods presented. The Company reported revenue cycle management revenues on a net basis, as its primary source of revenue was its end-to-end service fees, which were generally determined as a percentage of the invoice amounts collected. These service fees were reported as monthly revenue upon completion of the Company’s performance obligation to provide the agreed-upon service.

Deferred Revenue

Deferred revenue consists of payments received in advance of the Company’s satisfaction of the related performance obligations, principally advance ticket, camping, and sponsorship sales for the Company’s annual Country Stampede music festival. These amounts are recorded as contract liabilities upon receipt and are recognized as revenue upon completion of the related event, the point at which the Company’s performance obligation is satisfied. Deferred revenue of continuing operations is presented within current liabilities in the condensed consolidated balance sheets, as the related events are expected to occur within one year. See Note 21, Deferred Revenue, for the composition and activity of deferred revenue balances.

Cash and cash equivalents:

Cash and cash equivalents include funds on hand, in bank and short-term investments with original maturities of ninety (90) days or less.

The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC). At times, account balances may exceed the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions.

Accounts Receivable:

Accounts receivables are carried at original invoice amount less an allowance for doubtful accounts, which is estimated in accordance with ASC 326, Financial Instruments — Credit Losses. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, current economic conditions, and reasonable and supportable forecasts of future conditions that may affect the collectability of the reported amount. Trade receivables are written off when deemed uncollectible, and recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade receivables.

Goodwill and Other Intangibles:

Goodwill - In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles — Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31st, and more frequently if events and circumstances indicate that goodwill might be impaired.

Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.

The Company has adopted ASU 2017-04, which simplifies goodwill impairment measurement by eliminating the second step from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

The Company determines the fair value of its reporting units using a weighting of the income and market valuation approaches. The income approach applies a fair value methodology to each reporting unit based on discounted cash flows. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internally-developed forecasts of revenue and profitability, estimation of the long-term rate of growth for the business, estimation of the useful life over which cash flows will occur, and determination of the weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested. Under the market approach, the Company estimates the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the income and market approach include: future levels of revenue growth, gross profit margin, EBITDA as a percentage of revenue, cash-free debt-free net working capital as a percentage of revenue, capital expenditures as a percentage of revenue, discount rate, selection of guideline public companies, and revenue market multiples.

Long-lived and Other Intangible Assets - The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which the Company has determined to be the business level.

Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available.

Intangible assets include deferred patent costs, license agreements, trademarks and trade names. Legal expenses incurred in preparation of patent applications have been deferred and will be amortized over the useful life of granted patents. Costs incurred in preparation of applications that are not granted will be charged to expense at that time. The Company has entered into several sublicense agreements under which it has been assigned the exclusive rights to certain licensed materials used in its products. These sublicense agreements generally require upfront payments to obtain exclusive rights to such material. The Company capitalizes the upfront payments as intangible assets and amortizes such costs over their estimated useful life on a straight-line method.

Fair value of assets and liabilities acquired in business combinations:

The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date, with any excess recorded as goodwill. Transaction costs associated with acquisitions are expensed as incurred and included in selling, general and administrative expenses in the condensed consolidated statements of operations.

Inventories:

Inventories of continuing operations consist of tickets to live events held by the Entertainment business, which are carried at the lower of cost or net realizable value. Any unsold tickets remaining in inventory after the event are fully written off. Management establishes an inventory reserve for estimated losses on ticket inventory held at the balance sheet date. See Note 5, Inventories.

Inventories of the Video Solutions business, which are included within assets of the Video Solutions business held-for-sale in the condensed consolidated balance sheets, consist of electronic parts, circuitry boards, camera parts and ancillary parts (collectively, “components”), work-in-process, and finished goods, carried at the lower of cost or net realizable value, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor, and manufacturing overhead. Manufacturing inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned changes to products, and known trends in markets and technology. Changes in support plans or technology could have a significant impact on obsolescence. To support its worldwide service operations, the Video Solutions business maintains service spare parts inventory, consisting of both consumable and repairable spare parts; consumables are charged to cost of goods sold when issued during a service call, and the net carrying value of repairable spare parts is reduced over the related product group’s post-production service life, which is generally seven to twelve years.

Prepaid inventory represents advance payments made to suppliers for inventory not yet received. The Company periodically evaluates the recoverability of prepaid inventory balances and records an allowance when amounts are not expected to be fully realized.

Property, plant and equipment:

Property, plant and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful life of the asset, which ranges from three to thirty years, other than the infinite useful life of land. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.

Leases:

The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will evaluate whether to account for the lease as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheet as of June 30, 2026 and December 31, 2025. Finance leases would be included in property, plant and equipment, net, and long-term debt and finance lease obligations on the balance sheet. The Company had operating leases for copiers, offices, and warehouse space at June 30, 2026 and December 31, 2025, but no finance leases.

ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the operating lease liabilities if the operating lease does not provide an implicit rate. Lease terms may include the option to extend when the Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

The Company elected to apply the short-term lease measurement and recognition exemption, under which ROU assets and lease liabilities are not recognized for short-term leases.

Warranties:

Products of the Video Solutions business, which is reported as a discontinued operation, carry explicit product warranties that extend up to two years from the date of shipment, and accrued warranty costs are included within liabilities of the Video Solutions business held for sale in the condensed consolidated balance sheets. The Company records a provision for estimated warranty costs based upon historical warranty loss experience and periodically adjusts these provisions to reflect actual experience. 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.

Income Taxes:

Deferred taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company applies the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 740 – Income Taxes, which provides a framework for accounting for uncertainty in income taxes and a comprehensive model to recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax return. The Company initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, and its recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As it obtains additional information, the Company may need to periodically adjust its recognized tax positions and tax benefits. These periodic adjustments may have a material impact on its condensed consolidated statements of operations.

The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the condensed consolidated statements of operations. There was no interest expense related to the underpayment of estimated taxes during the three and six months ended June 30, 2026 and 2025. There were no penalties in the three and six months ended June 30, 2026 and 2025.

The Company is subject to taxation in the United States and various states. The Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2022 and all prior tax years for federal tax purposes, and 2023 and all prior years for state tax purposes.

For the three and six months ended June 30, 2026 and 2025, the Company recorded no income tax expense or benefit. The Company maintains a full valuation allowance against its net deferred tax assets as it is more likely than not that such assets will not be realized. Accordingly, no tax benefit has been recognized on the Company’s pretax losses for the three and six months ended June 30, 2026 and 2025.

Research and Development Expenses:

The Company expenses all research and development costs as incurred. Research and development costs have historically been incurred by the Video Solutions business, and such costs are reported within income (loss) from discontinued operations for all periods presented. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Costs incurred after achievement of technological feasibility were not significant, and software development costs were expensed as incurred during the three and six months ended June 30, 2026 and 2025.

Warrant Derivative Liabilities and Bifurcated Embedded Derivatives:

In accordance with ASC 815-40, Derivatives and Hedging: Contracts in an Entity’s Own Equity, entities must consider whether to classify contracts that may be settled in their own stock, such as warrants to purchase shares of common stock, as equity of the entity or as an asset or liability. If an event that is not within the entity’s control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. The Company has determined that because the terms of the various warrants issued and remaining outstanding include a provision that entitles all the warrant holders to receive cash for their warrants in the event of a qualifying cash tender offer, while only certain of the holders of the underlying shares of common stock would be entitled to cash, its warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.

In addition, the Company evaluates the terms of its debt instruments for embedded features that require bifurcation under ASC 815-15, Derivatives and Hedging: Embedded Derivatives. When a convertible note contains a conversion feature or other embedded derivative that is not clearly and closely related to the host debt instrument and meets the definition of a derivative, the Company bifurcates the embedded feature from the host instrument and records it as a separate derivative liability measured at fair value. The host debt instrument is recorded at its residual carrying value after the bifurcation. The bifurcated embedded derivative and any detachable warrants issued in connection with the same debt instrument are initially recorded at their respective fair values, with any excess of the aggregate fair value over the proceeds allocated to the host note recognized immediately in earnings as a day-one loss. Subsequent changes in fair value of both the warrant derivative liabilities and bifurcated embedded derivatives are reported in earnings each period.

Volatility in the price of the Company’s common stock may result in significant changes in the value of these derivatives and resulting gains and losses on its condensed consolidated statements of operations.

Stock-Based Compensation:

The Company grants stock-based compensation to its employees, board of directors and certain third-party contractors. Share-based compensation arrangements may include the issuance of options to purchase common stock in the future or the issuance of restricted stock, which generally are subject to vesting requirements. The Company records stock-based compensation expense for all stock-based compensation granted based on the grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.

The Company estimates the grant-date fair value of stock-based compensation using the Black-Scholes valuation model. Assumptions used to estimate compensation expense are determined as follows:

Segment Reporting

The accounting guidance on segment reporting establishes standards for reporting information regarding operating segments in financial statements and requires selected information about those segments to be presented in the condensed consolidated financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer, or “CODM”) in making decisions about how to allocate resources and assess performance. Following the classification of the Video Solutions business as a discontinued operation during the three months ended June 30, 2026, the Company’s continuing operations consist of one reportable segment, Entertainment, which has dedicated personnel responsible for the business who report directly to the CODM. Corporate expenses represent the Company’s corporate administrative activities and are included in segment information but are not considered a separate reportable segment for financial reporting purposes. Prior-period segment information has been recast to conform to the current presentation.

The Company previously operated two additional reportable segments. The Revenue Cycle Management segment, which reflected the operations of Nobility Healthcare, was sold on January 8, 2026 (effective January 1, 2026), and the Video Solutions segment was classified as held for sale and a discontinued operation during the three months ended June 30, 2026. The results of both are classified as discontinued operations for all periods presented and are no longer included in segment reporting.

The Company adopted ASU 2023-07 in 2024 and applied the amendment retrospectively to all periods presented. See Note 20, Operating Segments, for additional information.

Non-Controlling Interests

Non-controlling interests in the Company’s condensed consolidated financial statements represent the ownership interests in consolidated subsidiaries not attributable, directly or indirectly, to the Company. The Company previously held a 51% equity interest in Nobility Healthcare, with the remaining 49% held by third-party venture partners, and consolidated Nobility Healthcare based on its controlling financial interest. Nobility Healthcare was sold on January 8, 2026, with an effective date of January 1, 2026; its results of operations are presented within discontinued operations for the 2025 comparative periods, and the 2026 periods include no operating results of Nobility Healthcare. Non-controlling interests relate solely to the 2025 periods; no amounts attributable to non-controlling interests are included in income or loss from continuing operations for any period presented, and the non-controlling owners’ share of Nobility Healthcare’s results for the 2025 periods is presented separately as net income attributable to noncontrolling interests in the condensed consolidated statements of operations. Upon completion of the sale, the noncontrolling interest was removed from stockholders’ equity as a component of the loss on disposition, and as of June 30, 2026, the Company has no non-controlling interests in any consolidated subsidiary. See Note 22, Discontinued Operations, for additional details.

Subscription Receivable:

Subscription receivables (also referred to as lease receivables) relate to the Video Solutions business and are included within assets of the Video Solutions business held-for-sale in the condensed consolidated balance sheets. Subscription receivables are carried at the original invoice amount less the total payments received pertaining to each individual customer’s subscription lease agreement. These agreements generally range from three to five years and are removed from subscription receivables upon termination of the agreement. The Company determines an allowance for doubtful accounts by regularly evaluating individual customer receivables and considering the customer’s financial condition, credit history, and current economic conditions.

Notes Receivable:

Notes receivable represent amounts owed to the Company under promissory notes, including notes received as consideration in connection with the disposition of businesses. Notes receivable are initially recorded at their estimated fair value on the date of origination, with any resulting discount amortized to interest income over the term of the note using the effective-interest method. The Company evaluates notes receivable for collectibility based on the borrower’s financial condition, payment history, collateral (if any), and current economic conditions, and records an allowance for credit losses when amounts are not expected to be fully realized.

Earn-out features embedded in notes received as consideration for the disposition of a business adjust the contractual principal amount of the note based on the post-closing performance of the divested business. Such adjustments are recognized as fair value adjustments to the note receivable, with the resulting gain or loss recorded within loss from discontinued operations in the period the adjustment is determined, in accordance with ASC 205-20, Discontinued Operations. The Company does not separately recognize the earn-out feature as a contingent consideration arrangement.

As of June 30, 2026, notes receivable consisted of a note received as partial consideration in connection with the sale of Nobility Healthcare on January 8, 2026. See Note 22, Discontinued Operations, for additional details.

Reverse Stock Split

The Company retroactively adjusts all historical share and per-share amounts reflected throughout the condensed consolidated financial statements and other financial information to reflect reverse stock splits as if they had occurred as of the earliest period presented. The par value per share of the Company’s common stock is not affected by reverse stock splits. See Note 16, Stockholders’ Equity for details regarding each reverse stock split effectuated during and subsequent to the periods presented.

Discontinued Operations

In accordance with ASC 205-20, Discontinued Operations, a component of the entity is reported as a discontinued operation when it is disposed of, or classified as held for sale, and represents a strategic shift having a major effect on the Company’s operations and financial results. A component is classified as held for sale when management with the appropriate authority commits to a plan to sell, the component is available for immediate sale in its present condition, an active program to locate a buyer has been initiated, and the sale is probable and expected to be completed within one year at a price reasonable in relation to current fair value.

Held-for-sale assets are measured at the lower of carrying amount or fair value less costs to sell, with depreciation and amortization ceasing upon classification. Results of operations of the disposal group are reported as discontinued operations, net of tax, with prior periods retrospectively reclassified. Assets and liabilities of the disposal group are presented separately as held for sale on the balance sheet in the period of classification.

The Company classified Nobility Healthcare as held for sale and a discontinued operation as of December 31, 2025 and completed its sale on January 8, 2026, effective January 1, 2026; accordingly, no assets or liabilities of Nobility Healthcare remain as of June 30, 2026. During the three months ended June 30, 2026, the Company classified its Video Solutions business as held for sale and a discontinued operation upon execution of the June 24, 2026 Asset Purchase Agreement, and the December 31, 2025 condensed consolidated balance sheet has been recast to present the assets and liabilities of the Video Solutions business as held for sale for comparative purposes.

Going Concern

The Company evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued, in accordance with ASC 205-40, Presentation of Financial Statements - Going Concern. When substantial doubt is determined to exist, the Company evaluates whether its plans intended to mitigate those conditions, when implemented, will alleviate substantial doubt. The Company’s evaluation is based on relevant conditions and events that are known and reasonably knowable as of the date the condensed consolidated financial statements are issued. The condensed consolidated financial statements have been prepared on a going-concern basis, which assumes the realization of assets and settlement of liabilities in the ordinary course of business, and do not include any adjustments that might result from the outcome of this uncertainty.

New Accounting Standards

The Company did not adopt any new accounting standards during the three months ended June 30, 2026 that had a material impact on its condensed consolidated financial statements. The Company’s adoption of ASU 2023-07, Improvements to Reportable Segment Disclosures, in 2024 and ASU 2023-09, Improvements to Income Tax Disclosures, in 2025 is described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

Recently Issued Accounting Pronouncements.

In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40), which requires public business entities to disclose disaggregated information about certain income statement expense line items, including employee compensation, depreciation, and intangible asset amortization. As clarified by ASU 2025-01 issued in January 2025, the ASU is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

In November 2024, the FASB issued ASU 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, which clarifies the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as induced conversions. The ASU is effective for annual reporting periods beginning after December 15, 2025 and interim periods within those fiscal years. The Company adopted this ASU effective January 1, 2026 and the adoption did not have a material impact on its condensed consolidated financial statements.

In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements, which clarifies when the interim reporting requirements of ASC 270 apply and improves the navigability of the related guidance. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

In December 2025, the FASB issued ASU 2025-12, Codification Improvements, which contains 33 improvements to U.S. GAAP across a wide range of topics, including clarifications related to diluted earnings per share calculations when a loss from continuing operations exists. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

The other recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) are not expected to have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.