KUSTOM ENTERTAINMENT, INC. Debt Disclosure

NOTE 10. DEBT OBLIGATIONS

 

Debt obligations is comprised of the following:

 SCHEDULE OF DEBT OBLIGATIONS

		December 31, 2025				December 31, 2024
Economic injury disaster loan (EIDL)		$	141,083			$	144,495
Unsecured Promissory note – Entertainment Segment			525,000				—
2025 Secured Notes			1,070,000				—
Commercial Extension of Credit- Entertainment Segment			—				100,000
Merchant Cash Advances – Video Solutions Segment			—				1,922,750
Senior Secured Promissory Notes-Issued November 2024			—				3,600,000
Total gross principal			1,736,083				5,767,245
Unamortized debt issuance costs			(890,716	)			(664,719	)
Debt obligations			845,367				5,102,526
Less: current maturities of debt obligations			707,826				4,961,443
Debt obligations, long-term		$	137,541			$	141,083

 

Debt obligations mature on an annual basis as follows as of December 31, 2025:

 SCHEDULE OF MATURITY OF DEBT OBLIGATIONS

		Gross Principal				Unamortized Discount				Net Carrying Value
2026		$	1,598,542			$	(890,716	)		$	707,826
2027			3,677				-				3,677
2028			3,817				-				3,817
2029			3,963				-				3,963
2030 and thereafter			126,084				-				126,084
Total		$	1,736,083			$	(890,716	)		$	845,367

 

 

2020 Small Business Administration Notes.

 

On May 12, 2020, the Company received $150,000 in loan funding from the SBA under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the recently enacted CARES Act. The EIDL is evidenced by a secured promissory note, dated May 8, 2020, in the original principal amount of $150,000 with the SBA, the lender.

 

Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of such note is thirty years, though it may be payable sooner upon an event of default under such note. Monthly principal and interest payments began in November 2022, after being deferred for thirty months after the date of disbursement and total $731 per month thereafter. Such note may be prepaid in part or in full, at any time, without penalty. The Company granted the SBA a continuing interest in and to any and all collateral, including but not limited to tangible and intangible personal property.

 

Unsecured Promissory Note

 

On February 1, 2025, the Company’s Entertainment Segment entered into a $600,000 unsecured promissory note with a third party. The promissory note bears an interest rate of 10.0% per annum, compounded monthly. Payments of principal and interest were originally due on May 5, 2025, however the parties agreed to extend the term for payments of principal and interest to begin July 1, 2025. The remaining outstanding balance totaled $525,000 as of December 31, 2025.

 

2024 Commercial Extension of Credit

 

On January 22, 2024, the Company’s Entertainment segment entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance with the Ticket Solution Agreement. The Lender, Ticket Evolution, Inc., agreed to extend, subject to the conditions hereof, and Borrower agreed to take, an advance for a sum of $75,000 with monthly advances of $100,000.

 

The advances made are recoupable from client service fees with no more than $25,000 being recouped in any one week. The total advances received for the year ended December 31, 2024 were $1,275,000 and payments made totaled $1,175,000. The outstanding balance as of December 31, 2024 was $100,000.

 

On August 7, 2024 and as amended on September 25, 2024, the Company’s Entertainment segment entered into an extension of credit (the “Agreement”) with Vegas Tickets in the form of a prepayment for the rights to acquire certain Major League Baseball and National Football League playoff and season tickets. Vegas Tickets agreed to advance, subject to the conditions of the Agreement, and the Company’s Entertainment segment agreed to take, an advance for a sum of $200,000. Under the Agreement, the Company’s Entertainment segment has the right to reacquire the tickets for a cash amount of $220,000 by November 1, 2024. The repurchase date was extended to December 1, 2024 by an amendment dated October 31, 2024. The repurchase was completed and the remaining balance is $-0- as of December 31, 2024.

 

Merchant Cash Advances – Video Solutions Segment

 

In November 2023, the Company obtained a short-term merchant advance, which totaled $1,050,000, from a single lender to fund operations. These advances included origination fees totaling $50,000 for net proceeds of $1,000,000. The advance is, for the most part, secured by expected future sales transactions of the Company with expected payments on a weekly basis. The Company will repay an aggregate of $1,512,000 to the lender. The loan bears interest at 2.9% per week.

 

During the year ended December 31, 2024, the Company made repayments totaling $1,551,250 and received additional proceeds of $1,144,000 and recorded additional discount of $980,000. The Company refinanced this loan in April 2024 resulting in the additional proceeds received during the year ended December 31, 2024. The refinancing was deemed to be an extinguishment of debt and a loss on extinguishment of debt was recorded during the year ended December 31, 2024 of $68,827.

 

The Company paid the outstanding balance of $1,922,750 in full during the year ended December 31, 2025 and the merchant advance arrangement was subsequently terminated. There were no amounts outstanding or available under this arrangement as of December 31, 2025.

 

Merchant Cash Advances – Entertainment Segment

 

On March 1, 2024, the Company obtained a short-term merchant advance, which totaled $1,000,000, from a single lender to fund operations. These advances included origination and issuance fees totaling $85,000 for net proceeds of $915,000. The advance is, for the most part, secured by expected future sales transactions of the Company with expected payments on a weekly basis. The Company will repay an aggregate of $1,425,000 to the lender. The loan bears interest at a 40.4523% annual effective rate based on latest debt modification.

 

The Company entered into the original agreement on March 1, 2024. On July 13, 2024, the Company entered into a letter agreement with the Purchaser, amending the terms of the note agreement, and on September 12, 2024, the Company entered into a second letter agreement further amending the terms of the note agreement. The two amendments to the underlying loan agreement, resulting in additional proceeds totaling $393,836. The modifications were both deemed to be extinguishments of debt resulting in a $310,505 loss on the extinguishment of debt during the year ended December 31, 2024.

 

On July 13, 2024, the Company entered into a Letter Agreement with the note holder, which modified the note payable by increasing the principal amount of the note payable from $1,425,000 to $1,725,000; provided, however, that if the Borrowers repay the Note in full on or before August 15, 2024, then the principal amount of the Note shall be reduced automatically by $100,000. Pursuant to the Letter Agreement, the Borrowers’ failure to adhere to certain repayment requirements of the underlying note purchase agreement did not constitute an event of default, as defined in the note purchase agreement. Pursuant to the modified/amended note, the Company agreed to make a cash payment to the note holder in the amount of $150,000 on or before July 26, 2024. The Company also agreed to sell or enter into a firm commitment to sell the office building owned by the Company and pay to the Purchaser: (i) $325,000, if the Company sells or enters into a firm commitment to sell the building on or before August 7, 2024; or (ii) $400,000, if the Company sells or enters into a firm commitment to sell the building after August 7, 2024. Pursuant to the modified/amended note, the Company’s failure to sell or enter into a firm commitment to sell the building prior to September 1, 2024 shall constitute an event of default, as defined in the note purchase agreement. The Company also agreed to pay to the note holder $100,000 per month until the modified/amended note is repaid in full, with the first such payment occurring on August 12, 2024, and each subsequent payment occurring on the 12th calendar day of each month thereafter.

 

 

On September 25, 2024, the Company and the note holder agreed to an amended and restated senior secured promissory note with a new principal amount of up to $2,000,000. The amended note evidences the new principal amount and amends and restates in its entirety, the terms and provisions of the Note. Pursuant to the amended note the Company promised to pay to the note holder the new principal amount, together with accrued interest or the amount outstanding under the amended note from time to time, to be computed from the date of the amended note at the rates and in the amounts set forth in the amended note. The amount of the unpaid balance, including such interest, that shall be due and payable under the Amended Note may increase and decrease as advances and payments are made thereunder. The Amended Note bears interest at a rate of 1.58% per month.

 

The Company can request advances in writing to the note holder and upon approval by the note holder to be determined in its sole discretion, (but which shall not be unreasonably withheld), the note holder can either make payment directly to specified vendor(s) or other creditors on behalf of the Company or deposit the advance into the Company’s account.

 

The amended note, requires the Company to repay the amended note, in full, on the earlier of (i) November 1, 2024, and (ii) the consummation of the merger between Kustom Entertainment and CL Merger Sub, Inc. (“CL Merger Sub”) pursuant to the merger agreement among the Company, Kustom Entertainment, Clover Leaf Capital Corp. the Company is also required to pay in arrears in cash an amount equal to 50% of revenues from all ticket sales generated by Kustom Entertainment, up to nine thousand tickets sold, and thereafter equal to 10% of all revenues from all ticket sales until the earlier of the date on which the amended note is repaid in full or the November 1, 2024 maturity date. The Company has the right, but not the obligation, under the amended note to prepay the amended note, upon written notice to the Company, by payment in full of the entire outstanding principal balance plus interest.

 

Furthermore, pursuant to the amended note, the parties agreed to extend the repayment date of $100,000, by the Company to the note holder, from September 26, 2024, to October 10, 2024.

 

The Company was unable to make certain required payments under the terms of the amended note. On October 22, 2024, the Company received a Default and Reservation Letter (the “Default Notice”) from counsel for the administrative agent for the amended note, (i) notifying the Company that it was in default under the amended note for, among other reasons, failing to make a $100,000 payment that was due on October 10, 2024, (ii) accelerating all principal and interest payments due under the amended note, and (iii) demanding the Borrowers enter into a lockbox control agreement within ten (10) business days of the date of the Default Notice. As of the date of the Default Notice, the outstanding obligation of the Company under the amended note was approximately $1,600,000.

 

On October 24, 2024, the Company received a Notice of UCC Article 9 Public Sale (the “Sale Notice”) from counsel to the administrative agent for the amended note notifying the Company that it intended to conduct a public sale of the collateral securing the Company’s obligations under the Note and Security Agreement on November 5, 2024.

 

As further described below (see Securities Purchase Agreement and Senior Secured Promissory Notes), the Company raised sufficient funds through a private placement which closed on November 7, 2024, to repay the amended note in full. The Company’s full repayment of the outstanding obligations under such amended note effectively cured all defaults under the Agreement and terminated the public sale process of the collateral securing the Borrowers’ obligations thereunder.

 

During the year ended December 31, 2024, the Company amortized $384,302 of debt discount under interest expense. The Company recorded total losses of $684,512 from the extinguishments of such debt during the year ended December 31, 2024. 

 

2024 Securities Purchase Agreement and Senior Secured Promissory Notes

 

On November 6, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors (the “Purchasers”), pursuant to which the Company agreed to issue and sell to such Purchasers, in a private placement transaction, (i) senior secured promissory notes in aggregate principal amount of $3,600,000 (the “Notes”), and (ii) 135 shares (the “Commitment Shares”) of the Company’s Common Stock, for aggregate gross proceeds of approximately $3.0 million, before deducting placement agent fees and other offering expenses payable by the Company. This private placement closed on November 7, 2024 (the “Closing Date”).

 

 

Pursuant to the SPA, the Company was required to use approximately $2,015,623 of the net proceeds from the private placement to pay, in full, all liabilities, obligations and indebtedness owing by the Company and its subsidiary, Kustom Entertainment, Inc., to Mosh Man, LLC (the “Borrower”). See Merchant Cash Advances – Entertainment Segment.

 

The Company’s full repayment of the outstanding obligations under such promissory note effectively cured all defaults under the promissory note and terminated the public sale process of the collateral securing the Borrowers’ obligations thereunder. The Company’s recorded a loss of $374,007 from the extinguishment of such debt during the year ended December 31, 2024.

 

Pursuant to the SPA, the Company was required to file within 30 days of the Closing Date a registration statement with the SEC for a public offering and use its reasonable best efforts to pursue and consummate a follow-on financing transaction within 90 days of the Closing Date. The proceeds of the public offering were first used for the repayment of the principal amounts of the Notes. The Company was also required to file within 30 days of the Closing Date a registration statement on Form S-1 (or other appropriate form if the Company is not then S-1 eligible) providing for the resale by the Purchasers of the Commitment Shares issued under the SPA. The Company is required to use commercially reasonable efforts to cause such registration statement to become effective within 60 days following the filing thereof and to keep such registration statement effective at all times until no Purchaser owns any Commitment Shares.

 

Furthermore, pursuant to the SPA, the Company was required to complete the following: (i) the Company’s board of directors approved an amendment to the Company’s bylaws setting the quorum required for a special meeting of stockholders to one-third of all stockholders entitled to vote at such special meeting and (ii) the Company filed with the SEC a preliminary proxy statement on Schedule 14A announcing a meeting of stockholders for the purpose of approving the Series A and Series B warrants issued by the Company on June 25, 2024. See Note 17, Common Stock Purchase Warrants.

 

The senior secured promissory notes mature ninety (90) days following their issuance date (the “Maturity Date”) and shall accrue no interest unless and until an Event of Default (as defined in the senior secured promissory notes) has occurred, in which case interest shall accrue at a rate of 14% per annum during the pendency of such Event of Default. In addition, upon customary Events of Default, the Purchasers may require the Company to redeem all or any portion of the senior secured promissory notes in cash with a 125% redemption premium. The Purchasers may also require the Company to redeem all or any portion of the senior secured promissory notes in cash upon a Change of Control, as defined in the senior secured promissory notes, at the prices set forth therein. Upon a Bankruptcy Event of Default (as defined in the senior secured promissory notes), the Company shall immediately pay to the Purchasers an amount in cash representing 100% of all outstanding principal, accrued and unpaid interest, if any, in addition to any and all other amounts due under the senior secured promissory notes, without the requirement for any notice or demand or other action by the Purchaser or any other person.

 

If the Company engages in one or more subsequent financings while the senior secured promissory notes are outstanding, the Company will be required to use at least 100% of the gross proceeds of such financing to redeem all or any portion of the senior secured promissory notes outstanding. The Company may also prepay the senior secured promissory notes in whole or in part at any time or from time to time. The senior secured promissory notes also contain customary representations and warranties and covenants of each of the parties. Subject to certain exceptions, the senior secured promissory notes are secured by a first lien and continuing security interest in and to the Collateral (as defined in the senior secured promissory notes).

 

The net proceeds of the private placement on November 7, 2024 was $2,669,250 (after $330,750 deduction of costs of the offering). The Company allocated the net proceeds from the private placement of the senior secured promissory notes and the commitment shares based upon their relative fair values as of the date of issuance as follows:

 SCHEDULE OF ALLOCATED NET PROCEEDS FROM PRIVATE PLACEMENT OF SENIOR SECURED PROMISSORY NOTES AND COMMITMENT SHARES

		Amount
Allocated to the following:
Senior secured promissory notes		$	2,129,795
Commitment shares			539,455
Total		$	2,669,250

 

 

The Company paid the senior secured promissory notes off in full on February 13, 2025 with funds generated by the February 2025 public equity offering (See Note 12). Following is an analysis of the senior secured promissory notes balance:

 SCHEDULE OF SENIOR SECURED PROMISSORY NOTES BALANCE

		Amount
Balance, as of December 31, 2023		$	—
Principal payment			-
Issuance of senior secured promissory notes, at par			3,600,000
Discount recognized at issuance date			(1,470,205	)
Amortization of discount			805,486
Balance, as of December 31, 2024			2,935,281
Amortization of discount			664,719
Principal payment			(3,600,000	)
Balance, as of December 31, 2025		$	—

 

2025 Senior Secured Convertible Note and Committed Equity Financing

 

On September 15, 2025, the Company entered into a Securities Purchase Agreement with an institutional investor (the “Purchaser”), pursuant to which the Company issued Senior Secured Convertible Notes (the “2025 Secured Notes”) with an aggregate original principal amount of $802,500, which reflects a 7% original issue discount applied to gross proceeds of $750,000, and detachable common stock purchase warrants to purchase 158,856 shares of the Company’s common stock at an exercise price of $6.372 per share. See Note 17, Common Stock Purchase Warrants. The 2025 Secured Notes bear interest at 8% per annum.

 

The 2025 Secured Notes are convertible at the investor’s option at any time at a conversion price equal to a 10% discount to the five-day volume-weighted average price (VWAP) preceding conversion, subject to customary anti-dilution and price-based adjustment provisions. The Company may, subject to certain conditions, redeem all or a portion of the Notes at 110% of the outstanding principal amount. A second closing of Senior Secured Convertible Notes with an original principal balance of $267,500 occurred on December 16, 2025, with 49,043 detachable common stock purchase warrants to purchase shares of the Company’s common stock at an exercise price of $6.372 per share. See Note 17, Common Stock Purchase Warrants. The second closing of the 2025 Secured Notes were issued at a 7% original issue discount, providing gross proceeds of $250,000, and bear interest at 8% per annum.

 

The 2025 Secured Notes are senior secured obligations, ranking senior to all existing and future indebtedness of the Company, except for specified subsidiaries that provide either a second-priority or no security interest. The Notes are secured by substantially all of the Company’s assets and guaranteed by certain subsidiaries. In connection with the transaction, the Company also entered into a Registration Rights Agreement and a Leak-Out Agreement with customary terms and conditions.

 

The conversion price of the 2025 Secured Notes is variable, equal to a 10% discount to the five-day VWAP preceding conversion, and accordingly does not meet the fixed-for-fixed requirement under ASC 815-40, Derivatives and Hedging: Contracts in an Entity’s Own Equity. As a result, the conversion feature was bifurcated from the host debt instrument and recognized as a derivative liability at fair value under ASC 815-15, Derivatives and Hedging: Embedded Derivatives. The detachable warrants were similarly classified as derivative liabilities at fair value under ASC 815-40, as their terms include provisions that could require net cash settlement upon a qualifying tender offer. Upon issuance, the aggregate fair value of these derivative liabilities was $852,675. Both derivative liabilities are remeasured at fair value each reporting period, with changes recognized in earnings. See Note 11, Fair Value Measurement, for the Level 3 derivative liability activity related to the bifurcated conversion feature and detachable warrants during the year ended December 31, 2025.

 

At the September 2025 closing, the fair value of the bifurcated conversion feature exceeded the net proceeds of $610,000; accordingly, no proceeds were allocated to the host debt instrument or the detachable warrants, and the excess of $128,246 was recognized immediately as a day-one charge within the change in fair value of derivative liabilities in the consolidated statements of operations. The full face value of $802,500 was recorded as a debt discount at the September 2025 closing. At the December 2025 closing, a debt discount of $244,425 was recorded. The debt discounts are amortized to interest expense over the term of the 2025 Secured Notes using the effective-interest method.

  

 

The aggregate original principal amount of the 2025 Secured Notes of $1,070,000 represents the combined face value of both closings. The combined net proceeds were $832,500 , consisting of $610,000 from the September 2025 closing, net of $140,000 in transaction costs, and $222,500 from the December 2025 closing, net of $27,500 in transaction costs.

 

Following is an analysis of the 2025 Senior Notes balance:

 SCHEDULE OF SENIOR NOTES BALANCE

		Amount
Balance, as of December 31, 2024		$	—
Issuance of 2025 Senior Notes, at par			1,070,000
Discount recognized at issuance date			(1,046,925	)
Amortization of discount			156,209
Balance, as of December 31, 2025		$	179,284