TOMI Environmental Solutions, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations relates to the years ended December 31, 2025 and 2024. This discussion and analysis should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. Business Highlights and Recent Events Fiscal year 2025 was a year of meaningful commercial progress for TOMI Environmental Solutions, Inc. Despite a revenue[DV1] decline driven primarily by the timing of large equipment purchases that occurred in the prior year, the Company advanced its strategic platform across multiple fronts: launching new product lines, securing landmark customers, establishing OEM partnerships with global manufacturers, and entering new markets including aerospace, aquaculture, cell and gene therapy. Our SteraMist® iHP™ technology is now protected by more than 30 utility and design patents through 2038 and is deployed in over 40 countries across our four divisions: Life Sciences, Hospital-Healthcare, Food Safety, and Commercial. In a significant expansion of our technology platform into the medical device sector, the heart monitoring device project is nearing completion and is scheduled for Factory Acceptance Testing ("FAT") in the near term. This initiative — developed collaboratively with a strategic partner utilizing our SIS iHP product platform — reflects our ability to design and deploy iHP technology within highly regulated medical device environments and underscores our commitment to advancing healthcare through innovation. Upon successful FAT completion, we intend to submit our iHP device for U.S. market clearance through the 510(k) premarket notification pathway, a well-established regulatory route for medical devices of this classification. We view this milestone as a meaningful step in positioning iHP as a platform technology across the broader medical device industry, and we look forward to progressing this opportunity alongside our core decontamination business. The SteraMist Integration System ("SIS"), launched in the second half of 2024, achieved its first commercial installation in Q2 2025 at a leading CDMO and has since been adopted across pharmaceutical isolators, biosafety cabinets, and OEM-integrated enclosures,reflecting the growing adoption of iHP as the preferred decontamination solution in advanced life sciences manufacturing environments. This momentum is underpinned by a powerful macro tailwind: announced U.S. onshoring investments in pharmaceutical manufacturing now exceed $370 billion in aggregate commitments from major drugmakers, driving sustained demand for validated decontamination systems that integrate seamlessly with new facility construction. By year-end, we had 10 active integration projects with a combined pipeline valued at approximately $3 million. In December 2025, we secured a signed purchase order of approximately $500,000 from a global biopharmaceutical leader for iHP integration into sterile manufacturing passthrough fill boxes, and a leading Cell and Gene Therapy manufacturer adopted SteraMist iHP as a commercial-scale pharmaceutical facility. We note that the conversion of certain CES projects to recognized revenue has been subject to timing delays, as pharmaceutical facility construction and capital deployment decisions in the United States were affected during 2025 by uncertainty surrounding tariff policy and its downstream impact on equipment costs, materials procurement, and supply chain planning. Management views this as a timing issue reflecting broader macroeconomic conditions rather than a change in underlying customer demand, and industry forecasters project that pharmaceutical manufacturing construction activity will recover and accelerate through 2026–2027 as policy clarity improves. 21 Table of Contents Our OEM partnership strategy gained significant momentum during 2025. Partnerships with PBSC (formalized March 2025), ESCO, Steelco, Nuaire, and Getinge are embedding iHP directly into cleanroom enclosures, passthrough hatches, and biosafety cabinets at the point of manufacture, opening a scalable distribution channel that extends our reach without proportional increases in direct sales cost. In the Commercial division, T.A.C.T. franchises purchased $175,000 of SteraMist equipment and BIT Solution in Q4 2025, and our expanding relationships with franchise networks Steri-Clean (approximately 60 locations) are building a recurring BIT Solution revenue stream consistent with our razor-blade revenue model. Regulatory developments during 2025 further validated and broadened our platform across multiple new verticals. In September 2025, the FDA expanded the permitted use of hydrogen peroxide as a direct food additive, significantly extending the application of SteraMist iHP to food contact surfaces and ready-to-eat food processing, a market where we have demonstrated efficacy against foot-and-mouth disease virus, African Swine Fever, and mycotoxins. In Q1, we deployed iHP at NASA's Johnson Space Center, marking our entry into aerospace, and in August we announced a new major customer in the eye health sector implementing iHP across two facilities. SteraMist was recognized as the 2025 "Disinfection and Decontamination Products Company of the Year" by Medtech Outlook, affirming the competitive differentiation of our technology across an expanding range of industries and applications. Notwithstanding this commercial progress, the Company recorded a net loss of approximately $3.7 million for fiscal year 2025, compared to $4.5 million in 2024. Management continues to pursue additional financing through equity and convertible debt instruments, including the $20 million ELOC entered into with Hudson Global Ventures in November 2025, and remains focused on converting its strong commercial pipeline into recognized revenue in 2026. The financial results of operations are discussed in detail in the sections that follow. The following overview summarizes key factors affecting the Company’s financial performance for the year ended December 31, 2025 compared to the prior year and should be read in conjunction with the selected financial metrics presented below. Financial Operations Overview (in thousands) 2025 2024 Change Cash and cash equivalents $ 88 $ 665 $ (577 ) Accounts receivable, net $ 689 $ 1,881 $ (1,192 ) Inventories, net (Note 3) $ 2,926 $ 3,578 $ (652 ) Working capital $ 1,024 $ 3,772 $ (2,748 ) Total shareholders’ equity $ 589 $ 4,099 $ (3,510 ) Total debt (convertible notes) $ 2,912 $ 2,360 $ 552 The following table summarizes selected financial metrics for the years ended December 31, 2025 and 2024 and provides a high-level overview of the Company’s operating performance. Key financial metrics (in thousands, except per share data) 2025 2024 Change Revenue $ 5,636 $ 7,739 $ (2,103 ) Gross profit $ 3,077 $ 3,557 $ (480 ) Operating expenses 6,931 7,662 (731 ) Loss from operations $ (3,854 ) $ (4,105 ) $ 251 Net loss $ (3,749 ) $ (4,477 ) $ 728 Basic and diluted loss per share $ (0.19 ) $ (0.22 ) $ 0.03 The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following table presents our results of operations for the years ended December 31, 2025, and 2024, together with the changes between the periods. The discussion below addresses the significant factors contributing to the changes in our results of operations. Results of operations (in thousands) 2025 2024 Change Revenue $ 5,636 $ 7,739 $ (2,103 ) Cost of sales 2,559 4,182 (1,623 ) Gross profit $ 3,077 $ 3,557 $ (480 ) Operating expenses: Professional fees 743 597 146 Depreciation and amortization 271 297 (26 ) Selling expenses 775 1,128 (353 ) Research and development 290 291 (1 ) Consulting fees 318 226 92 General and administrative 4,534 5,123 (589 ) Total operating expenses $ 6,931 $ 7,662 $ (731 ) Loss from operations $ (3,854 ) $ (4,105 ) $ 251 Other income (expense) 105 (372 ) 477 Net loss $ (3,749 ) $ (4,477 ) $ 728 22 Table of Contents Revenue by type (in thousands) 2025 2024 Change Product revenue $ 3,965 $ 6,035 $ (2,070 ) Service revenue 1,671 1,704 (33 ) Total revenue $ 5,636 $ 7,739 $ (2,103 ) Revenue decreased $2.1 million, or 27%, to $5.6 million for the year ended December 31, 2025 compared to $7.7 million in the prior year. The decrease was primarily attributable to the timing of certain customer equipment purchases that occurred in the prior year period. Service revenue remained relatively consistent, reflecting ongoing demand for the Company’s decontamination and service solutions. The Company continues to engage with existing and new customers regarding installations and service engagements across its target markets. Geographic revenue (in thousands) 2025 2024 Change United States $ 4,011 $ 6,098 $ (2,087 ) International 1,625 1,641 (16 ) Total $ 5,636 $ 7,739 $ (2,103 ) Domestic revenue declined primarily due to lower equipment sales, while international revenue remained relatively stable year over year, including sales of our product into various countries, including Canada, the UK and Europe. Cost of sales and gross profit (in thousands) 2025 2024 Change Revenue $ 5,636 $ 7,739 $ (2,103 ) Cost of sales 2,559 4,182 (1,623 ) Gross profit $ 3,077 $ 3,557 $ (480 ) Gross margin 54.6 % 46.0 % - Gross margin improved to 54.6% in 2025 from 46.0% in 2024, despite a 27% decline in revenue. The improvement was primarily driven by the Company recording an allowance for inventory reserve of approximately $1.1 million in 2024. Further details of the reserve movement are set out in Note 3. Excluding reserve movements, underlying gross margin was relatively stable year over year, with a modest decline reflecting reduced fixed cost absorption on lower overall sales volume. Operating expenses (in thousands) 2025 2024 Change Professional fees $ 743 $ 597 $ 146 Depreciation and amortization 271 297 (26 ) Selling expenses 775 1,128 (353 ) Research and development 290 291 (1 ) Consulting fees 318 226 92 General and administrative 4,534 5,123 (589 ) Total operating expenses $ 6,931 $ 7,662 $ (731 ) Total operating expenses decreased $0.7 million, or 10%, to $6.9 million in 2025 from $7.7 million in the prior year. Selling expenses decreased $353,000 (31%) to $775,000, driven by lower sales commissions, and less spend advertising and trade shows, consistent with the 34% decline in product sales volume during the year. General and administrative expenses decreased $588,000 (11%) to $4.5 million, primarily due to a significant reduction in credit loss expense to $267,000 in 2025 from $1.1 million in 2024, reflecting improved collections and accounts receivable management. Professional fees increased $146,000 (24%) and consulting fees increased $92,000 (41%), reflecting higher legal and advisory costs associated with public company compliance, Nasdaq deficiency proceedings, and strategic initiatives during the year. Research and development and depreciation and amortization were essentially flat year over year. 23 Table of Contents Liquidity and Capital Resources Liquidity metrics (in thousands) 2025 2024 Change Cash and cash equivalents $ 88 $ 665 $ (577 ) Accounts receivable, net $ 689 $ 1,881 $ (1,192 ) Inventories, net (Note 3) $ 2,926 $ 3,578 $ (652 ) Working capital $ 1,024 $ 3,772 $ (2,748 ) Total shareholders’ equity $ 589 $ 4,099 $ (3,510 ) Total debt - convertible notes $ 2,912 $ 2,360 $ 552 Accumulated deficit $ (58,052 ) $ (54,303 ) $ (3,749 ) As of December 31, 2025, we had cash and cash equivalents of $88,000 and working capital of $1.0 million, compared to cash of $665,000 and working capital of $3.8 million at December 31, 2024. For the year ended December 31, 2025, we incurred a net loss of $3.7 million and used $1.2 million of cash in operating activities. Our accumulated deficit as of December 31, 2025 is $58.1 million. These conditions raise substantial doubt about our ability to continue as a going concern within the next twelve months after the date these financial statements are issued. The consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to our consolidated financial statements for further discussion of the going concern assessment. The $2.7 million decline in working capital from $3.8 million to $1.0 million reflects the net loss incurred during the year and the Company's ongoing capital requirements. On the asset side, accounts receivable decreased $1.2 million on lower revenue, cash decreased $577,000, and inventories declined $652,000 following write-offs and demand-adjusted purchasing. On the liability side, accrued expenses increased $405,000, a $254,000 current obligation arose from the Agile Capital sale of future receipts facility entered into during the year, and deferred revenue increased $212,000 reflecting our deposit policy on customer orders. These increases in current liabilities were partially offset by a $444,000 reduction in accounts payable. Management’s Plan to Address Going Concern Management has evaluated the conditions that give rise to substantial doubt about our ability to continue as a going concern and has developed the following plan to address those conditions. Each element of this plan is subject to execution risk and there can be no assurance that it will be successfully implemented. Shelf Registration Statement and Equity Line of Credit Our $20 million ELOC with Hudson Global Ventures, LLC became fully operational upon the effectiveness of our Form S-3 registration statement on December 8, 2025, under which the Company is registered up to $50,000,000 of securities for offer and sale from time to time. We may, at our sole discretion, draw down between $25,000 and $2,000,000 per draw, subject to applicable exchange caps. In February 2026, we made our first draw generating gross proceeds of $94,130. Management believes this facility provides meaningful near-term liquidity, with capacity to provide up to approximately $4 million in the short term, subject to market conditions. Further details are provided in Note 10 to our consolidated financial statements. Capital Markets Access Our effective Form S-3 shelf registration statement (File No. 333-291563) provides a registered platform to raise up to $50,000,000 of securities from time to time. We have engaged Bancroft Capital as an investment banking advisor to explore additional financing opportunities, including equity and equity-linked transactions with existing and new investors. Convertible Note Management We are evaluating options to reduce our outstanding convertible note obligations, including potential conversion into equity or repayment using proceeds from the Hudson Global equity line, either of which would reduce total debt and improve stockholders' equity. Details of our convertible notes are set out in Note 9 to our consolidated financial statements. Pipeline Conversion to Revenue As of December 31, 2025, we had ten active SIS and CES integration projects with a combined contract value of approximately $3 million, including a $500,000 signed purchase order from a global biopharmaceutical leader received in December 2025. Our broader commercial sales pipeline of management-tracked opportunities exceeded $18 million at year-end, with quoted opportunities of approximately $11 million in progress. These figures represent potential future revenue and are not committed orders or guarantees of future performance. Conversion of this pipeline is a primary driver of our 2026 liquidity plan. Certain CES project conversions were delayed during 2025 by the tariff-driven slowdown in U.S. pharmaceutical facility capital decisions, which management views as a temporary, externally driven timing issue rather than a change in underlying demand. 24 Table of Contents Sales Backlog and Revenue Visibility Our sales backlog grew during 2025 to approximately $1.8 million, reflecting improved visibility into near-term revenue conversion and continued contribution from our recurring consumables and service revenue base. Cost Management We reduced total operating expenses by $731,000, or 10%, in 2025. We continue to actively manage controllable costs while preserving the technical and commercial capacity required to execute on our pipeline. Customer Deposit Policy Our customer deposit policy, implemented during 2025, requires deposits on equipment orders ahead of fulfilment. This policy reduces working capital exposure and is expected to generate incremental operating cash flow benefits in 2026 as it becomes fully embedded across our order intake process. While management believes the actions described above provide a reasonable basis to address the going concern conditions, there can be no assurance that we will successfully execute this plan, that our pipeline will convert to revenue on the anticipated timeline, or that additional capital will be available on terms acceptable to us. If we are unable to execute this plan, we may be required to delay, reduce, or eliminate certain operations, which could materially adversely affect our business, financial condition, and results of operations. Debt and Contractual Obligations Our outstanding debt as of December 31, 2025 consists of: (i) $2,600,000 in principal of 12% convertible notes issued under our November 2023 Securities Purchase Agreement, maturing November 2028; and (ii) $535,000 in principal of 12% convertible notes issued under our 2025 Securities Purchase Agreement, maturing in 2030. All notes are convertible into common stock at $1.25 per share (not to exceed $1.55 per share), are unsecured, and are senior to other indebtedness subject to certain exceptions. Total note principal outstanding is $3,135,000, with a net carrying value of $2,912,000 after amortized debt issuance costs. Annual cash interest on the outstanding principal at 12% is approximately $376,000. Full terms are disclosed in Note 9 to our consolidated financial statements. In addition to our convertible notes, we have a $367,425 balance under our sale of future receipts agreement with Agile Capital Funding, subject to weekly repayments of $15,975. Our operating lease for our Frederick, Maryland headquarters requires annual rent of approximately $169,000 through April 2029. We have no off-balance-sheet financing arrangements, unconsolidated variable interest entities, or material guarantees. A breakdown of our statement of cash flows for the year ended December 31, 2025 and 2024 is provided below: Cash flows for the year (in thousands) 2025 2024 Change Net cash used in operating activities $ (1,197 ) $ (1,440 ) $ 243 Net cash used in investing activities (136 ) (262 ) 126 Net cash provided by financing activities 755 28 727 Net decrease in cash $ (578 ) $ (1,674 ) $ 1,096 Operating Activities Net cash used in operating activities was $1,197,000 for the year ended December 31, 2025, an improvement of $243,000, or 17%, from $1,440,000 in 2024. The improvement was primarily driven by a $904,000 reduction in accounts receivable on lower revenue and an $800,000 decrease in inventory, reflecting our revised deposit policy on customer orders and disciplined inventory management implemented during the year. These inflows were partially offset by a $271,000 decrease in accounts payable. Non-cash charges consisted primarily of depreciation and amortization of $271,000, credit loss expense of $267,000, and equity-based compensation of $198,000, which also served to contain cash consumption relative to the reported net loss of $3.7 million. Investing Activities Net cash used in investing activities was $136,000 for the year ended December 31,2025, compared to $262,000 in 2024, reduction of $126,000. The improvement was driven primarily by the deferral of non-essential capital expenditures, with property and equipment additions of $5,000 in 2025 versus $108,000 in 2024. Patent and trademark capitalization was $130,000 essentially flat with $154,000 in 2024. Financing Activities Net cash provided by financing activities was $755,000 in 2025 compared to $28,000 in 2024. The improvement reflects two capital raises completed during the year: $535,000 raised through the issuance of 12% convertible promissory notes under the 2025 Securities Purchase Agreement (SPA), and $300,000 received through a sale of future receipts agreement with Agile Capital Funding, LLC, partially offset by $80,000 in repayments on that facility, an increase of $727,000. 25 Table of Contents Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates. The SEC defines critical accounting estimates as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and the most demanding of our judgment. We consider the following estimates to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows. Going Concern Assessment The assessment of our ability to continue as a going concern is the most significant judgment reflected in our financial statements for the year ended December 31, 2025. Under ASC 205-40, management is required to evaluate whether there is substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. This evaluation requires management to consider all available information about the future, including the Company's projected cash flows, planned capital raising activities, anticipated operating improvements, and the probability and timing of successfully executing those plans. For the year ended December 31, 2025, we recorded a net loss of approximately $3.7 million and used approximately $1.2 million of cash in operations. As of December 31, 2025, we had approximately $88,000 of cash and cash equivalents and an accumulated deficit of approximately $58.1 million. Based on these conditions, management concluded that substantial doubt exists about our ability to continue as a going concern within one year after the issuance of these financial statements. Management's conclusion is based on projected cash flows that assume successful execution of our capital raising plans, including continued drawdowns under our convertible note facilities and the potential utilization of the $20 million Equity ELOC with Hudson Global Ventures, LLC entered into in November 2025, as well as anticipated revenue growth from our active commercial pipeline. If our assumptions regarding capital availability, revenue timing or operating costs prove incorrect, the Company's liquidity position could deteriorate more rapidly than projected, and there can be no assurance that the going concern doubt will be resolved within the anticipated timeframe. See Note 2 to the consolidated financial statements for further discussion. 26 Table of Contents Revenue Recognition We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as we satisfy the performance obligations. We must use judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; (b) the transaction price under step (iii) above; and (c) the stand-alone selling price for each performance obligation for the allocation of transaction price under step (iv) above. Title and risk of loss generally pass to our customers upon shipment. Shipping and handling costs charged to customers are included in product revenues, and the associated expenses are treated as fulfillment costs included in cost of revenues. Revenues are reported net of sales taxes collected from customers. Product revenue includes sales from our standard and customized equipment, BIT Solution and accessories. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive. Service and training revenue includes sales from our high-level decontamination and service engagements, equipment validation and customer training, and is recognized as the agreed-upon services are rendered. A growing portion of our revenue is derived from our SIS and CES, which may involve multiple performance obligations including equipment supply, installation, validation and ongoing service. For these arrangements, management exercises significant judgment in identifying and allocating the transaction price among the distinct performance obligations and in determining the point at which control transfers to the customer. Delays in project completion or customer acceptance for these arrangements can affect the timing of revenue recognition and contribute to variability in our quarterly results. We also record estimated allowances for sales returns, determined by using a specific identification method based on subsequent return activity and historical averages. For the years ended December 31, 2025 and 2024, we recorded an allowance of $47,844 and $227,000, respectively. As of December 31, 2025 and December 31, 2024, deferred revenue totaled approximately $424,000 and $212,000, respectively, representing contracted amounts for which performance obligations had not yet been satisfied. The increase in deferred revenue reflects growth in our SIS and CES project pipeline and the timing of project milestones. Changes in assumptions regarding the timing of project completion or customer acceptance could affect the amount and timing of revenue recognized in future periods. Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. This is particularly the case for our SIS and CES, which may involve equipment supply, installation, validation services and ongoing maintenance components. Where a contract contains multiple performance obligations, we allocate the total transaction price to each distinct performance obligation based on its relative stand-alone selling price, estimated using observable market prices where available or using a cost-plus-margin approach where direct market evidence is not available. Significant Judgments Our contracts with customers for products and services often dictate the terms and conditions of when control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for those products and services. For standard equipment and BIT Solution sales, control transfers and revenue is recognized at the point of shipment, which is when title and risk of loss pass to the customer. For service and training arrangements, revenue is recognized as services are rendered. For SIS and CES arrangements involving installation and validation milestones, management exercises judgment in determining the point at which control transfers, which may be upon completion of installation, customer acceptance, or satisfaction of specific contractual milestones. The timing of these measures can affect the period in which revenue is recognized and contribute to variability in our quarterly results. We also record an estimated allowance for anticipated product returns, determined using a specific identification method based on subsequent return activity and historical average calculations. 27 Table of Contents Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying consolidated financial statements and notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses, inventory obsolescence reserves, allowances for sales returns, the fair value of stock-based awards, the realizability of deferred tax assets, the useful lives of intangible assets and property and equipment, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accounts Receivable Accounts receivable are stated at the amount management expects to collect from outstanding balances. We do not generally require collateral to support customer receivables. In accordance with ASC 326, Current Expected Credit Losses, we estimate and record expected credit losses over the entire life of our accounts receivable, considering historical collection experience, customer creditworthiness, specific customer risk, current economic conditions and reasonable and supportable forecasts of future conditions. We make a risk-based evaluation of collectability at the point of sale, which is further reviewed on both an individual and collective basis during each reporting period. As of December 31, 2025, net accounts receivable totaled $689,153 compared to approximately $1,881,000 as of December 31, 2024. The decrease reflects collections on prior-period balances as well as lower revenue levels in the current year. Management exercises judgment in determining the appropriate allowance for credit losses, and changes in the creditworthiness of our customers, deterioration in economic conditions, or the loss of a significant customer relationship could result in allowance adjustments that materially affect our results of operations in a given period. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. Inventories consist primarily of finished goods. We review inventory on an ongoing basis, considering factors such as deterioration, obsolescence, and anticipated future customer demand, and we record an allowance for estimated losses when facts and circumstances indicate that particular inventory items may not be usable or saleable. The determination of the appropriate reserve requires management to exercise judgment regarding expected future demand, the useful life of specific inventory items, and the potential for product design changes or regulatory developments that could render existing inventory obsolete. As of December 31, 2025, our reserve for obsolete inventory was $500,000, compared to $1.1 million as of December 31, 2024. The decrease in the reserve reflects inventory disposals and adjustments to our demand estimates during the year. Inventories, net of reserves, totaled approximately $2.9 million as of December 31, 2025, compared to approximately $3.6 million as of December 31, 2024. If actual demand for our products differs materially from our forecasts, or if changes in our product offerings render existing inventory obsolete, additional write-downs may be required. Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets, including property and equipment and acquired intangible assets, for potential impairment at the end of each fiscal year or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of the asset to the estimated future undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment charge recognized equals the amount by which the carrying value exceeds the asset's estimated fair value, which we determine using an income approach based on an internally developed discounted cash flow model. Key assumptions in this model include projected revenues and operating expenses, long-term growth rates, and estimated discount rates. These assumptions are based on our historical experience, industry data, and management's expectations about future business conditions. We noted no long-lived asset impairment charges for the years ended December 31, 2025 and 2024. Management's impairment analysis considered the going concern conditions described above and concluded that projected undiscounted cash flows, based on our current operating plan and capital raising assumptions, continue to support the carrying values of our long-lived assets. Changes in our revenue outlook, discount rates or other key assumptions could result in impairment charges in future periods. Convertible Notes and Debt Discount As of December 31, 2025, we had outstanding convertible notes with an aggregate principal balance of approximately $3.1 million, net of amortized debt discount and issuance costs of approximately $222,000, resulting in a carrying value of approximately $2.9 million. Our convertible notes were issued under two separate securities purchase agreements — the 2023 SPA, under which $2.6 million of notes were issued, and the 2025 SPA, under which up to $3.0 million of additional notes may be issued, of which $535,000 had been issued as of December 31, 2025. The notes bear interest at 12% per annum, are convertible at the option of the holder at $1.25 per share and mature on the fifth anniversary of their respective issuance dates. The conversion features embedded in the 2023 Notes and 2025 Notes are considered clearly and closely related to the host debt instruments and do not require bifurcation under ASC 815. No modifications to the terms of the existing notes occurred during the years ended December 31, 2025 and 2024. 28 Table of Contents Stock-Based Compensation We account for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation. Stock-based awards, including stock options, restricted stock units and shares issued for services, are measured at their estimated fair value on the grant date and recognized as expense over the requisite service period. For stock options and warrant awards, fair value is determined using the Black-Scholes option pricing model, which requires management to make assumptions regarding the expected volatility of our common stock, the expected term of the award, the risk-free interest rate and expected dividend yield. We assume a dividend yield of zero, as we have not paid and do not intend to pay cash dividends on our common stock. Expected volatility is based on the historical volatility of our common stock over a period commensurate with the expected term of the award. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date for the applicable expected term. During the year ended December 31, 2025, we recognized approximately $198,000 of stock-based compensation expense, including shares issued to directors and shares issued for services rendered. Changes in the assumptions used in the Black-Scholes model, or modifications to existing awards, could result in materially different fair value estimates and compensation expense amounts. Income Taxes and Valuation Allowance We account for income taxes in accordance with ASC 740, Income Taxes, using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, as well as for net operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance to the extent that management concludes it is more likely than not that some or all of the deferred tax assets will not be realized. We recorded no income tax expense or benefit for the years ended December 31, 2025 and 2024 due to our net operating losses and the maintenance of a full valuation allowance against our net deferred tax assets. As of December 31, 2025, our total valuation allowance was approximately $9,719,000, an increase of approximately $1,027,000 from $8,692,000 as of December 31, 2024, primarily reflecting additional deferred tax assets arising from current-year losses. As of December 31, 2025, we had available federal net operating loss carryforwards of approximately $28,310,000 and state net operating loss carryforwards of approximately $25,784,000. Net operating losses generated after December 31, 2017 carry forward indefinitely; those generated prior to 2018 expire at various dates through 2037. NOL’s generated after 2017 carry forward indefinitely but are limited to offset 80% of taxable income in any given year. The judgment to maintain a full valuation allowance is the most significant estimate within our income tax accounting. This judgment is based on our cumulative history of operating losses, our going concern conditions, and the uncertainty surrounding the timing and amount of future taxable income sufficient to realize these assets. We reassess this conclusion at each reporting date. If our operating results improve materially and we conclude it is more likely than not that a portion of our deferred tax assets will be realized, we would reduce the valuation allowance accordingly, which could result in a material income tax benefit in the period of that determination. We adopted ASU 2023-09, Improvements to Income Tax Disclosures, in the fourth quarter of 2025 on a prospective basis; the required disaggregated rate reconciliation and taxes paid disclosures are included in Note 15 to the consolidated financial statements. Recently issued accounting pronouncements not yet adopted In November 2024, the FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40), subsequently clarified by ASU No. 2025-01 issued in January 2025. This ASU requires disaggregated disclosure of specific expense categories, including purchases of inventory, employee compensation, depreciation and amortization, within relevant income statement captions, and also requires disclosure of total selling expenses and their definition. The ASU is effective for annual periods beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the provisions of this ASU, which will likely result in additional required disclosures once adopted. In July 2025, the FASB issued ASU No. 2025-05, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This ASU provides a practical expedient permitting an entity to assume that conditions at the balance sheet date remain unchanged over the life of the asset when estimating expected credit losses for current-classified accounts receivable and contract assets. The ASU is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the provisions of this ASU and do not expect it to have a material impact on our consolidated financial statements. 29 Table of Contents In December 2025, the FASB issued ASU No. 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements. The ASU clarifies interim disclosure requirements and the applicability of Topic 270. The objective of the amendments is to provide further clarity about the current interim disclosure requirements. The ASU is effective for interim reporting periods within annual reporting periods beginning after December 15, 2027. Adoption of this ASU can be applied either a prospective or a retrospective approach. Early adoption is permitted. We are currently evaluating the provisions of this ASU and do not expect this ASU to have a material impact on our consolidated financial statements. In December 2025, the FASB issued ASU No. 2025-12, Codification Improvements. The ASU addresses thirty-three items, representing the changes to the Codification that (1) clarify, (2) correct errors, or (3) make minor improvements. Generally, the amendments in this Update are not intended to result in significant changes for most entities. The ASU is effective for interim reporting periods within annual reporting periods beginning after December 15, 2026. The adoption method of this ASU may vary, on an issue-by-issue basis. Early adoption is permitted. We are currently evaluating the provisions of this ASU and do not expect this ASU to have a material impact on our consolidated financial statements. Recently adopted accounting pronouncements In December 2023, FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. The Company adopted ASU 2023-09 in the fourth quarter of 2025 using a prospective transition method. On July 4, 2025, the U.S. H.R.1, an act to provide for reconciliation pursuant to title II of H. Con. Res. 14. (the “OBBBA”) was enacted. The OBBBA introduces multiple tax law and other legislative changes, including modifications to income tax provisions such as domestic research and development expenses, capital expenditures, and U.S. taxation of international earnings; the repeal or acceleration of the sunset of certain tax credits under the 2022 Inflation Reduction Act and elimination of certain penalties for violations of certain regulatory credit programs. We have recognized the effects of the OBBBA provisions in our financial results to the extent they are applicable to the year ended December 31, 2025. We will continue to evaluate the impact of these provisions on our 2026 and subsequent consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. 30 Table of Contents