TOMI Environmental Solutions, Inc. 10-K

Item 8. Financial Statements and Supplementary Data The consolidated financial statements of TOMI Environmental Solutions, Inc. and the related notes, together with the report of our independent registered public accounting firm, appear beginning on page 32 of this Annual Report on Form 10-K. Report of Independent Registered Public Accounting Firm (PCAOB No. 89 ) 32 Consolidated Balance Sheets December 31, 2025 and 2024 34 Consolidated Statements of Operations Years ended December 31, 2025 and 2024 35 Consolidated Statements of Shareholders’ Equity Years ended December 31, 2025 and 2024 36 Consolidated Statements of Cash Flows Years ended December 31, 2025 and 2024 37 Notes to Consolidated Financial Statements 38 31 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of TOMI Environmental Solutions, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of TOMI Environmental Solutions, Inc. (the Company) as of years ended December 31, 2025 and 2024, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2025, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America. Substantial Doubt about the Company’s Ability to Continue as a Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has recurring net losses, negative cash flows from operations, and has a retained deficit as of December 31, 2025. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 32 Allowance for credit losses As described further in Note 2 to the consolidated financial statements, the Company maintains an allowance for credit losses against its accounts receivable balances based on the future estimated credit losses. As of December 31, 2025, the allowance for credit losses was $1.1 million, or 60.9% of total accounts receivable. This estimate is determined based on internally developed qualitative and quantitative factors derived from the aging of receivables, the Company’s past collection history with customers, forward looking information and economic trends and conditions. We have identified the evaluation of the Company’s estimation of allowance for credit losses as a critical audit matter. There is an established policy for determining overall allowance for credit losses. The Company evaluates customers into two economic pools for delinquent customers and industry specific with additional judgement in place for certain account balances that require additional evaluation and assessment which are used in estimating losses related to customer receivables. There is also a degree of subjectivity in management's assessment of the completeness and accuracy of the allowance for credit losses, specifically the portion of the receivable expected to be collected, which requires a significant level of auditor judgement in auditing the estimate. Our audit procedures related to the allowance for credit losses included: · We obtained an understanding of the process management uses to determine the allowance for credit losses, including the assumptions developed in the analysis. · Testing the mathematical accuracy of management’s allowance for credit losses calculation as of December 31, 2025 by recalculating and independently applying the credit loss methodology promulgated by generally accepted accounting principles to each risk pool, as well as recalculating the aging of receivables based on underlying source documentation. · Recomputing current and historical collection rates for customer receivable balances and comparing the historical loss rates against the current period estimated loss rates within the respective risk pools and performing a prior year look back at the collection percentages on customer receivables with certain risk characteristics. · Taking into consideration future economic factors applicable to the Company’s industry and their effect over the allowance for current expected credit loss. · Evaluating the reasonableness of management’s qualitative adjustments against the allowance for credit losses by obtaining corroborating evidence which supports the adjustments and assumptions made by management in determining the allowance. Inventory – Valuation associated with excess and obsolete (E&O) inventory As further described in Note 2 & 3 to the financial statements, inventory is stated at the lower of cost or net realizable value. At the balance sheet date, the Company evaluated inventories for excess quantities and obsolescence (E&O) and included an inventory reserve against its inventory balances. As of December 31, 2025, the inventory reserve was $500 thousand, or approximately 14.6% of total inventory. To estimate the amount of inventory that may be in excess or obsolete, the Company reviews inventory quantities on hand as well as historical and projected sales volumes. The Company’s model assumes that inventory will be distributed on a first-in-first-out basis. Due to the nature of the inventory and the levels of inventory purchased in prior years, as well as recent sales trends, estimating the amount of inventory that is in excess or potentially obsolete involves significant judgments and estimates. Given the significant judgments associated with evaluating the valuation of E&O inventory, auditing the reasonableness of management’s estimates and assumptions involved especially subjective judgment and an increased extent of effort, therefore we identified the estimates used to determine the valuation of the E&O inventory as a critical audit matter. Our audit procedures related to the Company’s valuation of E&O inventory included the following: · We obtained an understanding of the process management uses to determine the inventory valuation. · Obtaining the Company’s E&O calculation and testing the mathematical accuracy. · Inquiring of the Company’s employees outside of the accounting department and evaluating other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory E&O calculation. · Evaluating management’s future projections by comparing to current and historical sales trends. · Assessing the reasonableness of the assumptions used in the E&O calculation by developing an independent expectation and comparing our independent expectation to the results of the Company’s calculation. /s/ Rosenberg Rich Baker Berman P.A. We have served as the Company’s auditor since 2021. Somerset, New Jersey March 31, 2026 33 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS As of December 31, Current assets: 2025 2024 Cash and cash equivalents $ 87,775 $ 664,879 Accounts receivable, net 689,153 1,881,138 Inventories, net (Note 3) 2,926,427 3,578,202 Vendor deposits (Note 4) 161,597 35,895 Prepaid expenses 322,114 332,999 Total current assets 4,187,066 6,493,113 Property and equipment, net (Note 5) 614,311 875,449 Other assets: Intangible assets, net (Note 6) 1,351,164 1,250,574 Operating lease – right of use asset (Note 7) 322,089 399,254 Other assets 559,671 675,348 Total other assets 2,232,924 2,325,176 Total assets $ 7,034,301 $ 9,693,738 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,480,189 $ 1,924,379 Accrued expenses and other current liabilities (Notes 13 and 14) 860,703 455,675 Deferred revenue 424,032 211,724 Sale of future receipts, net of discount of $ 113,191 (Note 12) 254,234 - Current portion of long-term operating lease (Note 7) 143,672 129,132 Total current liabilities 3,162,830 2,720,910 Long-term liabilities: Long-term operating lease, net of current portion (Note 7) 370,591 513,395 Convertible notes payable, net of discount of $ 222,624 and $ 239,506 at December 31, 2025 and December 31, 2024, respectively (Note 9) 2,912,376 2,360,494 Total long-term liabilities 3,282,967 2,873,889 Total liabilities 6,445,797 5,594,799 Commitments and contingencies (Notes 7, 9, 11 and 12) - - Shareholders’ equity: Cumulative convertible Series A preferred stock; par value $ 0.01 per share, 1,000,000 shares authorized; 63,750 shares issued and outstanding at December 31, 2025 and December 31, 2024, respectively 638 638 Cumulative convertible Series B preferred stock; $ 1,000 stated value; 7.5 % cumulative dividend; 4,000 shares authorized; none issued and outstanding at December 31, 2025 and December 31, 2024, respectively - - Common stock; par value $ 0.01 per share, 250,000,000 shares authorized; 20,277,205 and 20,015,205 shares issued and outstanding at December 31, 2025 and December 31, 2024, respectively 202,772 200,152 Additional paid-in capital 58,437,080 58,201,140 Accumulated deficit ( 58,051,986 ) ( 54,302,991 ) Total shareholders’ equity 588,504 4,098,939 Total liabilities and shareholders' equity $ 7,034,301 $ 9,693,738 The accompanying notes are an integral part of the consolidated financial statements. 34 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2025 2024 Sales, net $ 5,635,927 $ 7,738,842 Cost of sales 2,558,848 4,181,764 Gross profit 3,077,079 3,557,078 Operating expenses: Professional fees 742,785 597,365 Depreciation and amortization 271,329 296,536 Selling expenses 775,133 1,128,402 Research and development 289,899 290,683 Consulting fees 317,649 225,779 General and administrative 4,534,622 5,123,073 Total operating expenses 6,931,417 7,661,838 Loss from operations ( 3,854,338 ) ( 4,104,760 ) Other income (expense): Other income (Note 18) 534,912 - Interest income 86,543 17,489 Interest expense ( 516,112 ) ( 389,491 ) Total other income (expense) 105,343 ( 372,002 ) Loss before income taxes ( 3,748,995 ) ( 4,476,762 ) Provision for income taxes (Note 15) - - Net loss $ ( 3,748,995 ) $ ( 4,476,762 ) Net loss per common share: Basic $ ( 0.19 ) $ ( 0.22 ) Diluted $ ( 0.19 ) $ ( 0.22 ) Basic weighted average common shares outstanding 20,085,703 19,992,592 Diluted weighted average common shares outstanding 20,085,703 19,992,592 The accompanying notes are an integral part of the consolidated financial statements. 35 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 2025 and 2024 Additional Total Series A Preferred Common Stock paid-in Accumulated shareholders' Shares Amount Shares Amount capital deficit equity Balance at January 1, 2024 63,750 $ 638 19,923,955 $ 199,240 $ 57,985,245 $ ( 49,826,229 ) $ 8,358,894 Options exercised 31,250 312 27,188 27,500 Common stock issued to directors 60,000 600 44,400 45,000 Common stock issued as executive compensation 144,307 144,307 Net (loss) for the year ended December 31, 2024 ( 4,476,762 ) ( 4,476,762 ) Balance at December 31, 2024 63,750 $ 638 20,015,205 $ 200,152 $ 58,201,140 $ ( 54,302,991 ) $ 4,098,939 Common stock issued to directors 60,000 600 50,400 51,000 Common stock issued for services provided 150,000 1,500 145,500 147,000 Common stock issued as commitment for ELOC 52,000 520 40,040 40,560 Net (loss) for the year ended December 31, 2025 ( 3,748,995 ) ( 3,748,995 ) Balance at December 31, 2025 63,750 $ 638 20,277,205 $ 202,772 $ 58,437,080 $ ( 58,051,986 ) $ 588,504 The accompanying notes are an integral part of the consolidated financial statements. 36 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2025 2024 Cash Flows from Operating Activities: Net (Loss) $ ( 3,748,995 ) $ ( 4,476,762 ) Adjustments to Reconcile Net (Loss) to Net Cash (Used) in Operating Activities: Depreciation and amortization 271,329 296,536 Amortization of right of use asset 157,315 157,315 Amortization of deferred financing costs 70,939 62,480 Origination fees 15,000 - Equity compensation expense 147,000 144,307 Shares issued to directors 51,000 45,000 Credit loss expense 267,309 1,050,543 Inventory reserve - 1,005,000 Sales returns allowance 104,781 227,000 Changes in Operating Assets and Liabilities: Decrease (increase) in: Accounts receivable 819,895 ( 470,512 ) Inventory 637,376 60,363 Prepaid expenses 70,554 38,299 Vendor deposits ( 125,702 ) ( 6,560 ) Other assets 115,677 ( 5,321 ) Increase (decrease) in: Accounts payable ( 271,476 ) 657,349 Accrued expenses 178,258 ( 219,816 ) Deferred revenue 212,308 159,724 Lease liability ( 169,220 ) ( 165,098 ) Net Cash (Used) in Operating Activities ( 1,196,652 ) ( 1,440,153 ) Cash Flows from Investing Activities: Capitalized patent and trademark costs ( 130,412 ) ( 153,636 ) Purchase of property and equipment ( 5,165 ) ( 107,891 ) Net Cash (Used) in Investing Activities ( 135,577 ) ( 261,527 ) Cash Flows from Financing Activities: Proceeds from issuance of convertible notes 535,000 - Proceeds from sale of future receipts, net of origination fees 300,000 - Repayments of sale of future receipts ( 79,875 ) - Proceeds from exercise of options - 27,500 Net Cash Provided by Financing Activities 755,125 27,500 (Decrease) in Cash and Cash Equivalents ( 577,104 ) ( 1,674,180 ) Cash and Cash Equivalents, Beginning 664,879 2,339,059 Cash and Cash Equivalents, Ending $ 87,775 $ 664,879 Supplemental Cash Flow Information: Cash paid for interest $ 437,474 $ 312,000 Cash paid (refunded) for income taxes - - Non-Cash Investing and Financing Activities: Service equipment reclassified from inventory to fixed assets $ 14,397 $ - The accompanying notes are an integral part of the consolidated financial statements. 37 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS TOMI Environmental Solutions, Inc., a Florida corporation (“TOMI”, the “Company”, “we”, “our” and “us”) is a global provider of disinfection and decontamination essentials through our premier Binary Ionization Technology® (BIT™) platform, under which we manufacture, license, service and sell our SteraMist® brand of products, including SteraMist® BIT™, a hydrogen peroxide-based mist and fog. Our solution and process are environmentally friendly as the only by-product from our decontamination process is oxygen and water in the form of humidity. Our solution is organically listed in the United States and Canada as a sustainably green product with no or very little carbon footprint. Our business is organized into four divisions: Life Sciences, Healthcare, Food Safety and Commercial. Invented under a defense grant in association with the Defense Advanced Research Projects Agency (“DARPA”) of the U.S. Department of Defense, BIT™ is registered with the U.S. Environmental Protection Agency (the “EPA”) and uses a low percentage hydrogen peroxide as its only active ingredient to produce a fog composed mostly of a hydroxyl radical (.OH ion), known as ionized Hydrogen Peroxide (iHP™). Represented by the SteraMist® brand of products, iHP™ produces a germ-killing aerosol that works like a visual non-caustic gas. Our products are designed to service a broad spectrum of commercial structures, including, but not limited to, hospitals and medical facilities, bio-safety labs, pharmaceutical facilities, meat and produce processing facilities, universities and research facilities, vivarium labs, other service industries including cruise ships, office buildings, hotel and motel rooms, schools, restaurants, military barracks, police and fire departments, prisons, and athletic facilities. Our products are also used in single-family homes and multi-unit residences. Additionally, our products have been listed on the EPA’s List N as products that help combat COVID-19 and are actively being used for this purpose. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of TOMI and its wholly owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. All intercompany accounts and transactions have been eliminated in consolidation. Reclassification of Accounts Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These reclassifications had no material effect on previously reported results of operations or financial position. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying consolidated financial statements and the accompanying 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, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Fair Value Measurements The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities. 38 Table of Contents The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, held at financial institutions and other liquid investments with original maturities of three months or less. At times, these deposits may be in excess of insured limits. At December 31, 2025 and December 31, 2024, there were no cash equivalents. Accounts Receivable Accounts receivables are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. Management assesses the collectability of outstanding customer invoices and maintains allowance resulting from the expected non-collection of customer receivables. In estimating this reserve, management considers factors such as historical collection experience, customer creditworthiness, specific customer risk, and current and expected general economic conditions. For those customers to whom we extend credit, in accordance with the Current Expected Credit Loss (CECL) model, we make a risk-based evaluation at the point of sale which is further reviewed on both an individual and collective (pool) basis during each reporting period based on ASC 326. 2025 2024 Gross accounts receivable $ 1,886,944 $ 4,338,115 Less: Allowance for credit losses ( 1,149,947 ) ( 2,229,977 ) Less: Allowance for sales returns ( 47,844 ) ( 227,000 ) Accounts receivable, net $ 689,153 $ 1,881,138 Movements on credit loss account are shown below: For the years ended December 31, 2025 2024 Beginning reserve $ 2,229,977 $ 1,494,347 Credit loss expense 267,309 1,050,543 Write-offs and adjustments ( 1,347,339 ) ( 314,913 ) Ending Reserve $ 1,149,947 $ 2,229,977 Long-term trade accounts receivable are principally amounts arising from the sale of goods and services with a contractual maturity date or realization period of greater than one year and are recognized as "Long-Term Accounts Receivable" on our Consolidated Balance Sheet. As of December 31, 2025 and 2024, we had no long-term Accounts Receivable. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods and raw materials. We expense costs to maintain certification to cost of goods sold as incurred. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence, and future customer demand. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable or realized when comparing current inventory levels to anticipated demand for our product. Our reserve for obsolete inventory was $ 500,000 and $ 1,100,000 as of December 31, 2025 and December 31, 2024, respectively. Property and Equipment We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter. 39 Table of Contents Leases We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depend on classification as a finance or operating lease. As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense in the period in which they are incurred. Vendor Concentration The Company is dependent on a limited number of third-party suppliers for the manufacture of its SteraMist® line of equipment and for the supply of its BIT Solution. This dependence results in concentration of both purchasing activity and accounts payable balances among a small number of vendors. As of December 31, 2025, one vendor accounted for approximately 42 % of total accounts payable, compared to approximately 60 % as of December 31, 2024. This vendor is the Company's primary equipment manufacturer and the decrease in concentration reflects both lower outstanding payable balances and improved payment timing relative to the prior year. For the year ended December 31, 2025, two vendors collectively accounted for approximately 60 % of total cost of sales, compared to approximately 67 % for the year ended December 31, 2024. The modest decrease in concentration reflects the Company's ongoing efforts to diversify its supplier base, though the Company remains substantially dependent on these vendors for its primary product lines. Any disruption to these relationships could have a material adverse effect on the Company's ability to fulfill customer orders and on its results of operations. See Item 1A, Risk Factors, for further discussion of risks related to the Company's reliance on third-party manufacturers and suppliers. Accrued Warranties Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. As of December 31, 2025, and December 31, 2024, our warranty reserves were $ 10,905 and $ 30,000 , respectively (See Note 14). Income Taxes The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A significant area of judgment relates to the realization of deferred tax assets, including net operating loss carryforwards and other deductible temporary differences. The Company evaluates the realizability of its deferred tax assets based on available evidence, including historical operating results, projections of future taxable income, and the expected reversal of temporary differences. Based on the Company’s recent history of operating losses, management has concluded that it is more likely than not that its deferred tax assets will not be realized. Accordingly, the Company has recorded a full valuation allowance against its deferred tax assets. The valuation allowance will be maintained until sufficient positive evidence exists to support the realization of these assets. Additional information regarding the Company’s income taxes, including deferred tax assets and net operating loss carryforwards, is included in Note 15– Income Taxes to the consolidated financial statements. 40 Table of Contents Net Loss Per Share Basic net loss per share is computed by dividing our net loss by the weighted average number of shares of common stock outstanding during the period presented. Diluted loss per share is based on the treasury stock method and includes the effect from potential issuance of shares of common stock, such as shares issuable pursuant to the exercise of options and warrants and conversions of preferred stock or debentures. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of common stock and the denominator may have to adjust to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued during the period to reflect the potential dilution that could occur from shares of common stock issuable through a contingent shares issuance arrangement, stock options, warrants, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, and warrants, and the if-converted method is used for convertible preferred stock as prescribed in FASB ASC Topic 260. Because of the net loss for the year ended December 31, 2025 and 2024, the impact of including these in our computation of diluted EPS was anti-dilutive. Potentially dilutive securities as of December 31, 2025 consisted of 2,508,000 shares of common stock from convertible debentures, 2,604,388 shares of common stock issuable upon exercise of outstanding warrants, 737,542 shares of common stock issuable upon outstanding options, 66,666 shares of common stock issuable upon vesting of restricted stock units and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Potentially dilutive securities as of December 31, 2024 consisted of 2,080,000 shares of common stock from convertible debentures, 2,765,846 shares of common stock issuable upon exercise of outstanding warrants, 805,042 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Options, warrants, RSU’s, preferred stock and shares associated with the conversion of debt to purchase approximately 6.0 million and 5.7 million shares of common stock were outstanding at December 31, 2025 and 2024, respectively, but were excluded from the computation of diluted net loss per share at December 31, 2025 and 2024 due to the anti-dilutive effect on net loss per share. For the years ended December 31, 2025 2024 Net loss $ ( 3,748,995 ) $ ( 4,476,762 ) Net loss attributable to common shareholders $ ( 3,748,995 ) $ ( 4,476,762 ) Basic weighted average common shares outstanding 20,085,703 19,992,592 Diluted weighted average common shares outstanding 20,085,703 19,992,592 The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented: For the years ended December 31, Numerator 2025 2024 Net loss $ ( 3,748,995 ) $ ( 4,476,762 ) Denominator: Basic weighted average common shares outstanding 20,085,703 19,992,592 Effect of dilutive securities Warrants - - Convertible Debt - - Options - - RSUs Preferred Stock - - Diluted weighted average common shares outstanding 20,085,703 19,992,592 Net loss per common share: Basic $ ( 0.19 ) $ ( 0.22 ) Diluted $ ( 0.19 ) $ ( 0.22 ) 41 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, 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 and whether they are distinct from one another; (b) the transaction price; and (c) the standalone selling price for each performance obligation for purposes of transaction price allocation. 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 of our standard and customized equipment, BIT Solution and accessories, recognized upon transfer of control to the customer. Service and training revenue includes high-level decontamination engagements, equipment validation and customer training, recognized as the agreed-upon services are rendered A portion of our revenue is derived from SIS and CES, which may involve multiple performance obligations including equipment supply, installation, validation and ongoing service. For these arrangements, management exercises judgment in identifying distinct performance obligations, allocating the transaction price based on relative standalone selling prices, and determining the point at which control transfers to the customer, and allocating the transaction price based on relative standalone selling prices, when applicable. Delays in project completion or customer acceptance can affect the timing of revenue recognition. We record estimated allowances for sales returns using a specific identification method based on subsequent return activity and historical averages. For the years ended December 31, 2025 and 2024, we recorded allowances of $ 47,844 and $ 227,000 , respectively. Disaggregation of Revenue The following table presents our revenues disaggregated by revenue source (rounded to nearest thousand). Product and Service Revenue For the years ended December 31, 2025 2024 Change Product $ 3,965,000 $ 6,035,000 $ (2,070,000 ) Service 1,671,000 1,704,000 (33,000 ) Total $ 5,636,000 $ 7,739,000 $ (2,103,000 ) Revenue by Geographic Region For the years ended December 31, 2025 2024 Change United States $ 4,011,000 $ 6,098,000 $ (2,087,000 ) International 1,625,000 1,641,000 (16,000 ) Total $ 5,636,000 $ 7,739,000 $ (2,103,000 ) Costs to Obtain a Contract with a Customer We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. 42 Table of Contents Contract Balances As of December 31, 2025, and December 31, 2024 we had contract balances and unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed in the amounts of $ 424,032 and $ 211,724 respectively. As of December 31, 2025 2024 Balance, beginning of year $ 211,724 $ - Deposits Received 1,991,611 1,225,734 Deposits applied to Revenue ( 1,779,303 ) ( 1,014,010 ) Balance, end of year $ 424,032 $ 211,724 Equity Compensation Expense We account for equity compensation expense in accordance with FASB ASC 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value. The valuation methodology used to determine the fair value of options and warrants issued as compensation during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The expected term of the Company’s warrants has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” warrants. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its common stock, par value $0.01 (the “Common Stock”) and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment. On July 7, 2017, our shareholders approved the Company’s Amended and Restated 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 2,000,000 shares of Common Stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of Common Stock for numerous reasons, including, but not limited to, shares of Common Stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award, and awards under the 2016 Plan are expressly conditioned upon such agreements. For awards of restricted stock units ("RSUs"), the fair value is determined based on the closing market price of our Common Stock on the grant date. Compensation expense for RSUs is recognized on a straight-line basis over the requisite service (vesting) period. During the year ended December 31, 2025, we granted 100,000 RSUs to Mr. David Vanston, our Chief Financial Officer, under the 2016 Equity Incentive Plan, with a grant date fair value of $ 0.9983 per unit. The RSUs vest in three equal installments: 33,334 shares vested immediately upon the grant date of October 6, 2025; 33,333 shares vest on May 30, 2026; and 33,333 shares vest on May 30, 2027 . As of December 31, 2025, unrecognized stock-based compensation expense related to unvested RSUs was approximately $ 66,553 , which will be recognized over the remaining vesting period through May 30, 2027. Subsequent to December 31, 2025, we issued 33,334 shares of our Common Stock to Mr. Vanston representing the first vesting installment (see Note 10). For the years ended December 31, 2025 and 2024, we issued 60,000 and 60,000 shares of common stock and granted 100,000 RSUs, respectively, out of the 2016 Plan (See Note 10). Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $ 250,000 at times during the year. 43 Table of Contents Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the years ended December 31, 2025 and 2024. Advertising and Promotional Expenses We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses included in selling expenses for the years ended December 31, 2025 and 2024 were approximately $ 114,000 and $ 221,000 , respectively. Research and Development Expenses We expense research and development expenses in the period in which they are incurred. For the years ended December 31, 2025 and 2024, research and development expenses were approximately $ 290,000 and $ 291,000 , respectively. Business Segments We currently have one reportable business segment due to the fact that we derive our revenue primarily from one product in which 1) The business activities are homogenous in nature, 2) The entire operation faces similar market conditions and risks, 3) There is a high degree of integration in its operations, 4) Internal evaluations of financial results are conducted on a consolidated basis. A breakdown of revenue is presented in “Revenue Recognition” in Note 2 above. See Note 17, Segment Reporting for more details. We are required to apply the guidance in ASC 280 and identify significant segment expenses and other segment items for our single reportable segment. Going Concern For the years ended December 31, 2025 and 2024, our net loss was approximately $ 3,749,000 and $ 4,477,000 , respectively, and the cash used in operations was approximately $ 1,197,000 and $ 1,440,000 , respectively. As of December 31, 2025, we had approximately $ 88,000 in cash and cash equivalents, working capital of approximately $ 1.0 million, total stockholders' equity of $ 588,504 , and an accumulated deficit of $ 58.1 million. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. The consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business; no adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we not continue as a going concern. Management's Plan to Address Going Concern Equity Line of Credit and Shelf Registration Statement In November 2025, we entered into a $20 million Equity Line of Credit ("ELOC") with Hudson Global Ventures, LLC. Our Form S-3 shelf registration statement became effective on December 8, 2025, under which the Company is registered to offer and sell up to $50,000,000 of securities from time to time. Under the ELOC, we may, at our sole discretion, draw down between $25,000 and $2,000,000 per draw, subject to applicable exchange caps. Subsequent to December 31, 2025, we made our first draw under the ELOC on February 25, 2026, issuing 180,000 shares of Common Stock at $0.5229 per share for 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 set out in Note 10 to these consolidated financial statements. Capital Markets Access Our effective Form S-3 shelf registration statement 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 As of December 31, 2025, we had $ 3,135,000 in total convertible note principal outstanding, with a net carrying value of $ 2,912,000 after amortized debt issuance costs. 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. Further details of our convertible notes are set out in Note 9 to these 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. 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. Nasdaq Listing Deficiencies On November 17, 2025, we received a deficiency letter from the Listing Qualifications Department (the "Staff") of the Nasdaq Stock Market ("Nasdaq") notifying us that, for the preceding 30 consecutive business days, the closing bid price for our common stock, par value $0.01 per share (the "Common Stock"), was below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the "Bid Price Requirement"). In accordance with Nasdaq rules, we have been provided an initial period of 180 calendar days, or until May 18, 2026 (the "Compliance Date"), to regain compliance with the Bid Price Requirement. As of the date of this filing, approximately seven weeks remain in the 180-day compliance period. We are actively monitoring our stock price and evaluating available options to regain compliance, including a potential reverse stock split, subject to shareholder approval. There is no guarantee that we will be able to regain compliance with the Bid Price Requirement by the Compliance Date, and failure to do so may subject us to delisting proceedings by Nasdaq. Additionally, as of December 31, 2025, our total stockholders' equity of $ 588,504 is below the $2,500,000 minimum required under Nasdaq Listing Rule 5550(b)(1). On November 21, 2025, we received a deficiency letter from the Listing Qualifications Department (the "Staff") of the Nasdaq Stock Market notifying us that, based on our Form 10-Q for the period ended September 30, 2025, which reported stockholders' equity of $ 2,206,482 , we no longer comply with the minimum stockholders' equity requirement for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(1), and that we do not meet the alternatives of market value of listed securities or net income from continuing operations. We submitted a compliance plan within the required 45-day period and Nasdaq has accepted our plan, granting us an extension of up to 180 calendar days from November 21, 2025, or until May 20, 2026, to evidence compliance. Both deficiencies are subject to concurrent review by Nasdaq. There is no guarantee that we will be able to regain compliance with either requirement within the applicable timeframes, and failure to do so may subject us to delisting proceedings by Nasdaq. 44 Table of Contents Recent Accounting Pronouncements Recently issued accounting pronouncements not yet adopted In November 2024, FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40). In January 2025, ASU No. 2025-01 was issued to clarify the effective date for all public business entities. The ASU requires the disaggregated disclosure of specific expense categories, including purchases of inventory, employee compensation, depreciation, and amortization, within relevant income statement captions. This ASU also requires disclosure of the total amount of selling expenses along with the definition of selling expenses. The ASU is effective for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Adoption of this ASU can either be applied prospectively to consolidated financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the consolidated financial statements. Early adoption is also permitted. This ASU will likely result in the required additional disclosures being included in our consolidated financial statements, once adopted. We are currently evaluating the provisions of this ASU. In July 2025, FASB issued ASU No. 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. The amendments in this update provide 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. This update is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years. Adoption of this ASU can be applied prospectively for reporting periods after its effective date. 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. 2025-11, 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. 45 Table of Contents NOTE 3. INVENTORIES Inventories consist of the following: As of December 31, 2025 2024 Finished goods $ 2,672,800 $ 3,800,385 Raw materials 753,627 877,817 Inventory reserve ( 500,000 ) ( 1,100,000 ) Total $ 2,926,427 $ 3,578,202 The movements of inventory reserve were as follows: For the years ended December 31, 2025 2024 Beginning reserve $ 1,100,000 $ 95,000 Additions (provisions) - 1,005,000 Write-off/disposals ( 600,000 ) - Ending reserve $ 500,000 $ 1,100,000 During the year ended December 31, 2025, the inventory reserve decreased by $ 600,000 from $1.1 million to $500,000, reflecting the write-off and disposal of $600,000 of inventory items identified as no longer serviceable or saleable, including certain surface unit equipment retired from active inventory and repurposed for internal parts and repairs, as well as other slow-moving and excess inventory items identified during the year . The remaining reserve of $ 500,000 represents management's estimate of inventory that may not be fully realizable. NOTE 4. VENDOR DEPOSITS On December 31, 2025 and December 31, 2024, we maintained vendor deposits of $ 161,597 and $ 35,895 , respectively, for open purchase orders for inventory. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at: As of December 31, 2025 2024 Furniture and fixtures $ 458,652 $ 458,652 Equipment 2,316,200 2,301,803 Vehicles 66,170 66,170 Computer and software 321,499 316,334 Leasehold improvements 393,381 393,381 Tenant improvement allowance 405,000 405,000 Total property and equipment $ 3,960,902 $ 3,941,340 Less: accumulated depreciation 3,346,591 3,065,891 Property and equipment, net $ 614,311 $ 875,449 For the years ended December 31, 2025 and 2024, depreciation was $ 241,506 and $ 270,228 , respectively. For the years ended December 31, 2025 and 2024, amortization of tenant improvement allowance was $ 39,194 in both years and was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations. 46 Table of Contents NOTE 6. INTANGIBLE ASSETS Intangible assets consist of patents and trademarks related to our Binary Ionization Technology. We amortize the patents over the estimated remaining lives of the related patents. The trademarks have an indefinite life. Amortization expense was $ 29,822 and $ 26,308 for the years ended December 31, 2025 and 2024, respectively. Definite life intangible assets consist of the following: As of December 31, 2025 2024 Intellectual property and patents $ 3,449,482 $ 3,350,031 Less: accumulated amortization 2,960,143 2,930,321 Patents, net $ 489,339 $ 419,710 Indefinite life intangible assets consist of the following Trademarks 861,825 830,864 Total intangible assets, net $ 1,351,164 $ 1,250,574 Approximate future amortization is as follows (rounded to nearest thousand dollars): Year ended: Amount December 31, 2026 $ 32,000 December 31, 2027 32,000 December 31, 2028 32,000 December 31, 2029 32,000 December 31, 2030 32,000 Thereafter 329,000 Total $ 489,000 NOTE 7. LEASES In April 2018, we entered into a 10 -year lease agreement for a new 9,000 -square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement commenced in December 2018 when the property was ready for occupancy. The agreement provided for annual rent of $ 143,460 , an escalation clause that increases the rent 3 % year over year, a landlord tenant improvement allowance of $ 405,000 and additional landlord work as discussed in the lease agreement. We took occupancy of the property on December 17, 2018 and the lease was amended in March 2019 to provide for a 4-month rent holiday and a commencement date of April 1, 2019. A 7 % discount rate was determined using our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The balances for our operating lease where we are the lessee are presented as follows within our consolidated balance sheet: As of December 31, Operating leases: 2025 2024 Assets: Operating lease right-of-use asset $ 322,089 $ 399,254 Liabilities: Current portion of long-term operating lease $ 143,672 $ 129,132 Long-term operating lease, net of current portion 370,591 513,395 Total right of use liability $ 514,263 $ 642,527 47 Table of Contents The components of lease expense are as follows within our consolidated statement of operations: For the years ended December 31, 2025 2024 Operating lease expense $ 157,315 $ 157,315 Other information related to leases where we are the lessee is as follows: For the years ended December 31, 2025 2024 Cash paid for amounts included in the measurement of lease liabilities $ 169,220 $ 165,098 Supplemental cash flow information related to leases where we are the lessee is as follows: As of December 31, 2025 2024 Weighted-average remaining lease term: Operating leases 3.25 years 4.25 years Discount rate: Operating leases 7 % 7 % As of December 31, 2025, the maturities of our operating lease liability are as follows: Year ended: Operating Lease December 31, 2026 $ 175,153 December 31, 2027 180,408 December 31, 2028 185,820 December 31, 2029 34,841 Total minimum lease payments 576,221 Less: interest 61,958 Imputed value of lease obligations 514,263 Less: current portion 143,672 Long-term portion of lease obligations $ 370,591 NOTE 8. CLOUD COMPUTING SERVICE CONTRACT In May 2020 we entered into a cloud computing service contract with a vendor which provided for annual payments of $ 30,409 and expired in May 2025. These implementation costs totaled $ 66,857 and were capitalized as a prepaid expense and amortized over the contract term in accordance with ASU No. 2018-15, for the period from January 2021 through May 2025 . Amortization expense for the years ended December 31, 2025 and 2024 was $ 11,297 and $ 15,063 , respectively. NOTE 9. CONVERTIBLE DEBT As of December 31, 2025, the Company has two series of convertible promissory notes outstanding under separate Securities Purchase Agreements entered into in 2023 and 2025, respectively. The aggregate outstanding principal of both series is $ 3,135,000 , carried as a long-term liability on the Consolidated Balance Sheet. Each series is described separately below. 2023 Notes On October and November 2023, we entered into a Securities Purchase Agreement (the “2023 SPA”) with certain accredited investors (collectively, the “Investors”) pursuant to which we agreed to sell and issue to the Investors in a private placement transaction (the “Private Placement”) in one or more closings up to an aggregate principal amount of $ 5,000,000 of Convertible Notes (the “2023 Notes”). As of December 31, 2025, we issued and sold an aggregate of $ 2,600,000 of 2023 Notes to certain Investors pursuant to the 2023 SPA, convertible into an aggregate of 2,080,000 shares of Common Stock at a conversion price of $ 1.25 per share. 48 Table of Contents The 2023 Notes mature and are due on the fifth anniversary of the issuance date in October and November of 2028. The 2023 Notes bear simple interest at a rate of 12% per annum, payable in equal monthly installments. The 2023 Notes are convertible into shares of our Common Stock at the option of the holder at a fixed conversion price of $1.25 per share. In addition, we may require the Investors to convert the 2023 Notes at the $1.25 per share conversion price at any time after 90 days from the issue date if the Common Stock has a closing bid price of $1.55 per share or higher on any twenty (20) trading days within a thirty (30) day consecutive trading period, or if a "fundamental change" occurs (as defined in the 2023 SPA). For the avoidance of doubt, $1.55 is the stock price threshold that triggers the Company's mandatory conversion right and is not itself a conversion price; the notes always convert at $1.25 per share . The 2023 Notes are unsecured and senior to other indebtedness subject to certain exceptions. 2025 Notes During the year ended December 31, 2025, we entered into Securities Purchase Agreements (the "2025 SPA") with certain accredited investors pursuant to which we agreed to sell and issue to the Investors in a private placement transaction in one or more closings up to an aggregate principal amount of $ 3,000,000 of Convertible Notes (the "2025 Notes"). Pursuant to the 2025 SPA and as of December 31, 2025, we sold and issued convertible promissory notes initially convertible into an aggregate of 428,000 shares of Common Stock at a conversion price of $ 1.25 per share in exchange for aggregate gross proceeds of $ 535,000 . As of December 31, 2025, approximately $ 2,465,000 remains available for issuance under the 2025 SPA, subject to the terms and conditions thereof. The 2025 Notes mature and are due on the fifth anniversary of the respective issuance dates in 2030. The 2025 Notes bear simple interest at a rate of 12% per annum, payable in equal monthly installments. The 2025 Notes are convertible into shares of our Common Stock at the option of the holder at a fixed conversion price of $1.25 per share. In addition, we may require the Investors to convert the 2025 Notes at the $1.25 per share conversion price at any time after 90 days from the issue date if the Common Stock has a closing bid price of $1.55 per share or higher on any twenty (20) trading days within a thirty (30) day consecutive trading period, or if a “fundamental change” occurs (as defined in the 2025 SPA). For the avoidance of doubt, $1.55 is the stock price threshold that triggers the Company's mandatory conversion right and is not itself a conversion price; the notes always convert at $1.25 per share . The 2025 Notes are unsecured and senior to other indebtedness subject to certain exceptions Interest expense on the 2023 Notes was $ 312,000 for each of the years ended December 31, 2025 and 2024. Interest expense on the 2025 Notes was $ 44,675 for the year ended December 31, 2025 (2024: nil), reflecting partial-year accrual from the respective issuance dates. Total interest expense on convertible notes for the year ended December 31, 2025 was $ 356,675 (2024: $ 312,000 ). Registration Rights In connection with each of the 2023 SPA and the 2025 SPA, we entered into registration rights agreements with the respective Investors pursuant to which we agreed to register for resale the shares of Common Stock issuable upon conversion of the respective Notes. As of December 31, 2025, we have not filed a resale registration statement covering these shares. We are evaluating the timing and method of fulfilling our registration obligations under each agreement. Failure to satisfy our registration obligations within the timeframes specified in the respective registration rights agreements could result in the payment of liquidated damages or other penalties to the Investors, the amount of which we are unable to estimate at this time. Debt Issuance Costs and Interest Amortization of deferred financing costs were $ 70,939 and $ 62,480 for the years ended December 31, 2025 and 2024, respectively, which has been included with interest expense on the statement of operations. Additions to deferred financing costs totaled $ 54,058 during the year ended December 31, 2025, and are being amortized on a straight-line basis over the life of the notes. Annual cash interest payable on the aggregate outstanding principal of $ 3,135,000 at 12% per annum is approximately $ 376,200 , payable in equal monthly installments. Convertible notes consist of the following at: As of December 31, 2025 2024 2023 Notes $ 2,600,000 $ 2,600,000 2025 Notes 535,000 - Total convertible notes $ 3,135,000 $ 2,600,000 Less: Debt issuance costs ( 366,456 ) ( 312,398 ) Accumulated amortization 143,832 72,892 Debt issuance costs, net ( 222,624 ) ( 239,506 ) Convertible notes, net $ 2,912,376 $ 2,360,494 49 Table of Contents NOTE 10. SHAREHOLDERS’ EQUITY Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding up by us before any payment is made to the holders of our common stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock. Convertible Series A Preferred Stock Our authorized Convertible Series A Preferred Stock, $ 0.01 par value, consists of 1,000,000 shares. At December 31, 2025 and 2024, there were 63,750 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock. Convertible Series B Preferred Stock Our authorized Convertible Series B Preferred Stock, $ 1,000 stated value, 7.5% cumulative dividend, consists of 4,000 shares. As at December 31, 2025 and 2024, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock. Common Stock In May 2024, we issued 60,000 shares of Common Stock valued at approximately $ 45,000 to members of our Board pursuant to our equity plan (see Note 10). In June 2025, we issued 60,000 shares of Common Stock valued at approximately $ 51,000 to members of our Board pursuant to our equity plan (see Note 10). In October 2025, we issued 150,000 shares of Common Stock valued at $ 147,000 in consideration for services provided by an external advisor which has been included in General & Administrative expenses. In December 2025, we issued 52,000 shares of our Common Stock to Hudson Global as consideration for the Commitment Shares, which was valued at $ 40,650 (see Equity Purchase Agreement below). Equity Purchase Agreement — Hudson Global Ventures, LLC On November 5, 2025, the Company entered into an Equity Purchase Agreement (the "Purchase Agreement") with Hudson Global Ventures, LLC ("Hudson Global"), pursuant to which the Company has the right, but not the obligation, to sell to Hudson Global up to $20,000,000 of shares of Common Stock from time to time over a 24-month period (the "Commitment Period"), subject to the satisfaction of certain conditions set forth in the Purchase Agreement. · Put Notices and Pricing At any time during the Commitment Period, the Company may direct Hudson Global to purchase shares of Common Stock by delivering a written Put Notice. Each Put Notice must be for a minimum of $ 25,000 . The purchase price per share for each draw is equal to the lesser of (i) 92% of the average of the three lowest trading prices of the Common Stock during the ten trading days immediately preceding the put date and (ii) 92% of the lowest closing price of the Common Stock during the applicable valuation period as defined in the Purchase Agreement . · Exchange Cap Under applicable Nasdaq rules, the Company may not issue or sell to Hudson Global shares of Common Stock in excess of 19.99 % of the shares of Common Stock outstanding immediately prior to the execution of the Purchase Agreement (the "Exchange Cap") without first obtaining shareholder approval as required by Nasdaq Rule 5635(d). The Company is not obligated to sell any shares to Hudson Global, and Hudson Global is not obligated to purchase any shares that would exceed the Exchange Cap. · Commitment Shares and Registration In consideration for Hudson Global's commitment under the ELOC, the Company issued 52,000 shares of Common Stock to Hudson Global as Commitment Shares on December 11, 2025, valued at $ 40,560 based on the closing price of the Common Stock on the date of issuance. These deferred financing costs are included within prepaid expenses on the Consolidated Balance Sheet and will be amortized on a straight-line basis over the 24-month Commitment Period. The Commitment Shares and the shares issuable to Hudson Global under the Purchase Agreement were registered for resale pursuant to the Form S-3 registration statement (File No. 333-291563), which was declared effective on December 8, 2025, and the prospectus supplement filed pursuant to Rule 424(b)(5) on December 11, 2025. 50 Table of Contents Equity Activity During the Year The Company did not draw any funds under the Purchase Agreement during the year ended December 31, 2025. Subsequent to December 31, 2025, the Company made its first draw under the Purchase Agreement, raising gross proceeds of $ 94,130 through the issuance of 180,000 shares of Common Stock at a price of $ 0.52 per share. See Note 19, Subsequent Events. Stock-based compensation for the year ended December 31, 2025 was $ 198,000 , consisting of $ 51,000 for shares issued to directors and $ 147,000 for shares issued to an external advisor. Stock-based compensation for the year ended December 31, 2024 was $ 189,307 , consisting of $ 45,000 for shares issued to directors and $ 144,307 related to officer stock options issued during the year. These expenses were included within General and Administrative expenses in our statement of operations. Stock Options There were no stock options issued during the year ended December 31, 2025. In May 2024, we issued options to purchase 225,000 shares of Common Stock to Officers at an exercise price of $ 0.75 per share pursuant to their employment agreements. The options were valued at $ 144,307 and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options received by Officers with the following assumptions: volatility, 125 %; expected dividend yield, 0%; risk free interest rate, 4.35 %; and a contractual term of 10 years. The grant date fair value of each share of Common Stock underlying the options was $ 0.64 . The following table summarizes stock options outstanding as of December 31, 2025 and 2024: For the years ended December 31, 2025 2024 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Outstanding, beginning of period 805,042 $ 1.23 617,542 $ 1.38 Granted - - 225,000 0.75 Exercised - - ( 31,250 ) 0.88 Expired ( 67,500 ) 3.83 ( 6,250 ) 0.80 Outstanding, end of period 737,542 $ 0.99 805,042 $ 1.23 Options outstanding and exercisable by price range as of December 31, 2025 were as follows: Average Weighted Exercisable Options Remaining Weighted Outstanding Options Contractual Average Range Number Life in Years Number Exercise Price $ 0.71 7,042 2.05 7,042 $ 0.71 $ 0.75 225,000 8.38 225,000 $ 0.75 $ 0.80 2,500 2.07 2,500 $ 0.80 $ 0.85 210,000 7.08 210,000 $ 0.85 $ 1.12 270,000 6.05 270,000 $ 1.12 $ 1.93 10,500 0.95 10,500 $ 1.93 $ 4.40 12,500 0.09 12,500 $ 4.40 737,542 6.84 737,542 $ 0.99 51 Table of Contents Restricted Stock Units During the year ended December 31, 2025, the Company granted 100,000 restricted stock units ("RSUs") to Mr. David Vanston, Chief Financial Officer, under the 2016 Equity Incentive Plan. The RSUs vest in three equal installments: 33,334 shares vested immediately upon the grant date of October 6, 2025; 33,333 shares vest on May 30, 2026; and 33,333 shares vest on May 30, 2027 . The following table summarizes RSU activity for the year ended December 31, 2025: Number of RSUs Weighted Average Grant Date Fair Value Outstanding, beginning of period - - Granted 100,000 $ 0.9983 Vested ( 33,334 ) $ 0.9983 Forfeited/Cancelled - - Outstanding, end of period 66,666 $ 0.9983 As of December 31, 2025, there were 66,666 unvested RSUs outstanding with a weighted average grant date fair value of $ 0.99 83 per share. The remaining unrecognized stock-based compensation expense related to unvested RSUs was approximately $ 66,553 as of December 31, 2025, which will be recognized over the remaining vesting period through May 30, 2027. Stock Warrants There were no stock warrants issued during the years ended December 31, 2025 and 2024. The following table summarizes the outstanding common stock warrants as of December 31, 2025 and 2024: For the years ended December 31, 2025 2024 Number of Warrants Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Outstanding, beginning of period 2,765,846 $ 2.26 2,772,096 $ 2.25 Granted - - - - Exercised - - - - Expired ( 161,458 ) 1.19 ( 6,250 ) 1.12 Outstanding, end of period 2,604,388 $ 2.32 2,765,846 $ 2.26 Warrants outstanding and exercisable by price range as of December 31, 2025 were as follows: Outstanding Warrants Exercisable Warrants Exercise Price Number Average Weighted Remaining Contractual Life in Years Number Weighted Average Exercise Price $ 0.64 31,250 7.89 31,250 $ 0.64 $ 0.80 125,000 8.08 125,000 $ 0.80 $ 0.96 437,500 6.98 437,500 $ 0.96 $ 1.68 1,434,721 0.74 1,434,721 $ 1.68 $ 2.18 172,167 0.74 172,167 $ 2.18 $ 4.00 28,750 4.32 28,750 $ 4.00 $ 6.95 375,000 4.75 375,000 $ 6.95 2,604,388 2.85 2,604,388 $ 2.32 There were no unvested warrants outstanding as of December 31, 2025. 52 Table of Contents NOTE 11. COMMITMENTS AND CONTINGENCIES Legal Contingencies We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operations or cash flows. In addition, from time to time, we may have to file claims against parties that infringe on our intellectual property. Product Liability As of December 31, 2025 and 2024, there were no claims against us for product liability. NOTE 12. CONTRACTS AND AGREEMENTS Employment Agreement – Chief Financial Officer On May 30, 2025, the Board of the Company appointed Mr. David Vanston as the Company’s Chief Financial Officer, effective immediately. In connection with his appointment, the Company entered into an offer letter with Mr. Vanston providing for an annual base salary of $ 230,000 and eligibility to receive an annual discretionary bonus of up to 40 % of his base salary. Mr. Vanston is also entitled to receive an initial grant of 100,000 restricted stock units and an additional grant of 100,000 restricted stock units following one year of employment, each subject to a three-year vesting schedule. Director Agreements On November 19, 2025, the Company’s shareholders elected Messrs. Francesco Fragasso and Harold Paul to serve as the Class II Directors on the Company’s Board to serve a three-year term that will expire at the Company’s 2028 Annual Meeting of Shareholders and at such time as their respective successor has been duly elected and qualified or their earlier resignation or removal. During the years ended December 31, 2025 and 2024, our director agreements for non-employee members of our Board consisted of an annual fee of $ 48,000 , to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee was $ 54,600 , also paid in cash on a quarterly basis. Non-employee Director compensation also included the annual issuance of our Common Stock. During October 2025, the Compensation Committee approved a change to our director compensation whereby each non-employee director of the Board will be granted 40,000 RSUs effective as of the date of the 2025 Annual Meeting of Stockholders (the “RSU grant”); the non-employee directors are entitled to receive one share of Common Stock for each RSU upon vesting; and the RSU grant will vest in full upon the earlier of (i) the first anniversary of the date of grant and (ii) immediately prior to the annual meeting of shareholders that occurs following the date of grant, subject to the non-employee director’s continued service to the Company through such vesting date. In addition, director fees are now reduced to $ 5,000 per quarter, which commenced in the fourth quarter of fiscal year 2025. Agreement for the Purchase and Sale of Future Receipts Effective November 18, 2025, we entered into an agreement with Agile Capital Funding, LLC ("Agile") pursuant to which we sold to Agile 15% of the proceeds of each future sale made by us (the "Future Receipts") until Agile has received an aggregate of $ 447,300 (the "Purchased Amount"). As consideration for the Purchased Amount, Agile paid us a purchase price of $ 315,000 , less an origination fee of $ 15,000 , for net proceeds of $ 300,000 . Although the agreement was structured as a sale of future receipts, we determined that the arrangement has the economic characteristics of a borrowing and have accordingly accounted for it as debt under ASC 470-10-25 The $ 132,300 excess of the Purchased Amount over the net proceeds received, has been recorded as a debt discount presented as a direct reduction of the carrying value of the liability on the Consolidated Balance Sheet, and is being amortized as interest expense over the expected repayment period on a pro rata basis of monthly receipts. Weekly payments of $ 15,975 , commencing December 3, 2025, are debited from our bank account and reconciled monthly against 15% of actual Future Receipts for the period. The agreement is secured by a security interest in all of our present and future accounts receivable, evidenced by a UCC-1 financing statement, supported by a corporate guaranty of performance. The agreement contains a covenant prohibiting us from entering into any additional financing arrangements relating to our future receipts or accepting any cash advance from any other funding source while any balance remains outstanding. The agreement provides for prepayment in whole at our option at specified payoff amounts, with credit applied for payments already made. 53 Table of Contents As of December 31, 2025, the gross remaining balance under the agreement is $ 367,425 . After deducting the debt discount of $ 113,191 , the net carrying value of $ 254,234 is classified as a current liability on the Consolidated Balance Sheet, with monthly repayments of approximately $ 69,225 continuing into 2026 until the Purchased Amount is satisfied. During the year ended December 31, 2025, we recognized $ 34,109 of interest expense related to this arrangement, included in the Consolidated Statements of Operations. NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES As of December 31, 2025 2024 Commissions $ 174,783 $ 187,151 Payroll and related costs 533,817 125,773 Director fees 64,650 37,650 Sales tax payable 1,653 3,864 Accrued warranty (Note 14) 10,905 30,000 Other accrued expenses and other current liabilities 74,895 71,237 $ 860,703 $ 455,675 The increase in payroll and related costs from $ 125,773 at December 31, 2024 to $ 533,817 at December 31, 2025 primarily reflects the accrual of earned but unpaid compensation to certain executive officers. As a cash conservation measure, certain members of executive management have not been paid their earned compensation in cash during the year. These obligations are fully accrued in accordance with ASC 710 and remain payable in accordance with the terms of the applicable employment arrangements. The Company intends to satisfy these obligations as operating cash flow permits. For further information regarding the compensation arrangements with the Company's named executive officers, including the portion of salary earned but not paid in cash during fiscal 2025, see the Summary Compensation Table and related footnotes in Part III, Item 11 of this Annual Report. NOTE 14. ACCRUED WARRANTY Our manufacturer assumes the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. The warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate warranty costs based on historical warranty claim experience. The following table presents warranty reserve activities at: For the years ended December 31, 2025 2024 Beginning accrued warranty costs $ 30,000 $ 30,000 Provision for warranty expense 6,404 9,707 Settlement of warranty claims ( 25,499 ) (9,707 ) Ending accrued warranty costs $ 10,905 $ 30,000 NOTE 15. INCOME TAXES The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, measured using enacted tax rates expected to apply when those differences reverse. As described in Note 2, Summary of Significant Accounting Policies , the Company has adopted ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, for the fiscal years ended December 31, 2025 and 2024, applied on a prospective basis as of January 1, 2025. Because the ASU affects disclosures only, adoption did not affect our Consolidated Statements of Operations or Consolidated Balance Sheets. 54 Table of Contents The Company recorded no income tax expense or benefit for the years ended December 31, 2025 and 2024 due to operating losses and the establishment of a full valuation allowance against its deferred tax assets. The Company’s net loss before income tax consisted of: 2025 2024 United States $ ( 3,748,995 ) $ ( 4,476,762 ) Foreign - - Total $ ( 3,748,995 ) $ ( 4,476,762 ) The Company’s income tax expense (benefit) consisted of: For the years ended December 31, 2025 2024 Current: Federal $ - $ - State - - Foreign - - Total current - - Deferred: Federal - - State - - Foreign - - Total deferred - - Total Income Tax Expense (benefit) $ - $ - Cash paid for income taxes, net of refunds was as follows: For the years ended December 31, 2025 2024 Federal $ - $ - State - - Foreign - - Total Cash Paid for Income Taxes $ - $ - State minimum taxes for 2025 and 2024 totaling $ 1,350 and $ 800 , respectively, are not within the scope of ASC 740, as it is assessed on the privilege of doing business rather than on net income and are classified as a general and administrative expense in the accompanying statements of operations. Effective Tax Rate Reconciliation Upon adoption of ASU 2023-09, Improvements to Income Tax Disclosures, the following table reconciles the statutory federal income tax rate to the Company's effective tax rate for the year ended December 31, 2025: 2025 Amount Percent Tax at U.S. federal statutory rate $ ( 787,289 ) - 21.0 % State Income Taxes, net of federal benefit - 0.0 % Tax Credits - 0.0 % Stock-based compensation - 0.0 % Meals & Entertainment 4,783 0.6 % Other 5,336 0.7 % Change in federal valuation allowance 777,170 22.3 % Effective tax rate $ - 0.0 % 55 Table of Contents The reconciliation of taxes at the federal statutory rate to our provision for (benefit from) income taxes for the year ended December 31, 2024 in accordance with the guidance prior to the adoption of ASU 2023-09 was as follows: As of December 31, 2024 Income (Loss) before income tax $ ( 4,476,762 ) US statutory corporate income tax rate 28 % Income tax expense computed at US statutory corporate income tax rate ( 1,253,493 ) Reconciling items: Change in valuation allowance on deferred tax assets 1,152,938 Provision to prior year tax return 68,437 Meals and Entertainment 2,330 Other 29,788 Income tax expense (benefit) $ - Components of our deferred income tax assets (liabilities) are as follows: As of December 31, 2025 2024 Deferred tax assets: Reserve for Credit Losses $ 322,000 $ 624,000 Inventory Reserve 140,000 308,000 Accrued Expenses 159,000 86,000 Intangible Assets 126,000 98,000 Allowance for Sales Returns 13,000 64,000 Capitalized R&D - 175,000 Stock-Based Compensation 1,163,000 1,278,000 Operating lease right-of-use liabilities 144,000 180,000 Net operating losses - federal 5,945,000 4,711,000 Net operating losses - state 1,805,000 1,403,000 Valuation Allowance ( 9,719,000 ) ( 8,692,000 ) Deferred Tax Assets 98,000 235,000 Deferred tax liabilities: Operating lease right-of-use assets ( 90,000 ) ( 158,000 ) Property and Equipment ( 8,000 ) ( 77,000 ) ( 98,000 ) ( 235,000 ) Net Deferred Tax Assets and Liabilities $ - $ - Net Operating Loss Carryforwards For income tax purposes in the United States, we had available federal net operating loss carryforwards (“NOL”) as of December 31, 2025 and 2024 of approximately $ 28,310,000 and $ 22,434,000 respectively to reduce future federal taxable income. For income tax purposes in the United States, we had available state NOL carryforwards as of December 31, 2025 and 2024 of approximately $ 25,784,000 and $ 20,045,000 respectively to reduce future state taxable income. If any of the NOL’s generated prior to 2018 are not utilized, they will 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. There may be certain limitations as to the future annual use of the NOLs due to certain changes in our ownership. Valuation Allowance The Company has established a full valuation allowance against its net deferred tax assets. Management evaluates the realizability of deferred tax assets based on all available evidence, including historical operating results, projections of future taxable income, and the reversal of temporary differences. Based on the Company’s history of operating losses, management has concluded that it is more likely than not that the deferred tax assets will not be realized and has therefore established a full valuation allowance. 56 Table of Contents Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized; in accordance with ASC-740 guidance for income taxes. As of December 31, 2025 and 2024, we recorded valuation allowances of $ 9,719,000 and $ 8,692,000 , respectively for the portion of the deferred tax assets that we do not expect to be realized. The valuation allowance on our net deferred taxes increased by $ 1,027,000 during the year ended December 31, 2025, primarily due to U.S. deferred tax assets incurred in the current year that cannot be realized. Uncertain Tax Positions We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2025, and 2024, the management of the Company determined there were no reportable uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various states, including Maryland, California, and Florida. Tax years 2022 through 2024 remain open to examination by the relevant taxing authorities. NOTE 16. CUSTOMER CONCENTRATION The Company monitors customer concentration by identifying customers whose accounts receivable balances individually represent 10 % or more of accounts receivable at the balance sheet date, and customers whose revenue for the fiscal year individually represents 10 % or more of total revenue. The following sets forth the Company's significant customer concentrations for the periods presented. Accounts Receivable Concentration As of December 31, 2025, two customers accounted for approximately 40 % of the Company's gross accounts receivable. As of December 31, 2024, two customers accounted for approximately 25 % of the Company's gross accounts receivable. Revenue Concentration For the year ended December 31, 2025, one customer accounted for approximately 10 % of the Company's total revenue. For the year ended December 31, 2024, one customer accounted for approximately 15 % of the Company's total revenue. The decrease in the concentration percentage reflects continuing efforts to diversify our customer base. The Company does not have any long-term purchase commitments with any of its significant customers, and there can be no assurance that these customers will continue to purchase the Company's products and services at historical levels or at all. The loss of, or a significant reduction in purchases by, any one of these customers could have a material adverse effect on the Company's revenue and results of operations. See Item 1A, Risk Factors, for further discussion of risks related to customer concentration and the absence of long-term customer contracts. NOTE 17. SEGMENT REPORTING The Company operates and is managed as a single operating and reportable segment. Our Chief Executive Officer is the chief operating decision maker ("CODM") and is responsible for allocating resources and assessing performance across the organization. The CODM manages the business and allocates resources on a consolidated basis. In assessing performance and making resource allocation decisions, the CODM regularly reviews consolidated financial information including net revenue, gross profit and operating income (loss), which is the Company’s reported measure of segment profit (loss) under ASC 280. The CODM also regularly reviews trends in significant expense categories that are included in this measure, such as professional and consulting fees, selling expenses, research and development, and general and administrative expenses. Other than our cash and cash equivalents, which are reviewed for liquidity management purposes, the CODM does not regularly review asset information at any lower level of the organization for purposes of allocating resources or assessing performance. The Company derives its revenue primarily from the sale of equipment and services based on its proprietary BIT technology, both domestically and internationally. A disaggregation of revenue is presented in Note 2, Summary of Significant Accounting Policies, under Revenue Recognition. 57 Table of Contents NOTE 18. EMPLOYEE RETENTION CREDITS During February and May 2025, the Company recorded refunds as a result of Employee Retention Credits (ERC), which are refundable tax credits against certain employment taxes initially made available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act). In accordance with the Company’s accounting policy, the ERC payments have been recognized as Other Income as the Company determined that all relevant criteria for recognition had been met. The ERC represents a one-time benefit and does not constitute recurring operational revenue. For the year ended December 31, 2025, we recorded $ 534,912 in employee retention credits and $ 81,887 related interest within other income and interest income, respectively, in our consolidated statement of operations. This consists of refund claims filed on amended Forms 941-X for the second, third and fourth quarters of 2020, and the first two quarters of 2021. NOTE 19. SUBSEQUENT EVENTS The Company has evaluated subsequent events from the balance sheet date and has identified the following events requiring disclosure: ( a) Common Stock Issuances to the Board for compensation In January 2026, the Company issued 50,000 shares of Common Stock valued at approximately $ 40,000 to members of its Board pursuant to the Company’s equity incentive plan (see Note 12), in settlement of director compensation for the fourth quarter of fiscal 2025 and the first quarter of fiscal 2026. (b) First Draw Under ELOC On February 25, 2026, the Company submitted a put notice to Hudson Global pursuant to the ELOC. Pursuant to that notice, Hudson Global purchased 180,000 shares of Common Stock at a price of $ 0.52 per share, for aggregate gross proceeds to the Company of $ 94,130 . The shares were issued pursuant to the Form S-3 registration statement (File No. 333-291563) and the prospectus supplement dated December 11, 2025. The Company intends to use the proceeds for working capital and general corporate purposes. 58 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.