Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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

This Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A") and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Forward-looking statements are not guaranteeing future performance and the TOMI Environmental Solutions, Inc. (the "Company," "TOMI," "we," and "our") actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company's annual report on Form 10-K for the year ended December 31, 2025, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 31, 2026 (the "Annual Report") under the heading "Risk Factors." The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Unless otherwise stated, all information presented herein is based on the Company's fiscal calendar, and references to years, quarters, months or periods refer to the Company's fiscal years ended in December and the associated quarters, months and periods of those fiscal years. Each of the terms the "Company" and "TOMI" as used herein refers collectively to TOMI Environmental Solutions, Inc. unless otherwise stated.

The following MD&A should be read in conjunction with the Annual Report filed with the SEC and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

Quarterly Highlights

Business and Financial Update

The first quarter of 2026 delivered improved financial results, with revenue of approximately $1.65 million reflecting a 5% increase over the first quarter of 2025 and a 67% sequential increase over the fourth quarter of 2025. Growth was primarily driven by increased equipment and CES-related sales to commercial service provider customers, partially offset by lower service revenue reflecting project completion timing. Total revenue and sales order backlog was $3.4 million as of March 31, 2026, providing strong visibility into near-term revenue conversion.

Our integrated project pipeline, encompassing SIS, Hybrid, and CES projects awaiting approval or unsigned contract, grew to approximately $4.3 million across 13 customers, an increase from the November 2025 $3 million integration sales pipeline. Notably, we secured a $440,000 annual purchase order for recurring decontamination services with a leading global medical technology company, reflecting the growing contribution of our high-margin iHP Corporate Service business.

Since 2024, BIT solution sales have shown steady annual growth of 21% from 2024 to 2025. This momentum has been maintained into the current quarter. Management expects BIT Solution sales to exceed 2025 levels, which management believes could support progress toward the Company's future profitability. Applicator sales in the current quarter exceeded total full-year 2025 applicator sales, representing a 139% year-over-year increase, reflecting growing adoption of our razor/blade consumable model.

Our iHP technology continued to gain market recognition across pharmaceutical, biotech, food safety, and international markets during the quarter. Key first quarter 2026 developments included regulatory authorization in Great Britain and Northern Ireland from the UK Health and Safety Executive, our first EU member state product authorization from the Dutch regulatory authority, a strategic partnership with Total Clean Air as our Preferred European Partner across the UK and EU, expanded Canadian operations through our distribution partner, and a new food safety case study demonstrating up to 95% reduction in sanitation testing costs.

Gross margin decreased from 60% in the three months ended March 31, 2025 to 50% in the current quarter, reflecting strategic price discounts to drive equipment adoption and an unfavorable product mix shift toward lower-margin equipment sales. Management views these factors as temporary, as growth in recurring high-margin BIT Solution consumable sales is expected to support margin recovery.

Operating expenses decreased $248,000, or 15%, to $1.5 million, reflecting disciplined cost management across professional fees, selling expenses, and general and administrative costs.

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Business Highlights and Recent Events

·	On January 6, 2026, a private East Coast research university purchased and installed a SteraMist Hybrid System for repeatable, high-level decontamination of reusable medical equipment, representing the second SteraMist Hybrid sale within the Company's automated installation pipeline.
·	On January 20, 2026, the Company sold a Custom Engineered System in the United Kingdom to an international pharmaceutical manufacturer, integrated into Total Clean Air's modular cleanroom platform, marking the first deployment of SteraMist iHP technology within TCA's modular architecture.
·	On February 23, 2026, the UK Health and Safety Executive granted official regulatory authorization for the Company's BIT Solution and SteraMist iHP products as biocidal products for use in Great Britain and Northern Ireland.
·	On March 3, 2026, the Company entered into a strategic partnership with Total Clean Air, establishing TCA as its Preferred European Partner for SteraMist iHP technology across the United Kingdom and European Union.
·	On March 16, 2026, the Company announced expanded Canadian operations, with its Canadian distribution partner increasing equipment inventory to support direct-to-customer sales across the provinces following strategic placements at leading Canadian health research organizations and hospital systems.
·	On March 18, 2026, the Company announced its expansion into the food safety sector, citing a case study in which SteraMist iHP technology delivered a reduction of up to 95% in sanitation testing costs for a food manufacturer.
·	On March 24, 2026, a major Mexican dairy manufacturer engaged ongoing SteraMist iHP services for facility sanitation through distributor DisinfectCare, further extending the Company's international service footprint.
·	On March 25, 2026, the Company received formal biocidal product authorization from the independent Dutch regulatory authority (Ctgb), marking TOMI's first product approval within a European Union member state and supporting a streamlined mutual recognition pathway in other EU member states.

Post-Quarter Developments:

·	The Company reported strong momentum in the compounding pharmacy sector, with approximately a dozen active client partnerships driven by tightening FDA regulatory standards for 503A and 503B facilities, reflecting growing adoption of SteraMist as a validated, automated decontamination solution.
·	The Company attended INTERPHEX 2026, one of the premier trade shows in the pharmaceutical, biotechnology, and medical device industries held in New York City. INTERPHEX showcases innovative solutions and technologies that drive advancements in the life sciences sector. At the event, TOMI engaged with over 200 current and potential new customers - explored new business opportunities with end users to expand its "Fortune 500" customer base, discussed new projects with contractor building designers and Original Equipment Manufacturers (OEMs), and met with our current life science distributors on growth opportunities. Discussions centered on strategizing new projects and expanding the pipeline in integrated automation lines.
·	TOMI finalized timelines with a new customer, a prominent American healthcare company renowned for its innovative medications in premixed ready-to-use formulations, known to enhance hospital efficiency and support patient safety protocols. Further, this company owns a proprietary container technology that allows certain premix medicines to have an extended shelf life. TOMI is set to develop an iHP integration for their proprietary system, utilizing iHP as its decontamination method.
·	This new partnership aligns well with our customers and strategy, adding to the five (5) installations, as well as with the recent service contract we have secured for delivery throughout 2026. With a robust pipeline of anticipated automated integration projects yet to be won, this delivery positions us favorably to achieve our expected annual revenue.

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The following overview summarizes key factors affecting the Company's financial performance for the quarter ended March 31, 2026 compared to the Company's Consolidated Balance Sheet as of December 31, 2025 and should be read in conjunction with the selected financial metrics presented below.

Financial Operations Overview (in thousands)		March 31, 2026				December 31, 2025				Change
Cash and cash equivalents		$	280			$	88			$	192
Accounts receivable, net		$	762			$	689			$	73
Inventories, net (Note 3)		$	2,917			$	2,926			$	(9	)
Working capital		$	394			$	1,024			$	(630	)

The following table summarizes selected financial metrics based on the Company's Consolidated Statement of Operations for the three months ended March 31, 2026 compared to March 31, 2025 and provides a high-level overview of the Company's operating performance.

Key financial metrics (in thousands, except per share data)		March 31, 2026				March 31, 2025				Change
Revenue		$	1,654			$	1,577			$	77
Gross profit		$	832			$	952			$	(120	)
Operating expenses		$	1,458			$	1,706			$	(248	)
Loss from operations		$	(626	)		$	(754	)		$	128
Net loss		$	(810	)		$	(255	)		$	(555	)
Basic and diluted loss per share		$	(0.04	)		$	(0.01	)		$	(0.03	)

The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following table presents our results of operations for the three months ended March 31, 2026, and 2025, together with the changes between the periods. The discussion below addresses the significant factors contributing to the changes in our results of operations.

Results of operations (in thousands)		March 31, 2026				March 31, 2025				Change
Revenue		$	1,654			$	1,577			$	77
Cost of sales			822				625				197
Gross profit		$	832			$	952			$	(120	)
Operating expenses
Professional fees			182				219				(37	)
Depreciation and amortization			53				69				(16	)
Selling expenses			197				246				(49	)
Research and development			57				45				12
Consulting fees			65				87				(22	)
General and administrative			904				1,040				(136	)
Total operating expenses		$	1,458			$	1,706			$	(248	)
Loss from operations		$	(626	)		$	(754	)		$	128
Other income (expense)			(184	)			499				(683	)
Net loss		$	(810	)		$	(255	)		$	(555	)

Other income (expense) decreased $683,000 compared to three months ended March 31, 2025, reflecting the absence of the one-time Employee Retention Credit benefit of $535,000 and related interest of $83,000 recognized in the prior year period, with no comparable activity in the current quarter. Interest expense increased $65,000 reflecting higher outstanding debt balances on our convertible notes and the Agile Capital sale of future receipts agreement.

Revenue by type (in thousands)		March 31, 2026				March 31, 2025				Change
Product revenue		$	1,311			$	1,000			$	311
Service revenue			343				577				(234	)
Total revenue		$	1,654			$	1,577			$	77

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Revenue increased $77,000, or 5%, to $1.65 million for the three months ended March 31, 2026 compared to $1.58 million in the prior year period. Product revenue increased $311,000 (31%), driven by higher equipment and CES-related sales. Service revenue decreased $234,000 (41%), reflecting the timing of decontamination project completions and service engagements in the period.

Geographic revenue (in thousands)		March 31, 2026				March 31, 2025				Change
United States		$	1,250			$	1,192			$	58
International			404				385				19
Total		$	1,654			$	1,577			$	77

Domestic revenue increased $58,000 (5%), driven by higher equipment and CES-related sales. International revenue increased $19,000 (5%), reflecting the onboarding of new customers in the UK.

Cost of sales and gross profit (in thousands)		March 31, 2026				March 31, 2025				Change
Revenue		$	1,654			$	1,577			$	77
Cost of sales			822				625				197
Gross profit		$	832			$	952			$	(120	)
Gross margin			50%				60%				-

Gross margin decreased from 60% in the three months ended March 31, 2025 to 50% in the current quarter. This decrease reflects strategic price discounts to drive equipment adoption and an unfavorable product mix shift, as equipment and CES-related sales comprised a higher proportion of total revenue compared to the prior year period. Management views these factors as temporary, as growth in recurring high-margin BIT Solution consumable sales is expected to support margin recovery in future periods.

Operating expenses (in thousands)		March 31, 2026				March 31, 2025				Change
Professional fees		$	182			$	219			$	(37	)
Depreciation and amortization			53				69				(16	)
Selling expenses			197				246				(49	)
Research and development			57				45				12
Consulting fees			65				87				(22	)
General and administrative			904				1,040				(136	)
Total operating expenses		$	1,458			$	1,706			$	(248	)

Total operating expenses decreased $248,000 to $1.5 million in the current quarter from $1.7 million in the three months ended March 31, 2025. The decrease was primarily driven by lower general and administrative expenses of $136,000, reflecting reduced credit loss expense, and lower selling expenses of $49,000, due to reduced sales commissions and advertising spend, and lower professional and consulting fees of $59,000 combined, reflecting tighter controls over legal and advisory costs. While management continues to actively manage costs, revenue growth remains the primary driver of the Company's path to profitability.

Liquidity and Capital Resources

Liquidity metrics (in thousands)		March 31, 2026				December 31, 2025				Change
Cash and cash equivalents		$	280			$	88			$	192
Accounts receivable, net		$	762			$	689			$	73
Inventories, net (Note 3)		$	2,917			$	2,926			$	(9	)
Working capital		$	394			$	1,024			$	(630	)
Total shareholders' equity		$	1			$	589			$	(588	)
Total debt - convertible notes		$	2,931			$	2,912			$	19
Accumulated deficit		$	(58,862	)		$	(58,052	)		$	(810	)

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As of March 31, 2026, we had cash and cash equivalents of $280,000 and working capital of approximately $394,000, compared to cash of $88,000 and working capital of $1.0 million at December 31, 2025. For the three months ended March 31, 2026, we incurred a net loss of approximately $810,000. Our accumulated deficit as of March 31, 2026 is $58.9 million.

These conditions raise substantial doubt about our ability to continue as a going concern within the next twelve months after the date these financial statements are issued. The consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to our consolidated financial statements for further discussion of the going concern assessment.

The $630,000 decline in working capital from $1.0 million to $394,000 reflects the net loss incurred during the period and the Company's ongoing capital requirements. On the asset side, accounts receivable increased $73,000 on higher revenue, cash increased $192,000, and inventories remained relatively flat. On the liability side, accounts payable and accrued expenses increased $993,000, and deferred revenue increased $177,000 reflecting our deposit policy on customer orders.

Equity Purchase Agreement - Hudson Global Ventures, LLC

On November 5, 2025, the Company entered into a Purchase Agreement with 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 over a 24-month Commitment Period. See Note 9 for additional information on the Purchase Agreement.

During the three months ended March 31, 2026, pursuant to the ELOC, we issued 336,147 shares of Common Stock in exchange for aggregate gross proceeds of $149,413. We recorded a receivable of $48,034 for proceeds not yet received as of quarter end related to shares issued under the ELOC, which was included within prepaid expenses on our condensed consolidated balance sheet. 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.

Management's Plan to Address Going Concern

For a full discussion of management's plan to address the going concern conditions, including the ELOC, shelf registration, convertible note management, pipeline conversion and cost management initiatives, refer to Note 2 to our condensed consolidated financial statements.

Debt and Contractual Obligations

Our outstanding debt consists of $3,135,000 in convertible notes at 12% per annum, maturing 2028-2030, and a $175,725 remaining balance under the Agile Capital sale of future receipts agreement. Full terms are disclosed in Note 8 to our condensed consolidated financial statements.

A breakdown of our statement of cash flows for the three months ended March 31, 2026 and 2025 is provided below:

Cash flows for the period (in thousands)		March 31, 2026				March 31, 2025				Change
Net cash provided by (used in) operating activities		$	296			$	(276	)		$	572
Net cash (used in) investing activities			(5	)			-				(5	)
Cash provided by (used in) financing activities			(98	)			285				(383	)
Net increase (decrease) in cash		$	193			$	9			$	184

Operating Activities

Net cash provided by (used in) operating activities was $296,000 for the three months ended March 31, 2026, an improvement of $572,000, from $(276,000) in the prior year period, primarily driven by an increase in accounts payable and accrued expenses, partially offset by the net loss of approximately $810,000.

Investing Activities

Net cash (used in) investing activities was $5,000 for the three months ended March 31, 2026, consisting of equipment purchases.

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Financing Activities

Net cash (used in) financing activities was $98,000 for the three months ended March 31, 2026, compared to net cash provided of $285,000 in the prior year period. In the prior year period, $285,000 was raised through convertible note issuances. For the three months ended March 31, 2026, net financing activities reflected repayments of $192,000 on the sale of future receipts agreement with Agile, partially offset by $94,000 in net ELOC proceeds, consisting of gross ELOC proceeds of $149,413, less $48,034 not yet received at quarter end and $7,250 in clearing costs expensed in operating activities.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates.

The SEC defines critical accounting estimates as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and the most demanding of our judgment. We consider the following estimates to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact on our results of operations, financial position and cash flows.

Going Concern Assessment

The assessment of our ability to continue as a going concern is the most significant judgment reflected in our financial statements for the three months ended March 31, 2026. Under ASC 205-40, management is required to evaluate whether there is substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. This evaluation requires management to consider all available information about the future, including the Company's projected cash flows, planned capital raising activities, anticipated operating improvements, and the probability and timing of successfully executing those plans.

For the three months ended March 31, 2026, we recorded a net loss of approximately $810,000. As of March 31, 2026, we had approximately $280,000 of cash and cash equivalents and an accumulated deficit of approximately $58.9 million. Based on these conditions, management concluded that substantial doubt exists about our ability to continue as a going concern within one year after the issuance of these financial statements. Management's conclusion is based on projected cash flows that assume successful execution of our capital raising plans, including continued drawdowns under our convertible note facilities and the potential utilization of the $20 million ELOC with Hudson Global Ventures, LLC entered into in November 2025, as well as anticipated revenue growth from our active commercial pipeline. If our assumptions regarding capital availability, revenue timing or operating costs prove incorrect, the Company's liquidity position could deteriorate more rapidly than projected, and there can be no assurance that the going concern doubt will be resolved within the anticipated timeframe. See Note 2 to the consolidated financial statements for further discussion.

Revenue Recognition

We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as we satisfy the performance obligations.

We must use judgment to determine: (a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; (b) the transaction price under step (iii) above; and (c) the stand-alone selling price for each performance obligation for the allocation of transaction price under step (iv) above.

Title and risk of loss generally pass to our customers upon shipment. Shipping and handling costs charged to customers are included in product revenues, and the associated expenses are treated as fulfillment costs included in cost of revenues. Revenues are reported net of sales taxes collected from customers.

Product revenue includes sales from our standard and customized equipment, BIT Solution and accessories. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive. Service and training revenue includes sales from our high-level decontamination and service engagements, equipment validation and customer training, and is recognized as the agreed-upon services are rendered.

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A growing portion of our revenue is derived from our SIS and CES, which may involve multiple performance obligations including equipment supply, installation, validation and ongoing service. For these arrangements, management exercises significant judgment in identifying and allocating the transaction price among the distinct performance obligations and in determining the point at which control transfers to the customer. Delays in project completion or customer acceptance for these arrangements can affect the timing of revenue recognition and contribute to variability in our quarterly results.

We also record estimated allowances for sales returns, determined by using a specific identification method based on subsequent return activity and historical averages. As of March 31, 2026 and December 31, 2025, we recorded allowances of $76,064 and $47,844, respectively.

As of March 31, 2026 and December 31, 2025, deferred revenue totaled approximately $601,000 and $424,000, respectively, representing contracted amounts for which performance obligations had not yet been satisfied. The increase in deferred revenue reflects growth in our SIS and CES project pipeline and the timing of project milestones. Changes in assumptions regarding the timing of project completion or customer acceptance could affect the amount and timing of revenue recognized in future periods.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. This is particularly the case for our SIS and CES, which may involve equipment supply, installation, validation services and ongoing maintenance components. Where a contract contains multiple performance obligations, we allocate the total transaction price to each distinct performance obligation based on its relative stand-alone selling price, estimated using observable market prices where available or using a cost-plus-margin approach where direct market evidence is not available.

Significant Judgments

Our contracts with customers for products and services often dictate the terms and conditions of when control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for those products and services. For standard equipment and BIT Solution sales, control transfers and revenue is recognized at the point of shipment, which is when title and risk of loss pass to the customer. For service and training arrangements, revenue is recognized as services are rendered. For SIS and CES arrangements involving installation and validation milestones, management exercises judgment in determining the point at which control transfers, which may be upon completion of installation, customer acceptance, or satisfaction of specific contractual milestones. The timing of these measures can affect the period in which revenue is recognized and contribute to variability in our quarterly results. We also record an estimated allowance for anticipated product returns, determined using a specific identification method based on subsequent return activity and historical average calculations.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying consolidated financial statements and notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses, inventory obsolescence reserves, allowances for sales returns, the fair value of stock-based awards, the realizability of deferred tax assets, the useful lives of intangible assets and property and equipment, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. We do not generally require collateral to support customer receivables. In accordance with ASC 326, Current Expected Credit Losses, we estimate and record expected credit losses over the entire life of our accounts receivable, considering historical collection experience, customer creditworthiness, specific customer risk, current economic conditions and reasonable and supportable forecasts of future conditions. We make a risk-based evaluation of collectability at the point of sale, which is further reviewed on both an individual and collective basis during each reporting period.

As of March 31, 2026, net accounts receivable totaled $761,789 compared to $689,153 as of December 31, 2025. The increase reflects higher revenue levels in the current period. Management exercises judgment in determining the appropriate allowance for credit losses, and changes in the creditworthiness of our customers, deterioration in economic conditions, or the loss of a significant customer relationship could result in allowance adjustments that materially affect our results of operations in a given period.

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Inventories

Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. Inventories consist primarily of finished goods. We review inventory on an ongoing basis, considering factors such as deterioration, obsolescence, and anticipated future customer demand, and we record an allowance for estimated losses when facts and circumstances indicate that particular inventory items may not be usable or saleable. The determination of the appropriate reserve requires management to exercise judgment regarding expected future demand, the useful life of specific inventory items, and the potential for product design changes or regulatory developments that could render existing inventory obsolete.

As of March 31, 2026 and December 31, 2025, our reserve for obsolete inventory was $500,000. Inventories, net of reserves, remained relatively flat at approximately $2.9 million as of March 31, 2026 and December 31, 2025, reflecting disciplined inventory management. If actual demand for our products differs materially from our forecasts, or if changes in our product offerings render existing inventory obsolete, additional write-downs may be required.

Long-Lived Assets Including Acquired Intangible Assets

We assess long-lived assets, including property and equipment and acquired intangible assets, for potential impairment at the end of each fiscal year or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of the asset to the estimated future undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment charge recognized equals the amount by which the carrying value exceeds the asset's estimated fair value, which we determine using an income approach based on an internally developed discounted cash flow model. Key assumptions in this model include projected revenues and operating expenses, long-term growth rates, and estimated discount rates. These assumptions are based on our historical experience, industry data, and management's expectations about future business conditions.

We noted no long-lived asset impairment charges for the three months ended March 31, 2026 and 2025. Management's impairment analysis considered the going concern conditions described above and concluded that projected undiscounted cash flows, based on our current operating plan and capital raising assumptions, continue to support the carrying values of our long-lived assets. Changes in our revenue outlook, discount rates or other key assumptions could result in impairment charges in future periods.

Convertible Notes and Debt Discount

As of March 31, 2026, we had outstanding convertible notes with an aggregate principal balance of approximately $3.1 million, net of amortized debt discount and issuance costs of approximately $200,000, resulting in a carrying value of approximately $2.9 million. Our convertible notes were issued under two separate securities purchase agreements - the 2023 SPA, under which $2.6 million of notes were issued, and the 2025 SPA, under which up to $3.0 million of additional notes may be issued, of which $535,000 had been issued as of March 31, 2026. The notes bear interest at 12% per annum, are convertible at the option of the holder at $1.25 per share and mature on the fifth anniversary of their respective issuance dates.

The conversion features embedded in the 2023 Notes and 2025 Notes are considered clearly and closely related to the host debt instruments and do not require bifurcation under ASC 815. No modifications to the terms of the existing notes occurred during the three months ended March 31, 2026 and 2025.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Stock-based awards, including stock options, restricted stock units and shares issued for services, are measured at their estimated fair value on the grant date and recognized as expense over the requisite service period. For stock options and warrant awards, fair value is determined using the Black-Scholes option pricing model, which requires management to make assumptions regarding the expected volatility of our common stock, the expected term of the award, the risk-free interest rate and expected dividend yield. We assume a dividend yield of zero, as we have not paid and do not intend to pay cash dividends on our common stock. Expected volatility is based on the historical volatility of our common stock over a period commensurate with the expected term of the award. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date for the applicable expected term.

During the three months ended March 31, 2026, we recognized approximately $73,000 of stock-based compensation expense, including shares issued to directors and equity compensation expense. Changes in the assumptions used in the Black-Scholes model, or modifications to existing awards, could result in materially different fair value estimates and compensation expense amounts.

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Income Taxes and Valuation Allowance

We account for income taxes in accordance with ASC 740, Income Taxes, using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, as well as for net operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance to the extent that management concludes it is more likely than not that some or all of the deferred tax assets will not be realized.

We recorded no income tax expense or benefit for the three months ended March 31, 2026 and 2025 due to our net operating losses and the maintenance of a full valuation allowance against our net deferred tax assets. As of March 31, 2026, our total valuation allowance was approximately $9,946,000, an increase of approximately $227,000 from $9,719,000 as of December 31, 2025, primarily reflecting additional deferred tax assets arising from current-period losses. As of December 31, 2025, we had available federal net operating loss carryforwards of approximately $28,310,000 and state net operating loss carryforwards of approximately $25,784,000. Net operating losses generated after December 31, 2017 carry forward indefinitely; those generated prior to 2018 expire at various dates through 2037. NOLs generated after 2017 carry forward indefinitely but are limited to offset 80% of taxable income in any given year.

The judgment to maintain a full valuation allowance is the most significant estimate within our income tax accounting. This judgment is based on our cumulative history of operating losses, our going concern conditions, and the uncertainty surrounding the timing and amount of future taxable income sufficient to realize these assets. We reassess this conclusion at each reporting date. If our operating results improve materially and we conclude it is more likely than not that a portion of our deferred tax assets will be realized, we would reduce the valuation allowance accordingly, which could result in a material income tax benefit in the period of that determination. We adopted ASU 2023-09, Improvements to Income Tax Disclosures, in the fourth quarter of 2025 on a prospective basis; the required disaggregated rate reconciliation and taxes paid disclosures were included in our Form 10-K as filed on March 31, 2026.

Recently issued accounting pronouncements not yet adopted

In November 2024, the FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40), subsequently clarified by ASU No. 2025-01 issued in January 2025. This ASU requires disaggregated disclosure of specific expense categories, including purchases of inventory, employee compensation, depreciation and amortization, within relevant income statement captions, and also requires disclosure of total selling expenses and their definition. The ASU is effective for annual periods beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the provisions of this ASU, which will likely result in additional required disclosures once adopted.

In 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, applied on a prospective basis as of January 1, 2025. Because the ASU affects disclosures only, adoption did not affect our consolidated financial statements.

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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.

In July 2025, the FASB issued ASU No. 2025-05, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This ASU provides a practical expedient permitting an entity to assume that conditions at the balance sheet date remain unchanged over the life of the asset when estimating expected credit losses for current-classified accounts receivable and contract assets. The ASU is effective for annual periods beginning after December 15, 2025, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2025-05 in the first quarter of 2026 on a prospective basis and did not elect the practical expedient. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements or on the allowance for credit losses as of March 31, 2026.