Quarterly Report for Quarter Ending June 30, 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 second quarter of 2026 delivered improved financial results, with revenue of approximately $2.25 million reflecting a 118% increase over the second quarter of 2025 and a 36% sequential increase over the first quarter of 2026. Growth was primarily driven by increased equipment, CES-related sales, and commercial service provider customers, partially offset by lower service revenue reflecting project completion timing. Total sales order backlog was $2.2 million as of June 30, 2026 (and has since expanded to $2.6 million), providing strong visibility into near-term revenue conversion.

Our intellectual property portfolio is a key strategic asset supporting our global market position. We hold or have pending over 45 utility or design patents worldwide, protecting both the methods and systems underlying our SteraMist® BIT™ platform, with U.S. patents extending through 2038. Recent additions include patents for backpack decontamination units, mobile carts, and enhanced applicator technology in the United States, alongside protections in diverse other countries including Singapore, Korea, Austria, Belgium, Bulgaria, Denmark, Estonia, Finland, France, Germany, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Romania, Slovenia, Sweden, Brazil, Mexico, United Kingdom, Israel, Japan and Australia. We continue to advance protections for further inventive enhancements to our technologies, including computer-automated biosecurity systems for decontamination of buildings in the United States, Japan and Europe; enhanced applicator technologies in the United States, Europe, China, Australia, and Korea; and food decontamination technology in the United States. In particular, we have recently obtained a Japanese patent protecting our inventive computer-automated biosecurity systems; and we have also obtained allowances for patents protecting our enhanced applicator technologies and systems in the United States. We are continuing to file new applications this year both in the United States and internationally for inventive technologies that lead in the biosecurity and decontamination fields.

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We hold more than 30 design patents for decontamination devices, covering applicators, chambers, carts, and surface-mounted systems, across major global markets including the United States, China, Japan, Korea, and the United Kingdom. In addition, we maintain over 200 trademarks registered or pending in multiple classes across the globe, covering chemical formulations, sterilization equipment, services, and training.

In the second quarter of 2026, four key metrics delivered sustainable growth trends: BIT Solution sales, mobile equipment, single applicators-where TOMI's patented iHP intellectual property resides-and support services, including qualification, acceptance testing, and training programs. The increases in applicator sales and support services stem directly from initiatives introduced in late 2024 and early 2025, further validating the Company's strategic focus.

This growth clearly demonstrates that customers are expanding their deployment of our patented cold plasma technology. The applicator is a critical component that enables iHP to be utilized-whether paired with a mobile delivery system or installed in a permanent or semi-permanent configuration.

We only began emphasizing this strategy less than two years ago, and it builds on our consumable-driven model. In many ways, the applicator functions as a second "razor" in a razor-and-blade framework: it carries a longer replacement cycle than pure consumables such as BIT Solution, yet it has a significantly shorter sales cycle than full capital equipment when integrated accordingly. This allows TOMI to capture meaningful revenue and margin today while simultaneously locking in long-term, recurring BIT Solution demand.

Gross margin increased to 61.7% during the three months ended June 30, 2026, compared to 50% in the prior quarter and 65.7% in Q2 2025. Growth in recurring high-margin BIT Solution consumable and applicator sales continues to support long-term margin strength. Operating expenses decreased $180,000 or 10%, to $1.63 million compared to $1.81 million in the second quarter of 2025, reflecting disciplined cost management across selling, professional, and general and administrative costs.

During the second quarter of 2026, we delivered first set of iHP decontamination chambers for use on medical devices marking an important milestone for the Company. This chamber integration is an advancement in our technology platform and enables us to formally advance for our 510(k)-submission process with the U.S. Food and Drug Administration.

During the quarter, we further strengthened our registration portfolio increasing approvals to eleven countries between the European Union and United Kingdom, and continued progress toward NSF certification for Biosafety Cabinet decontamination. The Company delivered and installed another fully automated custom system in the United Kingdom - the second pharmaceutical company in the region to implement our CES product line. We expect our UK partner announced earlier in the year, Total Clean Air or TCA, to drive further adoption in the near term across markets.

In the healthcare sector, we have seen growing adoption of iHP technology by Special Pathogen Units throughout the first half of 2026, with additional opportunities developing for the second half of the year. These units, which manage high-consequence infectious diseases, require rapid, validated, and comprehensive decontamination of rooms, equipment, and personal protective equipment.

In the Food Safety market, we have been granted a new unconditional registration for AgriMist, TOMI's fourth Environmental Protection Association (EPA) label registration. This expanded label significantly broadens our approved use sites to include a wide range of food safety applications.

TOMI continues to expand its presence in the defense sector, having recently received approvals from defense contractors in Korea and defense agencies in Canada. While confidentiality agreements limit the disclosure of specific details, these relationships represent multi-year efforts with significant long-term potential with a very detailed strategic plan and specific to these two accounts we have been in contact with for years.

In addition, TOMI has authorized a local representative to distribute for the Defense Logistics Agency (DLA), which manages the global defense supply chain for the U.S. military services and allied partners. This partnership, established in the second quarter, is expected to streamline and accelerate government procurement of SteraMist iHP technology.

SteraMist was named Disinfection and Decontamination Products Company of the Year for 2026 by Medical Tech Outlook, representing a back-to-back global award for the brand.

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Agreement and Plan of Merger with Carbonium Core, Inc.

On June 28, 2026, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Carbonium Core, Inc., a Delaware corporation ("Carbonium"), and TOMZ Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub"), pursuant to which Merger Sub will merge with and into Carbonium (the "Merger"), with Carbonium continuing as the surviving corporation and becoming a wholly owned subsidiary of the Company.

Under the terms of the Merger Agreement, at the closing of the Merger (the "Closing"), Carbonium stockholders will receive (i) shares of the Company's common stock equal to 19.99% of the Company's outstanding common stock immediately prior to the Closing and (ii) shares of a newly designated Series C Preferred Stock, in each case allocated pro rata based on their respective ownership of Carbonium. Upon conversion of the Series C Preferred Stock, the former Carbonium stockholders will hold no less than 90% of the Company's capital stock on a fully converted basis. Following the Closing, the Company will seek any shareholder approval required under Nasdaq Listing Rule 5635 for the conversion of the Series C Preferred Stock into common stock, as well as shareholder approval for a change of the Company's name to "Carbonium Core, Inc." The Series C Preferred Stock may not be converted into common stock in excess of the limitations imposed by Nasdaq Listing Rule 5635 unless and until the required shareholder approval has been obtained.

The Merger Agreement also contemplates a financing transaction to be completed prior to the Closing that will result in gross proceeds to the Company of not less than $10.0 million, and completion of such financing is a condition to the Closing. Following the Closing, the Company is required to seek shareholder approval for the conversion of the Series C Preferred Stock into shares of the Company's common stock to the extent required under Nasdaq Listing Rule 5635, as well as approval of a change in the Company's name to "Carbonium Core, Inc." The Closing is expected to occur during the third quarter of 2026 and remains subject to the completion of the financing transaction, the receipt of required approvals and the satisfaction or waiver of the other conditions set forth in the Merger Agreement. For more information regarding the Merger Agreement and the transactions contemplated thereby, refer to the Company's Current Report on Form 8-K filed with the SEC on June 29, 2026.

Business Highlights and Recent Events

	·	On April 27, 2026, TOMI reported strong interest in its solutions at INTERPHEX 2026, reflecting broader market awareness and acceptance of its products, and noted the event helped position the Company to build on previously reported Q1 revenue and backlog.
	·	On April 29, 2026, TOMI announced a strategic pivot toward autonomous systems, targeting the $70 billion U.S. drone and defense budget with autonomous SteraMist iHP decontamination capability.
	·	On May 7, 2026, TOMI's Binary Ionization Technology received formal approval from four additional European Union member states, extending the Company's EU authorizations ahead of the broader registration progress later reported in the July 29 release.
	·	On May 8, 2026, alongside its Q1 2026 financial results, TOMI announced a non-binding Letter of Intent to merge with Carbonium Core, Inc., the precursor to the definitive merger agreement signed June 28, 2026. The May 8 release also described the transaction as establishing a domestic platform in advanced graphite addressing a $13-15 billion global graphite industry.
	·	On May 27, 2026, TOMI highlighted expanded commercial relevance for SteraMist amid rising global concerns tied to a CDC-published hantavirus study and escalating Ebola outbreak activity.
	·	On June 28, 2026, we signed a definitive merger agreement with Carbonium Core, Inc., a U.S.-based advanced materials company specializing in nuclear-grade graphite for 4th-generation nuclear reactors, including small modular reactors. The transaction is intended to diversify our business by combining Carbonium's domestic platform for nuclear-grade graphite, graphene, and lithium materials with our existing SteraMist decontamination business, and remains subject to customary closing conditions, including stockholder approval.

Post-Quarter Developments:

	·	We reaffirmed our expectation to achieve revenue of at least $12 million for fiscal 2026, confirmed a $35 million sales pipeline with approximately $8.6 million in advanced stages, and reported continued progress on the Carbonium Core merger, European regulatory expansion, and defense-sector engagement, including with defense contractors in Korea and defense agencies in Canada, and a planned partnership with the U.S. Defense Logistics Agency.
	·	The U.S. Environmental Protection Agency granted a new unconditional registration for SteraMist® (BIT®) - AgriMist (EPA Reg. No. 90150-4), expanding labeled use sites to include post-harvest food safety applications, cannabis and hemp cultivation, and greenhouse and hydroponic agriculture, including post-harvest treatment of raw agricultural commodities.
	·	TOMI and Carbonium Core announced results from a multi-element assay of an initial sample from the project underlying the pending merger, which returned elevated concentrations of rare earth elements together with meaningful levels of several industrially important minerals and metals, supporting continued evaluation of the project as a potential domestic source of critical minerals.

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The following overview summarizes key factors affecting the Company's financial performance for the three and six months ended June 30, 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)		June 30, 2026				December 31, 2025				Change
Cash and cash equivalents		$	322			$	88			$	234
Accounts receivable, net		$	1,890			$	689			$	1,201
Inventories, net (Note 3)		$	2,812			$	2,926			$	(114	)
Working capital		$	1,818			$	1,024			$	794
Total shareholders' equity		$	1,428			$	589			$	839
Total debt (convertible notes)		$	2,949			$	2,912			$	37

The following tables summarize selected financial metrics based on the Company's Consolidated Statement of Operations for the three and six months ended June 30, 2026 compared to June 30, 2025 and provides a high-level overview of the Company's operating performance.

		For the Three Months Ended
Key financial metrics (in thousands, except per share data)		June 30, 2026				June 30, 2025				Change
Revenue		$	2,247			$	1,031			$	1,216
Gross profit		$	1,385			$	677			$	708
Operating expenses		$	1,629			$	1,809			$	(180	)
Loss from operations		$	(244	)		$	(1,132	)		$	888
Net loss		$	(382	)		$	(1,237	)		$	855
Basic and diluted loss per share		$	(0.05	)		$	(0.19	)		$	0.14

		For the Six Months Ended
Key financial metrics (in thousands, except per share data)		June 30, 2026				June 30, 2025				Change
Revenue		$	3,901			$	2,608			$	1,293
Gross profit		$	2,217			$	1,629			$	588
Operating expenses		$	3,088			$	3,516			$	(428	)
Loss from operations		$	(871	)		$	(1,887	)		$	1,016
Net loss		$	(1,193	)		$	(1,493	)		$	300
Basic and diluted loss per share		$	(0.17	)		$	(0.22	)		$	0.05

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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 and six months ended June 30, 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.

		For the Three Months Ended
Results of operations (in thousands)		June 30, 2026				June 30, 2025				Change
Revenue		$	2,247			$	1,031			$	1,216
Cost of sales			862				354				508
Gross profit		$	1,385			$	677			$	708
Operating expenses:
Professional fees		$	342			$	184			$	158
Depreciation and amortization			50				69				(19	)
Selling expenses			228				240				(12	)
Research and development			38				84				(46	)
Consulting fees			177				63				114
General and administrative			794				1,169				(375	)
Total operating expenses		$	1,629			$	1,809			$	(180	)
Income (Loss) from operations		$	(244	)		$	(1,132	)		$	888
Other income (expense)			(138	)			(105	)			(33	)
Provision for income taxes			-				-				-
Net loss		$	(382	)		$	(1,237	)		$	855
Basic net loss per share			(0.05	)			(0.19	)			0.14
Basic and diluted loss per share			(0.05	)			(0.19	)			0.14

		For the Six Months Ended
Results of operations (in thousands)		June 30, 2026				June 30, 2025				Change
Revenue		$	3,901			$	2,608			$	1,293
Cost of sales			1,684				979				705
Gross profit		$	2,217			$	1,629			$	588
Operating expenses
Professional fees		$	525			$	403			$	122
Depreciation and amortization			103				138				(35	)
Selling expenses			425				487				(62	)
Research and development			95				129				(34	)
Consulting fees			242				142				100
General and administrative			1,698				2,217				(519	)
Total operating expenses		$	3,088			$	3,516			$	(428	)
Loss from operations		$	(871	)		$	(1,887	)		$	1,016
Other income (expense)			(322	)			394				(716	)
Provision for income taxes			-				-				-
Net loss		$	(1,193	)		$	(1,493	)		$	300
Basic net loss per share			(0.17	)			(0.22	)			0.05
Basic and diluted loss per share			(0.17	)			(0.22	)			0.05

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		For the Three Months Ended
Revenue by type (in thousands)		June 30, 2026				June 30, 2025				Change
Product revenue		$	1,858			$	653			$	1,205
Service revenue			389				378				11
Total revenue		$	2,247			$	1,031			$	1,216
		For the Three Months Ended
Geographic revenue (in thousands)		June 30, 2026				June 30, 2025				Change
United States		$	1,908			$	822			$	1,086
International			339				209				130
Total		$	2,247			$	1,031			$	1,216

		For the Six Months Ended
Revenue by type (in thousands)		June 30, 2026				June 30, 2025				Change
Product revenue		$	3,168			$	1,653			$	1,515
Service revenue			733				955				(222	)
Total revenue		$	3,901			$	2,608			$	1,293
		For the Six Months Ended
Geographic revenue (in thousands)		June 30, 2026				June 30, 2025				Change
United States		$	3,155			$	2,014			$	1,141
International			746				594				152
Total		$	3,901			$	2,608			$	1,293

For the three months ended June 30, 2026, revenue was $2,247,000 compared to $1,031,000 in the prior period, an increase of $1,216,000, or 118%. For the six months ended June 30, 2026, revenue was $3,901,000 compared to $2,608,000 in the prior period, an increase of $1,293,000, or 50%. Product revenue increased $1,516,000 (92%), driven by higher equipment and CES-related sales. Service revenue decreased $223,000 (23%), reflecting the timing of decontamination project completions and service engagements in the period.

Domestic revenue increased $1,141,000 (57%), driven by higher equipment and CES-related sales. International revenue increased $152,000 (26%), reflecting the onboarding of new customers in the UK.

		For the Three Months Ended
Cost of sales and gross profit (in thousands)		June 30, 2026				June 30, 2025				Change
Revenue		$	2,247			$	1,031			$	1,216
Cost of sales			862				354				508
Gross profit		$	1,385			$	677			$	708
Gross margin			61.7	%			65.7	%			-

		For the Six Months Ended
Cost of sales and gross profit (in thousands)		June 30, 2026				June 30, 2025				Change
Revenue		$	3,901			$	2,608			$	1,293
Cost of sales			1,684				979				705
Gross profit		$	2,217			$	1,629			$	588
Gross margin			56.8	%			62.5	%			-

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Gross margin decreased from 65.7% to 61.6% and from 62.5% to 56.8% for the three and six months ended June 30, 2026, respectively, compared to the prior period. The decrease reflects strategic price discounts to drive equipment adoption. 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.

		For the Three Months Ended
Operating expenses (in thousands)		June 30, 2026				June 30, 2025				Change
Professional fees		$	342			$	184			$	158
Depreciation and amortization			50				69				(19	)
Selling expenses			228				240				(12	)
Research and development			38				84				(46	)
Consulting fees			177				63				114
General and administrative			794				1,169				(375	)
Total operating expenses		$	1,629			$	1,809			$	(180	)

		For the Six Months Ended
Operating expenses (in thousands)		June 30, 2026				June 30, 2025				Change
Professional fees		$	525			$	403			$	122
Depreciation and amortization			103				138				(35	)
Selling expenses			425				487				(62	)
Research and development			95				129				(34	)
Consulting fees			242				142				100
General and administrative			1,698				2,217				(519	)
Total operating expenses		$	3,088			$	3,516			$	(428	)

Total operating expenses decreased $180,000 and $428,000 for the three and six months ended June 30, 2026 compared to the prior year period. The decrease was primarily driven by lower general and administrative expenses of $375,000 and $519,000, respectively, reflecting reduced credit loss expense, offset by an increase in professional fees due to various transactions undertaken in the current period, including our recent plan of merger, stock split and Schedule 14C filings. 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)		June 30, 2026				December 31, 2025				Change
Cash and cash equivalents		$	322			$	88			$	234
Accounts receivable, net		$	1,890			$	689			$	1,201
Inventories, net (Note 3)		$	2,812			$	2,926			$	(114	)
Working capital		$	1,818			$	1,024			$	794
Total shareholders' equity		$	1,428			$	589			$	839
Total debt - convertible notes		$	2,949			$	2,912			$	37
Accumulated deficit		$	(59,245	)		$	(58,052	)		$	(1,193	)

As of June 30, 2026, we had cash and cash equivalents of approximately $322,000 and working capital of approximately $1.8 million, compared to cash and cash equivalents of approximately $88,000 and working capital of approximately $1.0 million at December 31, 2025. For the six months ended June 30, 2026, we incurred a net loss of approximately $1,193,000. Our accumulated deficit as of June 30, 2026 was approximately $59.2 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 condensed 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 condensed consolidated financial statements for further discussion of the going concern assessment.

The approximately $0.8 million increase in working capital during the six months ended June 30, 2026 was primarily attributable to net proceeds of approximately $1.9 million received under the Company's Equity Line of Credit, partially offset by the net loss incurred during the period and cash used in operating activities of approximately $1.3 million. Accounts receivable increased by approximately $1.2 million, primarily reflecting increased sales activity during the second quarter of 2026. Cash and cash equivalents increased by approximately $234,000 and inventories decreased by approximately $114,000. Accounts payable and accrued expenses increased by approximately $788,000, primarily reflecting higher business activity levels, increased accrued payroll and purchases, and professional fees associated with the Company's strategic and financing initiatives.

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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 six months ended June 30, 2026, pursuant to the ELOC, we issued 1,345,642 shares of Common Stock and received aggregate net proceeds of $1,919,744. 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, stock split, merger, 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. Full terms are disclosed in Note 8 to our condensed consolidated financial statements.

A breakdown of our statement of cash flows for the six months ended June 30, 2026 and 2025 is provided below:

Cash flows for the period (in thousands)		June 30, 2026				June 30, 2025				Change
Net cash (used) in operating activities		$	(1,299	)		$	(463	)		$	(836	)
Net cash (used) in investing activities			(19	)			(67	)			48
Cash provided by financing activities			1,552				435				1,117
Net increase (decrease) in cash		$	234			$	(95	)		$	329

Operating Activities

Net cash (used in) operating activities was ($1,299,000) for the six months ended June 30, 2026, compared to ($463,000) in the prior year period, primarily driven by an increase in accounts payable and accrued expenses, partially offset by the net loss of approximately $1,193,000.

Investing Activities

Net cash (used in) investing activities was ($19,000) for the six months ended June 30, 2026, consisting of equipment purchases and a new patent granted in Japan. Net cash (used in) investing activities was ($67,000) for the six months ended June 30, 2025, consisting of equipment purchases and various international patents and trademarks.

Financing Activities

Net cash provided by financing activities was $1,552,000 for the six months ended June 30, 2026, compared to $435,000 in the prior year period which was raised through convertible note issuances. For the six months ended June 30, 2026, net financing activities reflected ELOC proceeds of $1,919,744 net of issuance costs offset by repayments of $367,000 on the sale of future receipts agreement with Agile Capital.

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.

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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 six months ended June 30, 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 six months ended June 30, 2026, we recorded a net loss of approximately $1,193,000. As of June 30, 2026, we had approximately $322,000 of cash and cash equivalents and an accumulated deficit of approximately $59.2 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.

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 June 30, 2026 and December 31, 2025, we recorded allowances of $76,621 and $47,844, respectively.

As of June 30, 2026 and December 31, 2025, deferred revenue totaled approximately $431,000 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.

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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 June 30, 2026, net accounts receivable totaled $1,890,105 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.

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.

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As of June 30, 2026 and December 31, 2025, our recorded reserve for obsolete inventory was $500,000 and $500,000, respectively. The carrying reserve of $500,000 as of June 30, 2026 reflects historical accounting treatment and estimation methodologies established in prior fiscal periods under ASC 330 and SEC Staff Accounting Bulletin (SAB) Topic 5.BB. Under SAB Topic 5.BB, an inventory write-down establishes a new cost basis that cannot subsequently be written back up, regardless of subsequent operational improvements or changes in forward demand expectations. While the recorded allowance of $500,000 is maintained on the Condensed Consolidated Balance Sheet to satisfy GAAP accounting requirements regarding prior cost-basis adjustments, management continuously evaluates the underlying economic exposure of its inventory population. Based on recent operational developments-including year-to-date unit depletion, internal conversion of equipment to active customer configurations, and expanding commercial pipeline conversion-The Company will derecognize the associated carrying reserves as underlying inventory units are sold, consumed, or otherwise disposed of in the ordinary course of business. If actual demand for our products differs materially from our forecasts, or if future 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 and six months ended June 30, 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 June 30, 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 $186,000, 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 June 30, 2026. The notes bear interest at 12% per annum, are convertible at the option of the holder at $3.75 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 and six months ended June 30, 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 six months ended June 30, 2026, we recognized approximately $90,000 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.

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.

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We recorded no income tax expense or benefit for the three and six months ended June 30, 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 June 30, 2026, our total valuation allowance was approximately $10,053,000, an increase of approximately $334,000 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.

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.

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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 June 30, 2026.