374WATER Inc — Quarterly Report (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

For the Quarterly Period ended June 30, 2026

Commission file No. 000-27866

100 Southcenter Court, Suite 200

Morrisville, North Carolina 27560

 (Address of principal executive offices)

440-601-9677

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes   ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes   ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes   ☒ No

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At August 10, 2026, the issuer had 17,718,161 shares of common stock outstanding.

Index to Form 10-Q

Cautionary Note Regarding Forward-Looking Statements

Readers are cautioned that the statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) that are not descriptions of historical facts may be “forward-looking statements” that are subject to risks and uncertainties. This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of our management, as well as on assumptions made by and information currently available to us as of the date of this Form 10-Q. When used in this Form 10-Q, the words “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project” and similar expressions are intended to identify such forward-looking statements. Although we believe these statements are reasonable, actual actions, operations and results could differ materially from those indicated by such forward-looking statements as a result of certain risks and uncertainties, including, but not limited to: changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological changes; changes in law; changes in fiscal, monetary, regulatory, and tax policies; monetary fluctuations as well as the risk factors included in our 2025 Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 31, 2026, as amended by Amendment No. 1 on Form 10-K/A filed with SEC on April 30, 2026 (the “2025 Form 10-K”), and other risks and uncertainties detailed elsewhere in this Form 10-Q. We must caution, however, that this list of factors may not be exhaustive and that these or other factors, many of which are outside of our control, could have a material adverse effect on us and our ability to achieve our objectives. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above.

PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

374Water Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2026 (Unaudited) and December 31, 2025

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

374Water Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2026 and 2025

(Unaudited)

(i) Adjusted for the effect of a 10:1 reverse stock split that went effective December 26, 2025 (see Note 1).

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

374Water Inc. and Subsidiaries

Condensed Consolidated Changes in Stockholders’ Equity

For the Three and Six Months Ended June 30, 2026 and 2025

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

374Water Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2026 and 2025 (Unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

374Water Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Nature of Business and Presentation of Financial Statements

Description of the Company

374Water Inc. (the “Company”, “374Water”, “we”, or “our”) is a cleantech and environmental services company developing super critical water oxidation (“SCWO”) for the destruction of organic waste streams within the municipal, federal, and industrial markets. 374Water offers our proprietary AirSCWO technology, which is designed to efficiently destroy and mineralize a broad spectrum of non-hazardous and hazardous organic wastes producing safe dischargeable water streams, safe mineral effluent, safe vent gas, and recoverable heat energy. Importantly, our AirSCWO system is designed to eliminate recalcitrant organic wastes without creating waste byproducts, as well as to simplify existing, complex waste processing and disposal practices. Our AirSCWO technology is designed to effectively convert solid and liquid wastes such as sewage sludge, biosolids, food waste, hazardous and non-hazardous waste, including ‘forever chemicals’ (e.g., “per-and polyfluoroalkyl substances” or “PFAS”) into inert and recoverable resources including water, minerals, and heat energy.

At a special meeting of stockholders held on December 15, 2025, the stockholders of 374Water, approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, to, at the discretion of the Company’s Board of Directors, effect a reverse stock split with respect to the Company’s issued and outstanding common stock, at a ratio of 1-for-8 to 1-for-20, with the ratio within such range to be determined at the discretion of the Company’s Board of Directors (or any of its delegated authorized persons) without further approval or authorization of our stockholders.

On December 15, 2025, after the approval from the stockholders, the Company filed a Certificate of Amendment of the Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to effect a 1-for-10 reverse stock split (the “Reverse Stock Split”) of the issued and outstanding shares of the Company’s common stock. The Certificate of Amendment took effect on December 26, 2025. All share and per share amounts have been retrospectively adjusted for the effect of the Reverse Stock Split.

Presentation of Financial Statements and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information. It is management’s opinion that the accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions for Form 10-Q and include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Annual Report on Form 10-K of 374Water at and for the year ended December 31, 2025, filed with the SEC on March 31, 2026, as amended by Amendment No. 1 on Form 10-K/A filed with SEC on April 30, 2026 (the “2025 Form 10-K”).

The results of operations for the three and six months ended June 30, 2026, are not necessarily indicative of the results to be expected for the full year or for future periods. The unaudited condensed consolidated financial statements include the accounts of 374Water Inc, 374Water Systems Inc, and 374Water Sustainability Israel LTD, currently inactive, each a wholly-owned subsidiary of 374Water. Intercompany balances and transactions have been eliminated in consolidation.

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the fair value of equity-based compensation and warrants issued with convertible notes, revenue recognition and the evaluation of the collectability of variable consideration, accrued loss provisions on onerous contracts, useful lives of long-lived assets, and the valuation allowance against deferred tax assets.

Accounts Receivable, Net

Accounts receivable due from customers are uncollateralized customer obligations due under normal and customary trade terms. Account receivables are stated at the amount billed to the customer, less an allowance for estimated credit losses.

Inventory, Net

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The majority of our inventory is raw materials. Net realizable value is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with either the eventual sale or the disposal of the asset in question. Costs associated with fabrication, and other costs associated with the manufacturing of products, are recorded as inventory. We periodically evaluate the carrying value of our inventories in relation to estimated forecasts of product demand, which takes into consideration the life cycle of product releases. When quantities on hand exceed estimated sales or usage forecasts, we perform an analysis to determine if a write-down for such excess inventories is required. Once inventory has been written down, it creates a new cost basis for inventory. Inventories are classified as current assets in accordance with recognized industry practice. Based on our evaluation, we estimated an inventory allowance of $50,000 at both June 30, 2026 and December 31, 2025.

Property and Equipment

Property and Equipment is recorded at cost. Depreciation is computed using the straight-line method and the estimated useful life of the asset. Expenses for maintenance and repairs are charged to expense as incurred.

The following table presents property and equipment at June 30, 2026 and December 31, 2025:

At June 30, 2026, we were in the process of manufacturing an AirSCWO 1 (“AS1”) model that can process approximately 1 wet ton of waste per day. The AS1 is highly mobile and can be deployed quickly to provide on-site waste destruction services. At June 30, 2026 and December 31, 2025, these manufacturing costs were classified as equipment in-process until the AS1 was completed and placed in service. In July 2026, the AS1 was deployed to an on-site waste destruction facility and reclassified from equipment-in-process to equipment.

Depreciation expense is presented as follows in the unaudited condensed consolidated statement of operations:

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, and marketable securities. Deposits with financial institutions are insured, up to certain limits, by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s cash deposits often exceed the FDIC insurance limit; however, all deposits are maintained with high credit quality institutions and the Company has not experienced any losses in such accounts. The financial condition of financial institutions is periodically reassessed, and the Company believes the risk of any loss is minimal. Furthermore, we perform ongoing credit evaluations of our customers and generally do not require collateral.

Significant customers and suppliers are those that account for greater than 10% of the Company’s revenues, purchases, accounts receivable and accounts payable.

For the three and six months ended June 30, 2026, we generated approximately 88% of our total consolidated revenues from one customer and two customers, respectively. For the three and six months ended June 30, 2025, we generated approximately 94% and 78% of our consolidated revenues with three customers, respectively.

At June 30, 2026, one customer comprised approximately 82% and 100% of our consolidated accounts receivable and unbilled accounts receivable, respectively. At December 31, 2025, our consolidated accounts receivable comprised approximately 74% and 10% outstanding with two customers, respectively.

Refer to Note 9 for information on a license agreement we have with Duke University for the SCWO technology used in our systems.

Revenue Recognition

The Company follows the revenue standards of Accounting Standards Codification (“ASC”) Topic 606: “Revenue from Contracts with Customers (Topic 606).” The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognized in accordance with that core principle by applying the following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as) we satisfy a performance obligation using the input method.

The Company generates revenue from providing waste destruction services, including the completion of full-scale demonstrations and treatability studies, and the sale of equipment (AirSCWO units) to customers. In the case of equipment revenues, the Company’s performance obligations are satisfied over time as the equipment is being manufactured and are typically long-term fixed price contracts. Revenue is recognized over time by measuring the progress toward complete satisfaction of the performance obligation based on an input method. Equipment sale-related revenues are recognized in the proportion that contract costs incurred bear to total estimated costs to be incurred to complete the equipment contract. The estimated completed percentage is applied to the total transaction price of the fixed price contract. This method is used because management considers the input method to be the best available measure of progress on these contracts.

Changes in our overall expected cost estimates are recognized as a cumulative adjustment for the inception-to-date effect of such a change. If these changes in estimates result in a possible loss being incurred on the contract, we accrue for such a loss in the period such an outcome becomes probable.

Services revenues related to bench-scale treatability studies are recognized when all five revenue recognition criteria have been completed which is generally when we deliver a completed treatability study report to the customer.

Service revenues related to our full demonstrations, using our owned AirSCWO unit, may include multiple performance obligations, typically the demonstration itself and a technical report that summarizes the analysis of materials processed. Management estimates are required in allocating the transaction price between the performance obligations. However, other full-scale demonstrations may include one performance obligation, the demonstration itself. Revenues from such contracts are recognized over time as the demonstration is being completed.

Orlando Contract

In late 2024, we deployed our Demo System to the City of Orlando’s Iron Bridge Regional Water Reclamation Facility pursuant to a contract executed in March 2024 as part of a full-scale demonstration (the “Demo Contract”). Pursuant to the Demo Contract, the Company was responsible for system design, installation, commissioning and the start-up of the AirSCWO unit at the facility. Further, the Company was to operate and maintain the AirSCWO unit for the demonstration period. Lastly, the Company was to decommission, disassemble and demobilize the AirSCWO unit after the contract period. The Company will receive $812,000 as consideration for the full-scale demonstration.

In accordance with ASC 606-10-25-21, we concluded that the Demo Contract includes one performance obligation related to the full-scale demonstration. The system design, site preparation, installation, commissioning and decommissioning represent fulfillment activities versus separate performance obligations. During the three and six months ended June 30, 2026, we completed the full-scale demonstration period and have no further obligations under this Demo Contract. At December 31, 2025, we had a contract asset of $91,100 and unearned revenue of $90,667 related to this Demo Contract. During the three and six months ended June 30, 2026, we recognized service revenue of $0 and $482,405, respectively, including the unearned revenue at December 31, 2025 on this Demo Contract. During the three and six months ended June 30, 2026, we expensed $0 and $91,100, respectively, of a contract asset upon completing the Demo Contract. We did not recognize any revenue on this Demo Contract during the three and six months ended June 30, 2025.

On January 26, 2026, the Company executed a license agreement with the City of Orlando for use of their space at Iron Bridge Water Reclamation (the “Orlando License Agreement”) and on April 27, 2026, we executed a first amendment to the Orlando License Agreement to increase our leased space from 15,000 square feet to an additional 21,639 of square feet . Therefore, we will no longer demobilize our owned AirSCWO unit. See Note 9 for further information regarding the Orlando License Agreement.

Olathe Contract

On March 4, 2026, we entered into a purchase order with Garney Companies, Inc. (“Garney”) in connection with the Cedar Creek Wastewater Treatment Plant Expansion Phase II project in Olathe, Kansas. Under the purchase order, the Company will design, fabricate, deliver, install, and commission an AirSCWO 6 supercritical water oxidation unit and related pretreatment, dewatering, and water treatment equipment, and will provide startup, training, and warranty services.

The principal terms of the purchase order are as follows:

The purchase order also contains customary provisions regarding indemnification, insurance, change orders, and dispute resolution, and includes a buy-back provision under which the Company would offer a trade-in credit currently estimated at $1,000,000 if Garney elects to upgrade to an AirSCWO 30 unit.

During the six months ended June 30, 2026, we issued Garney an invoice totaling $2,296,250 upon the execution of the purchase order. We received payment, less retainage as described above, on this invoice in April 2026. During the three and six months ended June 30, 2026, no revenue has been recognized on the contract. Revenue will be recognized over the equipment manufacturing period which has not yet commenced. Therefore, we have classified the unearned revenue on this invoice within long-term liabilities due to the uncertainty of when the equipment will be completed and delivered.

OC San Contract and Change in Accounting Estimate

Our equipment revenue contract with the Orange County Sanitation District (“OC San”) is a fixed price contract that includes billings based on the achievement of deliverables or milestones. During the year ended December 31, 2025, we had experienced delays in completing the equipment due to design changes and upgrades preventing us from meeting the next contractual milestone. Due to these delays, we had been contractually unable to bill for certain costs incurred related to the OC San contract. At December 31, 2025, we incurred costs in excess of billings of approximately $1.9 million in connection with completing this contract.

Pursuant to the contract terms with OC San, we were unable to invoice and resume billing until the manufactured equipment passed a factory acceptance test (“FAT”) which is based on a continuous run time of the equipment and volume of materials processed. At contract inception, the variable consideration included in the contract price was not deemed to be constrained. We had anticipated delivering the equipment to OC San during the year ended December 31, 2025. Due to the unexpected delays, we had encountered in delivering the equipment, we reassessed the variable consideration at December 31, 2025. The changes in facts and circumstances resulted in us fully constraining the variable consideration at December 31, 2025 and ceasing revenue recognition on this contract after the nine months ended September 30, 2025. This resulted in the reduction of unbilled accounts receivable and a reduction in equipment revenue in the amount of approximately $1.9 million and $100,000 of revenue earned in the last quarter of 2025 not being recognized due to the constraints.

At June 30, 2026, OC San approved a change order which resulted in the modification of metrics required to pass the FAT. Specifically, the volume of materials to be processed was reduced from 6 tons per day to 3.25 tons per day. Upon the passing of the FAT, the Company invoiced OC San in the amount of $518,282, which was the next milestone billing. Further, this removed the constraints on variable consideration and resulted in the Company recognizing the previously reversed $1.9 million and the $100,000 of unrecognized revenue earned in the last quarter of 2025 during the three months ended June 30, 2026 as equipment revenue. Further, the unbilled accounts receivable remaining at June 30, 2026 have been reflected on the condensed consolidated balance sheet which will be billed in accordance with the contractual terms of the contract over the period of delivery, decommissioning and systems operations of up to six months, which is anticipated to start in the last quarter of 2026 and will continue through the first half of 2027.

See further revenue-related disclosures in Note 6.

Contract costs include all direct material, labor and subcontractor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation.

Research and Development Costs

The Company’s research and development costs are expensed in the period in which they are incurred. Such expenditures amounted to $284,589 and $531,170 for the three months ended June 30, 2026 and 2025, respectively, $734,423 and $1,064,757 for the six months ended June 30, 2026 and 2025, respectively.

Loss Per Share

Loss per share is computed in accordance with ASC Topic 260, “Earnings per Share.” Basic weighted-average number of shares of common stock outstanding for the three and six months ended June 30, 2026 and 2025 include the shares of the Company issued and outstanding during such periods, each on a weighted average basis. The basic weighted average number of shares of common stock outstanding excludes common stock equivalent incremental shares, while diluted weighted average number of shares outstanding includes such incremental shares. However, as the Company was in a loss position for all periods presented, basic and diluted weighted average shares outstanding are the same, as the inclusion of the incremental shares would be anti-dilutive. At June 30, 2026 and June 30, 2025, there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect would be antidilutive: options for 1,668,633 and 1,751,550 shares of common stock, respectively, 1,864,191 and 1,467,524, respectively, of outstanding common stock warrants and unvested restricted stock units of 513,370 and 621,282, respectively.

Recent Accounting Pronouncements - Not Yet Adopted

Accounting Standards Update 2024-03, Disaggregation of Income Statement Expenses (“DISE”). In November 2024, the FASB issued a new accounting standard to improve the disclosures about an entity’s expenses and address requests from investors for more detailed information about the types of expenses included in commonly presented expense captions. The new standard is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with retrospective application permitted. The Company is evaluating the disclosure requirements related to the new standard and its impact on our consolidated financial statements.

The Company considers the applicability and impact of all recently issued accounting pronouncements. Recent accounting pronouncements not specifically identified in our disclosures are either not applicable to the Company or are not expected to have a material effect on our financial condition or results of operations.

Note 3 – Liquidity, Capital Resources and Going Concern

In accordance with ASU No. 2014-15 Presentation of Financial Statements – Going Concern (subtopic 205-40), the Company’s management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued. At June 30, 2026, the Company had a positive working capital of $2,419,543, an accumulated deficit of $57,204,456 and a cash balance of $1,776,259. For the six months ended June 30, 2026, the Company incurred a net loss of $7,267,858 and used $2,297,376 of net cash in operations for the period. These conditions raise substantial doubt regarding our ability to continue as a going concern.

Presently, the Company will need additional debt or equity financing or a combination of both to continue its operations and meet its financial obligations for at least the next twelve months from the date these unaudited condensed interim consolidated financial statements were issued and beyond. We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We expect to incur continuing losses and negative cash flows from operations for the foreseeable future until we are able to manufacture our AirSCWO units on a commercial scale.

Since inception, we have financed our operations principally through the sale of debt and equity securities and operating cash flows. On December 23, 2025, the Company entered into an ATM issuance sales agreement (the “Sales Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) as sales agent, pursuant to which the Company could offer and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $50 million in an at-the-market equity offering program (“ATM”). The Sales Agreement replaced the Company’s prior ATM agreement with Lake Street from June 2025. During the year ended December 31, 2025, we raised approximately $8,909,000 of net proceeds using our ATM. The Company is evaluating strategies to obtain the required additional funding for future operations and has not yet raised any capital with the ATM in 2026. During the six months ended, the Company issued convertible notes and received proceeds of $2,960,000 (see Note 5). The offering has not yet closed and we continue efforts to raise capital with this vehicle.

As of the date of our 2025 Form 10-K, the aggregate market value of our outstanding common stock held by non-affiliates, or the public float, was approximately $39,144,000, which was calculated based on 11,184,116 outstanding shares of the Company’s common stock held by non-affiliates at a price of $3.50 per share, the closing price of our common stock on March 25, 2026, as reported on Nasdaq. Pursuant to General Instruction I.B.6 of Form S-3, or the “baby shelf” rules, in no event will we sell securities registered on our Form S-3 registration statement, including under our ATM, with a value of more than one-third of the aggregate market value of shares of our common stock held by non-affiliates in any 12-month period, so long as the aggregate market value of shares of our common stock held by non-affiliates is less than $75 million. After giving effect to the approximate $13,000,000 offering limit imposed by General Instruction I.B.6 of Form S-3 and deducting the shares sold within the preceding 12 months, approximately $3,700,000 of common stock remain available at this time for sale under our Form S-3, including through our ATM.

Any additional debt or equity financing that the Company obtains may substantially dilute the ownership held by our existing stockholders. The economic dilution to our shareholders will be significant if our stock price does not materially increase, or if the effective price of any sale is below the price paid by a particular investor. The Company may be unable to access further equity or debt financing when needed or obtain additional financing under acceptable terms, if at all.

We may decide to raise additional capital through a variety of sources in the short-term and in the long-term, including but not limited to:

If the Company is unable to raise additional capital, there is a risk that the Company could be required to discontinue or significantly reduce the scope of its operations. These unaudited condensed interim consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 4 – Inventory, Net

Inventory, net consists of:

Note 5 – Debt Obligations

Convertible Notes

In March 2026, we issued three separate convertible notes and received cash proceeds of $800,000. Two of our non-employee directors purchased $250,000 and $50,000, respectively, of the issued convertible notes. In April and June 2026, we issued an aggregate of $2,160,000 of additional convertible notes, of which one in the amount of $400,000 was issued to one of our non-employee directors.  The convertible notes bear interest at 10% and mature three years from the issue date. Semi-annual interest payments are required on March 31, and September 30, each year commencing September 30, 2026. The convertible notes include warrant coverage equal to the shares of common stock issuable upon the conversion of the note. The original terms of the convertible notes provided a conversion rate of $5.00 per share and the warrants were exercisable immediately for a period of three years at an exercise price of $7.50 per warrant share. On May 26, 2026, the terms of the convertible notes were amended as follows: the conversion rate was reduced from $5.00 to $3.00, the exercise price of the warrants was reduced from $7.50 to $4.50, and substantially all assets of the Company were added as collateral (the “Modification”). The Modification impacted $2,300,000 convertible notes that were previously issued and originally convertible into 460,000 shares of common stock with equal warrant coverage of 460,000 warrant shares initially exercisable at $7.50 per warrant share. The Modification increased the number of shares issuable upon conversion to 766,667 from 460,000 and warrant shares to 766,667 from 460,000 on the $2,300,000 convertible notes outstanding at the time of the Modification.

The aggregate incremental value from the Modification to the embedded conversion option exceeded 10% of the total outstanding principal on the modified convertible notes. Therefore, the Modification resulted in an extinguishment of debt pursuant to ASC 470-50-40-10(a). Pursuant to ASC 470-50 Modifications and Extinguishments, the Company remeasured the acquisition price of the debt based on the fair value of the replacement convertible notes which approximated its $2,300,000 of principal outstanding due to arms-length issuances of convertible notes, with terms similar to the modified convertible notes, to various third parties near the date of the Modification. During the three and six months ended June 30, 2026, we have recognized a loss on debt extinguishment from the Modification of $1,021,787 which is comprised of $498,695 of unamortized issuance costs, which are required to be included in the debt extinguishment gain or loss pursuant to ASC 470-50. Further, ASC 470-50-40-17A requires any change in fair value of a freestanding-equity classified written call option held by the creditor that is modified as part of a debt modification to be included in debt extinguishment gain or loss.  Therefore, the increase in fair value of the warrants held by the convertible note holders, at the time of the Modification, of $523,092 was also included in the loss on extinguishment of debt.

We computed the incremental value received by the convertible note holders due to the Modification of the conversion rate and warrant exercise price using a Black-Scholes option pricing model (the “Black-Scholes”) and the following inputs:  expected term of approximately 3 years (based on the remaining contractual term of the warrants and convertible notes), volatility of approximately 115% (company’s volatility over the expected term), risk free rate of 4.10% ( based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term), underlying common stock of $2.30 per share, and a dividend rate of 0.00%.

At initial issuance of the $2,300,000 convertible notes a total of 460,000 warrants were also issued with an exercise price of $7.50. In accordance with ASC 470-20-25-2, we allocated the proceeds received between the convertible notes and the common stock warrants using the relative fair value method. Therefore, $528,898 of the total proceeds were allocated to the warrants and were presented as a discount against the convertible notes to be amortized into interest expense over the three-year term of the convertible notes and an increase to additional paid in capital. The relative fair value allocation was based on the estimated fair value of warrants on the date of issuance determined using the Black-Scholes and the following key assumptions: expected term of three years (based on the contractual term of the warrants), volatility of approximately 114-115% (company’s volatility over the expected term), risk free rate of 3.49-4.10% ( based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term), underlying common stock of $2.37 - $3.22 (market price on date of issuance) per share and a dividend rate of 0.00%. Prior to the Modification, a total of $26,566 and $30,203, of the warrant discount had been amortized into interest expense during the three and six months ended June 30, 2026, respectively. The unamortized discount of $498,695 associated with the originally issued warrants, with a $7.50 exercise price, at the time of the Modification, was also included in the loss on debt extinguishment.

Post Modification, an additional $660,000 of convertible notes were issued and a total of 220,000 warrant shares were issued, exercisable for three years at an exercise price of $4.50. In accordance with ASC 470-20-25-2, we allocated the proceeds received between the convertible notes and the common stock warrants using the relative fair value method. Therefore, $221,384 of the total proceeds was allocated to the warrants and has been presented as a discount against the convertible notes to be amortized into interest expense over the three-year term of the convertible notes and an increase to additional paid in capital. The relative fair value allocation was based on the estimated fair value of warrants on the date of issuance determined using the Black-Scholes and the following key assumptions: expected term of three years (based on the contractual term of the warrants), volatility of approximately 115% (company’s volatility over the expected term), risk free rate of 4.06-4.10% ( based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term), underlying common stock of $2.31 - $2.57 (market price on date of issuance) per share and a dividend rate of 0.00%.

Post modification, during the three and six months ended June 30, 2026, we recognized $5,430 of amortization related to the debt discount which has been included within interest expense on the condensed consolidated statements of operations. At June 30, 2026, the unamortized debt discount is $215,954.

At June 30, 2026, the total principal balance on the convertible notes is $2,960,000, which is due three years from issuance or March-June 2029, and accrued interest is $60,137, which is included within accounts payable and accrued expenses within the condensed consolidated balance sheets.

Note Payable

During the year ended December 31, 2025, we purchased approximately $48,200 of equipment with a note payable. The note bears interest at 10.75% and requires fixed payments of principal and interest of $1,042 for sixty months. At June 30, 2026 and December 31, 2025, the outstanding principal balance was $39,125 and $43,149, respectively.

At June 30, 2026, future principal payments on the note payable for the years ending December 31, will be as follows:

Secured Promissory Note

On September 30, 2025, the Company executed a $600,000 short-term secured promissory note (the “Short-Term Note”). The Short-Term Note required repayment of $630,000 on the maturity date of January 2, 2026. The Short-Term Note was secured by certain outstanding receivables of the Company. The lender of the Short-Term Note also received a warrant to purchase 10,000 shares of common stock at $11.25 for a period of four years. The Short-Term note was repaid in its entirety upon maturity.

Financing Liability

During the year ended December 31, 2025, we entered into a financing agreement to finance $265,505 of insurance premiums due on various policies. The financed amount is due in fixed monthly payments of $19,808 for a period of eleven months and bears interest at 9.85%. At June 30, 2026 and December 31, 2025, the balance of $10,159 and $159,342, respectively, remaining on the financing liability has been presented within current liabilities on the accompanying consolidated balance sheets.

Note 6 – Revenue

The following is a summary of our revenues by type for the three and six months ended June 30, 2026 and June 30, 2025:

Unearned Revenue

The following is a summary of our unearned revenue activity for the three and six months ended June 30, 2026 and year ended December 31, 2025:

During the three and six months ended June 30, 2026, we recognized $0 and $90,667, respectively, of service revenue that was previously unearned revenue at December 31, 2025. At June 30, 2026 and December 31, 2025, we have classified $0 and $312,905, respectively, within current liabilities and $2,548,488 and $30,000, respectively, within long-term liabilities based on when we estimate the unearned revenue will be recognized as revenue.

Note 7 – Stockholders’ Equity

The Company is authorized to issue 50,000,000 preferred stock shares and 1,000,000,000 common stock shares both with a par value of $0.0001.

Preferred Stock

On October 30, 2020, the Company designated 1,000,000 shares of preferred stock as Series D Convertible Preferred Stock with a par value of $0.0001. At June 30, 2026 and December 31, 2025, there were no shares of preferred stock issued and outstanding.

Common Stock

Issuance of Stock for Services

During the six months ended June 30, 2026, we issued 108,395 fully vested shares of restricted common stock to service providers and our board of directors with a fair value of $311,831, based on the closing market price of our common stock on date of grant.

During the six months ended June 30, 2025, we issued 29,310 fully vested shares of common stock to service providers with a fair value of $105,900 based on the market price of our common stock on date of grant.

Common Stock for Stock Option Exercises

During the six months ended June 30, 2026, we issued an aggregate of 222,972 shares of common stock for stock option exercises, all but one were cashless, and received cash proceeds of $6,600. One of the exercises was by our current Chief Executive Officer (“CEO”) who was issued 60,000 shares of common stock upon the cashless exercise.

During the six months ended June 30, 2025, we issued 20,000 shares of common stock for a stock option exercise that resulted in cash proceeds of $24,000.

Fully Vested Restricted Common Stock

During the six months ended June 30, 2026, certain executives and key employees vested in time-based restricted stock resulting in the Company issuing 243,023 shares of common stock.

During the six months ended June 30, 2025, certain executives and key employees vested in time-based restricted stock resulting in the Company issuing 41,633 shares of common stock.

Stock-based compensation

2021 Plan

The Company has reserved 3,615,000 shares of common stock or common stock equivalents to be issued under our 2021 Equity Incentive Plan (the “2021 Plan”) to the Company’s employees and non-employee services providers. Stock options granted under the 2021 Plan typically have a contractual term of ten years.

Stock-based compensation expense related to the stock options and restricted stock units expected to vest is presented as follows on the condensed consolidated statements of operations:

A summary of stock option activity during the three and six months ended June 30, 2026 is as follows:

*At June 30, 2026 and December 31, 2025, the options outstanding and exercisable include 0 and 300,000 granted in connection with a merger that occurred in 2021, respectively, which were not granted under the 2021 Plan. The 300,000 options were exercised on a cashless basis during the six months ended June 30, 2026. Further, at June 30, 2026 and December 31, 2025, the options outstanding and exercisable include 27,500 of options granted in 2024 pursuant to a legal settlement and were not granted under the 2021 Plan.

Intrinsic value is based on the difference between the option exercise price and the quoted closing market price at June 30, 2026 or the date of option exercise. At June 30, 2026, intrinsic value was nil.

During the three and six months ended, we granted our employees and our CEO stock options with an exercise price of $2.26 and 2.87, respectively. The options granted to employees vest ratably on each grant-date anniversary over a period of four years. Twenty-five percent (25%) of the CEO’s options vested immediately on date of grant with the remaining seventy-five percent (75%) vesting in eight equal quarterly installments at the end of each calendar quarter beginning June 30, 2026.

Of the total options outstanding at June 30, 2026, 91,894 of the options include performance conditions. The performance-based options vest as follows: 50% vest upon the achievement of operating profit, as defined in the employment agreements, and 50% upon the achievement of a revenue target of $100 million by the end of fiscal year 2028. The performance-based options with the revenue target begin vesting once the Company achieves $15 million in revenue for a fiscal year. Vesting will occur on January 31 of each year through January 31, 2029. The number of options that vest is based on the proportionate percentage of each fiscal year’s revenue to the $100 million target. For example, if our annual revenue for fiscal year 2026 is $20 million, 20% of the stock options with the revenue performance condition will vest on January 31, 2027.

At June 30, 2026, total unrecognized compensation expense for service based and performance-based options was $1,791,325 and $276,721, respectively. The unrecognized service-based expense will be recognized over a weighted-average period of 2.63 years. The unrecognized expense associated with the performance-based options will be expensed when it becomes probable that the performance obligations will be met.

The weighted-average grant date fair value of the options granted during the six months ended June 30, 2026 and June 30, 2025 was $1.93 and $2.44, respectively.

The grant date fair value was estimated using the Black-Scholes option pricing model during the six months ended June 30, 2026 and 2025 and the following assumptions:

Restricted Stock Units (“RSUs”)

At June 30, 2026, our unvested RSUs consist of 371,475 RSUs with time-based vesting provisions granted to executives, non-executives and non-employee directors, and 141,895 RSUs with performance-based vesting provisions. The performance-based unvested RSUs were granted to two current executive officers in prior periods.

A summary of our outstanding unvested time-based RSUs during the three and six months ended June 30, 2026 is as follows: