TOMI Environmental Solutions, Inc. 10-Q

Item 1. Financial Statements. TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEET June 30, 2021 (Unaudited) December 31, 2020 ASSETS Current Assets: Cash and Cash Equivalents $ 2,488,413 $ 5,198,842 Accounts Receivable - net 2,980,292 3,716,701 Other Receivables - 198,951 Inventories (Note 3) 5,175,979 3,781,515 Vendor Deposits (Note 4) 24,224 388,712 Prepaid Expenses 388,271 421,305 Total Current Assets 11,057,179 13,706,027 Property and Equipment – net (Note 5) 1,280,092 1,298,103 Other Assets: Intangible Assets – net (Note 6) 831,768 722,916 Operating Lease - Right of Use Asset (Note - 7) 608,111 631,527 Capitalized Software Development Costs - net (Note 8) 31,426 52,377 Other Assets 472,173 358,935 Total Other Assets 1,943,478 1,765,755 Total Assets $ 14,280,749 $ 16,769,885 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 1,534,172 $ 1,501,469 Accrued Expenses and Other Current Liabilities (Note 13) 568,502 501,849 Customer Deposits 41,827 118,880 Current Portion of Long-Term Operating Lease 86,391 81,223 Total Current Liabilities 2,230,892 2,203,421 Long-Term Liabilities: Loan Payable (Note 15) - 410,700 Long-Term Operating Lease, Net of Current Portion (Note 7) 908,677 953,190 Total Long-Term Liabilities 908,677 1,363,890 Total Liabilities 3,139,569 3,567,311 Commitments and Contingencies - - Shareholders’ Equity: Cumulative Convertible Series A Preferred Stock; par value $ 0.01 per share, 1,000,000 shares authorized; 63,750 shares issued and outstanding at June 30, 2021 and December 31, 2020 638 638 Cumulative Convertible Series B Preferred Stock; $1,000 stated value; 7.5% Cumulative dividend; 4,000 shares authorized; none issued and outstanding at June 30, 2021 and December 31, 2020 - - Common stock; par value $ 0.01 per share, 250,000,000 shares authorized; 16,811,513 and 16,761,513 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively. 168,115 167,615 Additional Paid-In Capital 52,369,899 52,142,399 Accumulated Deficit ( 41,397,471 ) ( 39,108,078 ) Total Shareholders’ Equity 11,141,180 13,202,574 Total Liabilities and Shareholders’ Equity $ 14,280,749 $ 16,769,885 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For The Three Months Ended For The Six Months Ended June 30, June 30, 2021 2020 (1) 2021 2020 (1) Sales, net $ 1,465,525 $ 10,028,497 $ 3,538,980 $ 17,081,915 Cost of Sales 523,563 4,463,602 1,361,860 7,029,012 Gross Profit 941,962 5,564,895 2,177,120 10,052,903 Operating Expenses: Professional Fees 106,781 54,831 280,274 190,956 Depreciation and Amortization 72,413 172,298 155,861 344,207 Selling Expenses 335,444 388,827 809,833 767,472 Research and Development 205,751 141,123 401,371 200,581 Equity Compensation Expense (Note 10) - 114,293 - 297,065 Consulting Fees 95,609 69,705 201,783 151,250 General and Administrative 1,319,194 967,158 3,031,560 1,785,303 Total Operating Expenses 2,135,192 1,908,235 4,880,682 3,736,834 Income (loss) from Operations ( 1,193,230 ) 3,656,660 ( 2,703,562 ) 6,316,069 Other Income (Expense): Gain Upon Debt Extinguishment 414,583 - 414,583 - Interest Income 192 1,043 619 1,585 Interest Expense - ( 787 ) ( 1,034 ) ( 41,476 ) Total Other Income (Expense) 414,776 256 414,169 ( 39,891 ) Income (loss) before income taxes ( 778,454 ) 3,656,916 ( 2,289,394 ) 6,276,178 Provision for Income Taxes (Note 16) - - - - Net Income (loss) $ ( 778,454 ) $ 3,656,916 $ ( 2,289,394 ) $ 6,276,178 Net income (loss) Per Common Share Basic $ ( 0.05 ) $ 0.22 $ ( 0.14 ) $ 0.39 Diluted $ ( 0.05 ) $ 0.20 $ ( 0.14 ) $ 0.35 Basic Weighted Average Common Shares Outstanding 16,811,513 16,692,675 16,784,737 16,271,514 Diluted Weighted Average Common Shares Outstanding 16,811,513 18,569,760 16,784,737 18,148,598 (1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information. The accompanying notes are an integral part of the condensed consolidated financial statements. 5 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED) For the six months ended June 30, 2021 Additional Total Series A Preferred Common Stock Paid Accumulated Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at December 31, 2020 63,750 $ 638 16,761,514 $ 167,614 $ 52,142,400 $ ( 39,108,078 ) $ 13,202,574 Common Stock Issued for Services Provided 50,000 500 227,500 228,000 Net (Loss) for the six months ended June 30, 2021 ( 2,289,394 ) ( 2,289,394 ) Balance at June 30, 2021 63,750 $ 638 16,811,514 $ 168,114 $ 52,369,900 $ ( 41,397,472 ) $ 11,141,181 For the six months ended June 30, 2020 Additional Total Series A Preferred Common Stock Paid Accumulated Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at December 31, 2019 63,750 $ 638 15,587,552 $ 155,876 $ 44,232,273 $ ( 43,499,243 ) $ 889,543 Equity Compensation 324,254 324,254 Common Stock Issued for Services Provided 50,000 500 47,500 48,000 Conversion of Notes Payable into Common Stock 1,041,667 10,417 4,489,583 4,500,000 Warrants and Options Exercised 39,856 399 120,601 121,000 Net Income for the six months ended June 30, 2020 6,276,178 6,276,178 Balance at June 30, 2020 (1) 63,750 $ 638 16,719,075 $ 167,191 $ 49,214,211 $ ( 37,223,065 ) $ 12,158,974 (1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information. The accompanying notes are an integral part of the condensed consolidated financial statements. 6 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED) For the three months ended June 30, 2021 Additional Total Series A Preferred Common Stock Paid Accumulated Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at March 31, 2021 63,750 $ 638 16,811,514 $ 168,114 $ 52,369,900 $ ( 40,619,018 ) $ 11,919,634 Net (Loss) for the three months ended June 30, 2021 ( 778,454 ) ( 778,454 ) Balance at June 30, 2021 63,750 $ 638 16,811,514 $ 168,114 $ 52,369,900 $ ( 41,397,472 ) $ 11,141,181 For the three months ended June 30, 2020 Additional Total Series A Preferred Common Stock Paid Accumulated Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at March 31, 2020 63,750 $ 638 16,689,635 $ 166,896 $ 49,036,715 $ ( 40,879,982 ) $ 8,324,265 Equity Compensation 114,293 114,293 Warrants and Options Exercised 29,440 294 63,206 63,500 Net Income for the three months ended June 30, 2020 3,656,916 3,656,916 Balance at June 30, 2020 (1) 63,750 $ 638 16,719,075 $ 167,191 $ 49,214,211 $ (37,223,065 ) $ 12,158,974 (1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information. The accompanying notes are an integral part of the condensed consolidated financial statements. 7 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2021 2020 Cash Flow From Operating Activities: Net Income (Loss) $ ( 2,289,394 ) $ 6,276,178 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used) In Operating Activities: Depreciation and Amortization 155,861 344,207 Amortization of Right of Use Asset 78,657 78,657 Amortization of Software Costs 20,950 20,950 Equity Compensation Expense - 297,065 Value of Equity Issued for Services 228,000 48,000 Reserve for Bad Debt 360,000 55,000 Inventory Reserve - ( 100,000 ) Gain Upon Debt Extinguishment ( 414,583 ) - Changes in Operating Assets and Liabilities: Decrease (Increase) in: Accounts Receivable 376,409 ( 3,151,403 ) Inventory ( 1,394,464 ) ( 307,829 ) Prepaid Expenses 33,034 ( 70,318 ) Vendor Deposits 364,488 ( 427,547 ) Other Receivables 198,951 - Other Assets ( 181,128 ) ( 188,396 ) Increase (Decrease) in: Accounts Payable 32,702 2,299,610 Accrued Expenses 70,538 318,406 Accrued Interest - ( 66,667 ) Customer Deposits ( 77,053 ) 32,040 Lease Liability ( 74,990 ) ( 72,806 ) Net Cash Provided (Used) in Operating Activities ( 2,512,020 ) 5,385,149 Cash Flow From Investing Activities: Capitalized Patent and Trademark Costs ( 45,807 ) - Purchase of Property and Equipment ( 152,602 ) ( 46,012 ) Net Cash (Used) in Investing Activities ( 198,408 ) ( 46,012 ) The accompanying notes are an integral part of the condensed consolidated financial statements. 8 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED (UNAUDITED) For the Six Months Ended June 30, 2021 2020 Cash Flow From Financing Activities: Proceeds from Exercise of Warrants and Options - 121,000 Proceeds from Loan Payable - 410,700 Repayment of Principal Balance on Convertible Note - ( 500,000 ) Net Cash Provided By Financing Activities: - 31,700 Increase (Decrease) In Cash and Cash Equivalents ( 2,710,429 ) 5,370,837 Cash and Cash Equivalents - Beginning 5,198,842 897,223 Cash and Cash Equivalents – Ending $ 2,488,413 $ 6,268,060 Supplemental Cash Flow Information: Cash Paid For Interest $ - $ 107,356 Cash Paid for Income Taxes $ 75,000 $ 800 Non-Cash Investing and Financing Activities: Accrued Equity Compensation $ - $ 27,189 Conversion of Note Payable into Common Stock $ - $ 4,500,000 Equipment, net Transferred to Inventory $ - $ 36,256 Patent and trademark costs reclassified from Other Assets $ 67,890 $ - The accompanying notes are an integral part of the condensed consolidated financial statements. 9 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS TOMI Environmental Solutions, Inc., a Florida corporation (“TOMI”, the “Company”, “we”, “our” and “us”) is a global provider of disinfection and decontamination essentials through our premier Binary Ionization Technology® (BIT™) platform, under which we manufacture, license, service and sell our SteraMist® brand of products, including SteraMist® BIT™, a hydrogen peroxide-based mist and fog. Our business is organized into five divisions: Healthcare, Life Sciences, TOMI Service Network, Food Safety and Commercial. Invented under a defense grant in association with the Defense Advanced Research Projects Agency (DARPA) of the U.S. Department of Defense, BIT™ is registered with the U.S. Environmental Protection Agency (EPA) and uses a low percentage hydrogen peroxide as its only active ingredient to produce a fog composed mostly of a hydroxyl radical ( . OH ion), known as ionized Hydrogen Peroxide (iHP™). Represented by the SteraMist® brand of products, iHP™ produces a germ-killing aerosol that works like a visual non-caustic gas. Our products are designed to service a broad spectrum of commercial structures, including, but not limited to, hospitals and medical facilities, bio-safety labs, pharmaceutical facilities, meat and produce processing facilities, universities and research facilities, vivarium labs, other service industries including cruise ships, office buildings, hotel and motel rooms, schools, restaurants, military barracks, police and fire departments, prisons, and athletic facilities. Our products are also used in single-family homes and multi-unit residences. Additionally, our products have been listed on the EPA’s List N as products that help combat COVID-19 and are actively being used for this purpose. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim unaudited condensed consolidated financial statements included herein, presented in accordance with generally accepted accounting principles utilized in the United States of America (“GAAP”), and stated in U.S. dollars, have been prepared by us, without an audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2020 and notes thereto which are included in the Annual Report on Form 10-K previously filed with the SEC on March 30, 2021. We follow the same accounting policies in the preparation of interim reports. The results of operations for the interim periods covered by this Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period. Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of TOMI and its wholly owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Reclassification of Accounts Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or financial position. 10 Table of Contents Use of Estimates The preparation of the condensed 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 condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventory, fair values of financial instruments, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Fair Value Measurements The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities. Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. All these items were determined to be Level 1 fair value measurements. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents includes cash on hand, held at financial institutions and other liquid investments with original maturities of three months or less. At times, these deposits may be in excess of insured limits. Accounts Receivable Our accounts receivable are typically from credit worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of their status and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Bad debt expense for the three and six months ended June 30, 2021 was approximately $ 303,000 and $ 418,000 , respectively. Bad debt expense for the three and six months ended June 30, 2020 was approximately $ 48,000 and $ 73,000 , respectively. At June 30, 2021 and December 31, 2020, the allowance for doubtful accounts was $ 750,000 and $ 390,000 , respectively. 11 Table of Contents Inventories Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods. We expense costs to maintain certification to cost of goods sold as incurred. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable. Our reserve for obsolete inventory was $ 0 as of June 30, 2021 and December 31, 2020, respectively. Property and Equipment We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter. Leases In February 2016, the FASB issued ASU No. 2016-02 (ASC 842), Leases , to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases , ASU No. 2018-11, Targeted Improvements , ASU No. 2018-20, Narrow-Scope Improvements for Lessors , and ASU 2019-01, Codification Improvements , to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We adopted ASC 842 as of January 1, 2019 using the modified retrospective basis with a cumulative effect adjustment as of that date. In addition, we elected the package of practical expedients permitted under the transition guidance within the standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. Accordingly, previously reported financial statements, including footnote disclosures, have not been recast to reflect the application of the standard to all comparative periods presented. Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current portion on our condensed consolidated balance sheet as of June 30, 2021 and December 31, 2020. We have elected not to present short-term leases on the condensed consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. Capitalized Software Development Costs In accordance with ASC 985-20 regarding the development of software to be sold, leased, or marketed, we expense such costs as they are incurred until technological feasibility has been established, at and after which time those costs are capitalized until the product is available for general release to customers. The periodic expense for the amortization of capitalized software development costs will be included in cost of sales. Amortization expense for the three and six months ended June 30, 2021 and 2020 was $ 10,475 and $ 20,950 , respectively. 12 Table of Contents Accounts Payable As of June 30, 2021, two vendors accounted for approximately 58 % of accounts payable. As of December 31, 2020, two vendors accounted for approximately 32 % of accounts payable. For the three and six months ended June 30, 2021, two vendors accounted for 73 % and 68 % of cost of sales, respectively. For the three and six months ended June 30, 2020, two vendors accounted for 78 % and 80 % of cost of sales, respectively. Accrued Warranties Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the condensed consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. As of June 30, 2021, and December 31, 2020, our warranty reserve was $ 68,000 . (See Note 14). Income Taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with Accounting Standards Codification (ASC) guidance for income taxes. Net deferred tax benefits have been fully reserved at June 30, 2021 and December 31, 2020. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. Net Income (Loss) Per Share Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the treasury stock method and includes the effect from potential issuance of shares of common stock, such as shares issuable pursuant to the exercise of options and warrants and conversions of preferred stock or debentures. Potentially dilutive securities as of June 30, 2021 consisted of 1,849,133 shares of common stock issuable upon exercise of outstanding warrants, 132,500 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Potentially dilutive securities as of June 30, 2020 consisted of 1,712,084 shares of common stock issuable upon exercise of outstanding warrants, 101,250 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Diluted net income or (loss) per share is computed similarly to basic net income or (loss) per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if such additional shares were dilutive. Options, warrants, and preferred stock of approximately 2.0 million and 2.2 million shares of common stock were outstanding at June 30, 2021 and December 31, 2020, respectively, but were excluded from the computation of diluted net loss per share at June 30, 2021 due to the anti-dilutive effect on net loss per share. 13 Table of Contents For the Three Months Ended June 30, (Unaudited) 2021 2020 Net Income (Loss) $ ( 778,454 ) $ 3,656,916 Adjustments for convertible debt - as converted Interest on convertible debt - - Net income (loss) attributable to common shareholders $ ( 778,454 ) $ 3,656,916 Weighted average number of shares of common stock outstanding: Basic 16,811,513 16,692,675 Diluted 16,811,513 18,569,760 Net income (loss) attributable to common shareholders per share: Basic $ (0.05 ) $ 0.22 Diluted $ (0.05 ) $ 0.20 The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented: For the Three Months Ended June 30, (Unaudited) 2021 2020 Numerator: Net Income (Loss) $ ( 778,454 ) $ 3,656,916 Denominator: Basic weighted-average shares 16,811,513 16,692,675 Effect of dilutive securities Warrants - 1,712,084 Convertible Debt - - Options - 101,250 Preferred Stock - 63,750 Diluted Weighted Average Shares 16,811,513 18,569,760 Net Income (Loss) Per Common Share: Basic $ (0.05 ) $ 0.22 Diluted $ (0.05 ) $ 0.20 Note: Warrants, options and preferred stock for the three months ended June 30, 2021 are not included in the computation of diluted weighted average shares as such inclusion would be anti-dilutive. Income (loss) from Operations Data: Income (Loss) from Operations $ ( 1,193,230 ) $ 3,656,660 Basic and Diluted Weighted Average Shares: Basic 16,811,513 16,692,675 Diluted 16,811,513 18,569,760 Basic and Diluted Income (loss) Per Common Share: Basic $ (0.07 ) $ 0.22 Diluted $ (0.07 ) $ 0.20 14 Table of Contents For the Six Months Ended June 30, (Unaudited) 2021 2020 Net Income (Loss) $ ( 2,289,394 ) $ 6,276,178 Adjustments for convertible debt - as converted Interest on convertible debt - 40,689 Net income (loss) attributable to common shareholders $ ( 2,289,394 ) $ 6,316,867 Weighted average number of shares of common stock outstanding: Basic 16,784,737 16,271,514 Diluted 16,784,737 18,148,598 Net income (loss) attributable to common shareholders per share: Basic $ (0.14 ) $ 0.39 Diluted $ (0.14 ) $ 0.35 The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented: For the Six Months Ended June 30, (Unaudited) 2021 2020 Numerator: Net Income (Loss) $ ( 2,289,394 ) $ 6,276,178 Denominator: Basic weighted-average shares 16,784,737 16,271,574 Effect of dilutive securities Warrants - 1,712,084 Convertible Debt - - Options - 101,250 Preferred Stock - 63,750 Diluted Weighted Average Shares 16,784,737 18,148,598 Net Income (Loss) Per Common Share: Basic $ (0.14 ) $ 0.39 Diluted $ (0.14 ) $ 0.35 Note: Warrants, options and preferred stock for the six months ended June 30, 2021 are not included in the computation of diluted weighted average shares as such inclusion would be anti-dilutive. Income (loss) from Operations Data: Income (Loss) from Operations $ ( 2,703,562 ) $ 6,316,069 Basic and Diluted Weighted Average Shares Basic 16,784,737 16,271,574 Diluted 16,784,737 18,148,598 Basic and Diluted Income (loss) Per Common Share Basic $ (0.16 ) $ 0.39 Diluted $ (0.16 ) $ 0.35 15 Table of Contents Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). 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(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are 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 identified in the contract for the allocation of transaction price in step (iv) above. Title and risk of loss generally pass to our customers upon shipment. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from Customers. Disaggregation of Revenue The following table presents our revenues disaggregated by revenue source. Product and Service Revenue For the three months ended June 30, (Unaudited) 2021 2020 SteraMist Product $ 1,026,000 $ 9,235,000 Service and Training 440,000 793,000 Total $ 1,466,000 $ 10,028,000 Revenue by Geographic Region For the three months ended June 30, (Unaudited) 2021 2020 United States $ 1,184,000 $ 8,392,000 International 282,000 1,636,000 Total $ 1,466,000 $ 10,028,000 Product and Service Revenue For the six months ended June 30, (Unaudited) 2021 2020 SteraMist Product $ 2,673,000 $ 15,880,000 Service and Training 866,000 1,202,000 Total $ 3,539,000 $ 17,082,000 16 Table of Contents Revenue by Geographic Region For the six months ended June 30, (Unaudited) 2021 2020 United States $ 2,989,000 $ 11,961,000 International 550,000 5,121,000 Total $ 3,539,000 $ 17,082,000 Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Costs to Obtain a Contract with a Customer We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses. Contract Balances As of June 30, 2021, and December 31, 2020 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. 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. Significant Judgments Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services. Equity Compensation Expense We account for equity compensation expense in accordance with FASB ASC 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value. On July 7, 2017, our shareholders approved the 2016 Equity Incentive Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 2,000,000 shares of common stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of common stock for numerous reasons, including, but not limited to, shares of common stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award, and awards under the 2016 Plan are expressly conditioned upon such agreements. For the six months ended June 30, 2021 and 2020, we issued 50,000 shares of fully vested common stock, respectively, pursuant to the 2016 Plan to our directors. 17 Table of Contents Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $ 250,000 at times during the year. Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three and six months ended June 30, 2021 and 2020. Advertising and Promotional Expenses We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses included in selling expenses for the three and six months ended June 30, 2021 were approximately $ 140,000 and $ 406,000 , respectively. Advertising and promotional expenses included in selling expenses for the three and six months ended June 30, 2020 were approximately $ 53,000 and $ 99,000 , respectively. Research and Development Expenses We expense research and development expenses in the period in which they are incurred. For the three and six months ended June 30, 2021, research and development expenses were approximately $206,000 and $401,000, respectively. For the three and six months ended June 30, 2020, research and development expenses were approximately $141,000 and $201,000, respectively. Business Segments We currently have one reportable business segment due to the fact that we derive our revenue primarily from one product. A breakdown of revenue is presented in “Revenue Recognition” in Note 2 above. Recent Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. We elected to adopt this guidance early, in 2020 on a prospective basis. The guidance did not have a material impact on our condensed Consolidated Financial Statements. 18 Table of Contents NOTE 3. INVENTORIES Inventories consist of the following at: June 30, 2021 (Unaudited) December 31, 2020 Finished goods $ 4,753,759 $ 3,404,025 Raw Materials 422,220 377,490 $ 5,175,979 $ 3,781,515 NOTE 4. VENDOR DEPOSITS At June 30, 2021 and December 31, 2020, we maintained vendor deposits of $ 24,224 and $ 388,712 , respectively, for open purchase orders for inventory. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at: June 30, 2021 (Unaudited) December 31, 2020 Furniture and fixtures $ 357,236 $ 357,236 Equipment 1,614,751 1,580,743 Vehicles 60,703 60,703 Computer and software 214,860 203,704 Leasehold improvements 386,120 386,120 Tenant Improvement Allowance 405,000 405,000 Capitalized Costs in Progress – Tooling and Molds 107,439 - 3,146,109 2,993,507 Less: Accumulated depreciation 1,866,017 1,695,404 $ 1,280,092 $ 1,298,103 For the three and six months ended June 30, 2021, depreciation was $ 69,990 and $ 151,016 , respectively. For the three and six months ended June 30, 2020, depreciation was $ 78,950 and $ 157,513 , respectively. For the three and six months ended June 30, 2021 and 2020, amortization of tenant improvement allowance was $ 9,798 and $ 19,597 , respectively and was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations. As of June 30, 2021, we had capitalized costs in progress not yet placed into service in connection with tooling and molds pursuant to ASC 340-10. NOTE 6. INTANGIBLE ASSETS Intangible assets consist of patents and trademarks related to our Binary Ionization Technology. We amortize the patents over the estimated remaining lives of the related patents. The trademarks have an indefinite life. Amortization expense was $ 2,422 and $ 4,845 for the three and six months ended June 30, 2021, respectively. Amortization expense was $ 93,347 and $ 186,694 for the three and six months ended June 30, 2020, respectively. 19 Table of Contents Definite life intangible assets consist of the following: June 30, 2021 (Unaudited) December 31, 2020 Intellectual Property and Patents $ 3,054,259 $ 3,000,012 Less: Accumulated Amortization 2,861,836 2,856,991 Patents, net $ 192,423 $ 143,021 Indefinite life intangible assets consist of the following: Trademarks 639,345 579,895 Total Intangible Assets, net $ 831,768 $ 722,916 Approximate future amortization is as follows: Year Ended: Amount July 1 – December 31, 2021 $ 6,000 December 31, 2022 13,000 December 31, 2023 13,000 December 31, 2024 13,000 December 31, 2025 13,000 Thereafter 134,000 $ 192,000 NOTE 7. LEASES In April 2018, we entered into a 10 -year lease agreement for a new 9,000 -square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement was scheduled to commence on December 1, 2018 or when the property was ready for occupancy. The agreement provided for annual rent of $ 143,460 , an escalation clause that increases the rent 3 % year over year, a landlord tenant improvement allowance of $ 405,000 and additional landlord work as discussed in the lease agreement. We took occupancy of the property on December 17, 2018 and the lease was amended in March 2019 to provide for a 4-month rent holiday and a commencement date of April 1, 2019. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The balances for our operating lease where we are the lessee are presented as follows within our condensed consolidated balance sheet: Operating leases: June 30, 2021 (Unaudited) December 31, 2020 Assets: Operating lease right-of-use asset $ 608,111 $ 631,527 Liabilities: Current Portion of Long-Term Operating Lease $ 86,391 $ 81,223 Long-Term Operating Lease, Net of Current Portion 908,677 953,190 $ 995,067 $ 1,034,413 20 Table of Contents The components of lease expense are as follows and are included within general and administrative expense on our condensed consolidated statement of operations: For the Three Months Ended June 30, 2021 (Unaudited) For the Three Months Ended June 30, 2020 (Unaudited) Operating lease expense $ 39,329 $ 39,329 For the Six Months Ended June 30, 2021 (Unaudited) For the Six Months Ended June 30, 2020 (Unaudited) Operating lease expense $ 78,657 $ 78,657 Other information related to leases where we are the lessee is as follows: June 30, 2021 (Unaudited) December 31, 2020 Weighted-average remaining lease term: Operating leases 7.75 years 8.25 years Discount rate: Operating leases 7.00 % 7.00 % Supplemental cash flow information related to leases where we are the lessee is as follows: For the Three Months Ended June 30, 2021 (Unaudited) For the Three Months Ended June 30, 2020 (Unaudited) Cash paid for amounts included in the measurement of lease liabilities: $ 38,049 $ 36,941 For the Six Months Ended June 30, 2021 (Unaudited) For the Six Months Ended June 30, 2020 (Unaudited) Cash paid for amounts included in the measurement of lease liabilities: $ 74,990 $ 72,806 As of June 30, 2021, the maturities of our operating lease liability are as follows: Year Ended: Operating Lease July 1 – December 31, 2021 $ 76,098 December 31, 2022 155,621 December 31, 2023 160,290 December 31, 2024 165,098 December 31, 2025 170,051 Thereafter 575,131 Total minimum lease payments 1,302,290 Less: Interest 307,223 Present value of lease obligations 995,067 Less: Current portion 86,391 Long-term portion of lease obligations $ 908,677 21 Table of Contents NOTE 8. CAPITALIZED SOFTWARE DEVELOPMENT COSTS In accordance with ASC 985-20 we capitalized certain software development costs associated with updating our continuing line of product offerings. Capitalized software development costs consist of the following at: June 30, 2021 (Unaudited) December 31, 2020 Capitalized Software Development Costs $ 125,704 $ 125,704 Less: Accumulated Amortization ( 94,278 ) ( 73,327 ) $ 31,426 $ 52,377 Amortization expense for the three and six months ended June 30, 2021 was $ 10,475 and $ 20,950 , respectively. Amortization expense for the three and six months ended June 30, 2020 was $ 10,475 and $ 20,950 , respectively. NOTE 9. CLOUD COMPUTING SERVICE CONTRACT In May 2020 we entered into a cloud computing service contract with a vendor. The contract provides for annual payments in the amount of $ 30,409 and has a term of 5 years. The annual contract payments are capitalized as a prepaid expense and amortized over a twelve-month period. We have incurred implementation costs of $ 62,677 in connection with the cloud computing service contract which have been capitalized in prepaid expenses and other assets as of June 30, 2021. In accordance with ASU No. 2018-15, such implementation costs are being amortized over the remaining contract terms beginning January 1, 2021, which was when the cloud-based service contract was placed in service. Amortization expense for the three and six months ended June 30, 2021 was $ 3,482 and $ 6,964 , respectively. Amortization expense for the three and six months ended June 30, 2020 was $0. NOTE 10. SHAREHOLDERS’ EQUITY Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up by us before any payment is made to the holders of our common stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock. Reverse Stock Split On September 9, 2020, the Board approved a reverse stock split of our common stock and our Convertible Series A Preferred Stock, in each case, at a ratio of 1-for-8 and without any change to the respective par value thereof (the “Reverse Stock Split”), and, on September 10, 2020 , we filed an Articles of Amendment to our Articles of Incorporation with the Department of State of the State of Florida to effect the Reverse Stock Split. The Reverse Stock Split became effective as of September 10, 2020. All per-share and share amounts have been retroactively restated in this Quarterly Report on Form 10-Q for all periods presented to reflect the reverse stock split. Convertible Series A Preferred Stock Our authorized Convertible Series A Preferred Stock, $ 0.01 par value, consists of 1,000,000 shares. At June 30, 2021 and December 31, 2020, there were 63,750 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock. Convertible Series B Preferred Stock Our authorized Convertible Series B Preferred Stock, $1,000 stated value, 7.5% cumulative dividend, consists of 4,000 shares. At June 30, 2021 and December 31, 2020, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock. 22 Table of Contents Common Stock In January 2020, we issued 50,000 shares of fully vested common stock valued at $ 48,000 to members of our Board (see Note 12). In March 2020, 1,041,667 shares of common stock were issued in connection with the conversion of convertible notes payable aggregating $ 4,500,000 . In March 2020, 10,417 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $ 57,500 . In May 2020, 2,500 shares of common stock were issued in connection with the exercise of options for which we received proceeds of $ 1,000 . In June 2020, 26,940 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $ 62,500 . In January 2021, we issued 50,000 shares of common stock valued at $ 228,000 to members of our Board (see Note 12). Stock Options There were no options granted for the six months ended June 30, 2021. In January 2020 we issued two options to purchase an aggregate of 31,250 shares of common stock to our Chief Operating Officer at an exercise price of $0.80 and $0.96 per share pursuant to her employment agreement with us. The options were valued at a total of $ 23,595 and have a term of 5 years. We utilized the Black-Scholes method to fair value the options received by the COO with the following assumptions: volatility, 135 %; expected dividend yield, 0 %; risk free interest rate, 1.64 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the options was $0.72 and $ 0.80 . The value of the stock option was included in accrued expenses at December 31, 2019. The following table summarizes stock options outstanding as of June 30, 2021 and December 31, 2020: June 30, 2021 (Unaudited) December 31, 2020 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Outstanding, beginning of period 132,500 $ 2.72 77,500 $ 2.56 Granted - - 62,500 3.96 Exercised - - ( 2,500 ) 0.40 Expired - - ( 5,000 ) 16.80 Outstanding, end of period 132,500 $ 2.72 132,500 $ 2.72 23 Table of Contents Options outstanding and exercisable by price range as of June 30, 2021 were as follows: Outstanding Options Average Weighted Exercisable Options Range Number Remaining Contractual Life in Years Number Weighted Average Exercise Price $ 0.80 27,500 3.60 27,500 $ 0.80 $ 0.88 31,250 2.51 31,250 $ 0.88 $ 0.96 25,000 2.52 25,000 $ 0.96 $ 2.16 5,000 3.51 5,000 $ 2.16 $ 4.40 12,500 4.60 12,500 $ 4.40 $ 7.06 31,250 4.25 31,250 $ 7.06 132,500 3.39 132,500 $ 2.72 Stock Warrants In January 2020 we issued a warrant to purchase 156,250 shares of common stock to our Chief Executive Officer at an exercise price of $ 1.20 per share pursuant to an employment agreement. The warrant was valued at $ 164,201 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 136 %; expected dividend yield, 0 %; risk free interest rate, 1.64 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.04 . In January 2020 we issued a warrant to purchase 5,208 shares of common stock to an employee at an exercise price of $ 0.96 per share. The warrant was valued at $ 3,594 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 135 %; expected dividend yield, 0 %; risk free interest rate, 1.58 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 0.72 . The value of the warrants was expensed in the fourth quarter of 2019 and included in accrued expenses at December 31, 2019. In February 2020 we issued a warrant to purchase 18,750 shares of common stock to an employee at an exercise price of $ 1.20 per share. The warrant was valued at $ 18,571 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 155 %; expected dividend yield, 0 %; risk free interest rate, 1.64 %; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $ 0.96 . In April 2020 we issued a warrant to purchase 12,500 shares of common stock to the CEO at an exercise price of $ 4.00 per share pursuant to an employment agreement. The warrant was valued at $ 49,693 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the CEO with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . In April 2020 we issued a warrant to purchase 6,250 shares of common stock to the COO at an exercise price of $ 4.00 per share pursuant to an employment agreement. The warrant was valued at $ 24,846 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the COO with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . In April 2020 we issued a warrant to purchase 6,250 shares of common stock to the CFO at an exercise price of $ 4.00 per share pursuant to an employment agreement. The warrant was valued at $ 24,846 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the CFO with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . 24 Table of Contents In April 2020 we issued a warrant to purchase 3,750 shares of common stock to a consultant at an exercise price of $ 4.00 per share. The warrant was valued at $ 14,908 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the consultant with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . On February 11, 2021, we agreed to amend (the “Warrant Amendment”) the warrant to purchase 125,000 shares of TOMI common stock, par value $ 0.01 (the “Common Stock”), issued by TOMI to Dr. Halden S. Shane, TOMI’s Chief Executive Officer and a director on TOMI’s board of directors, on February 11, 2014 (the “Warrant”), to provide TOMI an option to repurchase the Warrant from Dr. Shane at a negotiated price. In connection with the Warrant Amendment, TOMI repurchased the warrant from Dr. Shane (the “Repurchase”) for an aggregate cash consideration of $314,500, representing a 15% discount of the net exercise cash value of the Warrant, which was calculated using the closing price of the Common Stock on the Nasdaq on February 11, 2021 of $5.36, less the exercise price of the warrants in the amount of $2.40. On the same date, the Warrant Amendment and the Repurchase was considered, approved and adopted by a disinterested majority of TOMI’s board of directors . The $ 314,500 charge in connection with the warrant amendment has been included in General and Administrative expenses for the six months ended June 30, 2021. The following table summarizes the outstanding common stock warrants as of June 30, 2021 and December 31, 2020: June 30, 2021 (Unaudited) December 31, 2020 Number of Warrants Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Outstanding, beginning of period 2,049,133 $ 2.55 2,155,065 $ 3.12 Granted - - 585,447 4.97 Exercised - - ( 76,796 ) ( 2.77 ) Expired ( 200,000 ) ( 2.94 ) ( 614,583 ) ( 6.40 ) Outstanding, end of period 1,849,133 $ 2.65 2,049,133 $ 2.55 Warrants outstanding and exercisable by price range as of June 30, 2021 were as follows: Outstanding Warrants Exercisable Warrants Exercise Price Number Average Weighted Remaining Contractual Life in Years Number Weighted Average Exercise Price $ 0.64 31,250 2.40 31,250 $ 0.64 $ 0.80 158,125 2.26 158,125 $ 0.80 $ 0.96 473,958 1.44 473,958 $ 0.96 $ 1.12 6,250 2.80 6,250 $ 1.12 $ 1.20 175,000 3.38 175,000 $ 1.20 $ 1.36 1,250 1.32 1,250 $ 1.36 $ 2.16 31,250 0.50 31,250 $ 2.16 $ 2.32 523,061 0.66 523,061 $ 2.32 $ 2.40 12,500 0.25 12,500 $ 2.40 $ 2.56 31,250 0.25 31,250 $ 2.56 $ 4.00 28,750 8.82 28,750 $ 4.00 $ 6.95 375,000 9.25 375,000 $ 6.95 $ 8.40 1,488 2.13 1,488 $ 8.40 1,849,133 3.15 1,849,133 $ 2.65 There were no unvested warrants outstanding as of June 30, 2021. 25 Table of Contents NOTE 11. COMMITMENTS AND CONTINGENCIES Legal Contingencies We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operations or cash flows. In addition, from time to time, we may have to file claims against parties that infringe on our intellectual property. Product Liability As of June 30, 2021 and December 31, 2020, there were no claims against us for product liability. COVID-19 Pandemic The COVID-19 pandemic has increased the global demand for disinfection products and services that help prevent the spread and transmission of COVID-19 virus. The Company’s products have been identified as an essential disinfectant and decontamination vendor by various agencies and countries, which have materially affected its business and results of operations. The Company experienced a substantial increase in demand for our products and services in 2020 due to the pandemic. During the first half of 2021, the Company experienced a reduction of demand due to various factors, including the closure of our major customers’ business operations due to the pandemic, which resulted in the suspension of many of its ongoing long-term projects. It is difficult to predict how COVID-19 pandemic will affect the Company’s financial performance in the remainder of 2021, as the global economy gradually reopens, customers adjust and change their operations, and the Company implements new marketing and sales strategies in response. NOTE 12. CONTRACTS AND AGREEMENTS Executive Agreements Halden S. Shane On September 22, 2020, we entered into a three year employment agreement with Dr. Shane, effective October 1, 2020. The agreement provides for a base annual salary of $ 500,000 . The agreement also provides for a signing bonus of 375,000 warrants. Dr. Shane is also entitled to a cash performance bonus and an annual issuance of an option to purchase 31,250 shares of common stock from the 2016 Plan at the discretion of the Board. The agreement also provides that we will reimburse Dr. Shane for the expenses associated with the use of an automobile up to $ 750 a month. The term of the agreement is three years . In the event Dr. Shane is terminated as CEO as a result of a change in control, Dr. Shane will be entitled to a lump sum payment of two years’ salary at the time of such termination. The Board may terminate Dr. Shane for cause by written notification to Dr. Shane; provided, however, that no termination for cause will be effective unless Dr. Shane has been provided with prior written notice and opportunity for remedial action and fails to remedy within 30 days thereof, in the event of a termination by the Company (i) by reason of willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to, the Company, (ii) by reason of material breach of his employment agreement and (iii) by reason of gross negligence or intentional misconduct with respect to the performance of duties under the agreement. Upon termination for cause, Dr. Shane will be immediately paid an amount equal to his gross salary. The Board may terminate Dr. Shane other than for cause at any time upon giving notice to Dr. Shane. Upon such termination, Dr. Shane will be immediately paid an amount equal to his gross salary. 26 Table of Contents Elissa J. Shane On October 1, 2020, we entered into an employment agreement with Elissa J. Shane, effective October 1, 2020. Pursuant to her employment agreement, Ms. Shane will receive an annual base salary of at least $ 270,000 , subject to annual review and discretionary increase by the Compensation Committee of the Board. Ms. Shane is eligible to receive an annual cash bonus and other annual incentive compensation. The agreement originally provided for a grant of 93,750 warrants. Additionally, in connection with the execution of her employment agreement, on October 1, 2020, we issued Ms. Shane a warrant to purchase 93,750 shares of Common Stock at an exercise price of $6.17 per share. These provisions were subsequently amended to provide for the issuance to Ms. Shane of 31,250 options from the 2016 Equity Plan at the closing price of $ 7.06 on the date of grant in lieu of the warrant grant and the 93,750 warrants were cancelled. Ms. Shane acknowledged that the 31,250 options were in full consideration of the amount she was entitled to under the agreement. Her employment agreement also provides that we will reimburse Ms. Shane for reasonable and necessary business and entertainment expenses that she incurs in performing her duties. During the term of her employment, Ms. Shane will also be entitled to up to four weeks of paid vacation time annually, which will accrue up to six weeks, and to participate in our benefit plans and programs, including but not limited to all group health, life, disability and retirement plans. Ms. Shane is also entitled to the sum of $1,000 per month as a vehicle allowance. The initial term of her employment agreement is three years, which may be automatically extended for successive one-year terms, unless either party provides the other with 120 days’ prior written notice of its intent to terminate the agreement. In the event Ms. Shane is terminated as COO as a result of a change in control, Ms. Shane will be entitled to a lump sum payment of one and a half years’ salary at the time of such termination. Agreements with Directors In December 2017, we increased the annual fee to the members of our Board to $ 40,000 , to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee we increased to $ 45,000 , also to be paid in cash on a quarterly basis. Director compensation also includes the annual issuance of our common stock. For the six months ended June 30, 2020, we issued an aggregate of 50,000 shares of common stock that were valued at $ 48,000 to members of our Board. For the six months ended June 30, 2021, we issued an aggregate of 50,000 shares of common stock that were valued at $ 228,000 to members of our Board. Manufacturing Agreement In June 2020 we entered into a manufacturing agreement with Planet Innovation Products, Pty Ltd (“PI”). The agreement does not provide for any minimum purchase commitments and is for a term of three years. The agreement also provides for a warranty against product defects. Cloud Computing Service Contract In May 2020 we entered into an agreement for a cloud computing service contract. The contract provides for annual payments in the amount of $30,409 and has a term of 5 years. Approximate minimum future payments under the contract are as follows: Year Ended: Amount July 1 - December 31, 2021 $ - December 31, 2022 30,000 December 31, 2023 30,000 December 31, 2024 30,000 December 31, 2025 - $ 90,000 Other Agreements TOMI Service Network (“TSN”) is a national service network composed of existing full-service restoration industry specialists that have entered initially into licensing agreements with us to become Primary Service Providers (“PSPs”). The licensing agreements originally granted protected territories to PSPs to perform services using our SteraMist ® platform of products and also provide for potential job referrals to PSPs whereby we are entitled to referral fees. Additionally, the agreement provides for commissions due to PSPs for equipment and solution sales they facilitate to other service providers in their respective territories. As part of these agreements, we are obligated to provide to the PSPs various training, ongoing support and facilitate a referral network call center. As of June 30, 2021, we have 201 network companies in TSN. The nature and terms of our TSN agreements may represent multiple deliverable arrangements. Each of the deliverables in these arrangements typically represent a separate unit of accounting. There is no exclusivity in our TSN network. 27 Table of Contents NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following at: June 30, 2021 (Unaudited) December 31, 2020 Commissions $ 132,183 $ 151,709 Payroll and related costs 237,233 84,000 Director fees 41,250 41,250 Sales Tax Payable ( 3,436 ) 9,784 Income Taxes Payable (Note 16) 2,000 77,000 Accrued warranty (Note 14) 68,000 68,000 Other accrued expenses 91,272 70,106 Total $ 568,502 $ 501,849 NOTE 14. ACCRUED WARRANTY Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. The warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate warranty costs based on historical warranty claim experience. The following table presents warranty reserve activities at: June 30, 2021 (Unaudited) December 31, 2020 Beginning accrued warranty costs $ 68,000 $ 30,000 Provision for warranty expense 3,762 101,041 Settlement of warranty claims ( 3,762 ) ( 63,041 ) Ending accrued warranty costs $ 68,000 $ 68,000 NOTE 15. LOAN PAYABLE On April 21, 2020, we received $410,700 in loan funding from the Paycheck Protection Program (the "PPP") established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act") and administered by the U.S. Small Business Administration ("SBA"). The unsecured loan (the "PPP Loan") is evidenced by a promissory note of the Company, dated April 21, 2020 (the "Note") in the principal amount of $ 410,700 with City National Bank (the "Bank"), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0 % per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. In May of 2021, the loan principal and related interest was forgiven and we recognized a gain upon debt extinguishment in our statement of operations in the amount of $414,583 for the six months ended June 30, 2021. 28 Table of Contents NOTE 16. INCOME TAXES For the three and six months ended June 30, 2021 and 2020, our provision for income tax was $ 0 . Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized in accordance with ASC guidance for income taxes. As of June 30, 2021 and December 31, 2020, we recorded a valuation allowance of $ 4,170,000 and $ 3,530,000 , respectively for the portion of the deferred tax assets that we do not expect to be realized. Management believes that based on the available information, it is more likely than not that the remaining U.S. deferred tax assets will not be realized, such that a valuation allowance is required against U.S. deferred tax assets. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. NOTE 17. CUSTOMER CONCENTRATION Two customers accounted for 29 % of our revenue for the three months ended June 30, 2021. We had no customers/distributor whose revenue individually represented 10% or more of our total revenue for the six months ended June 30, 2021. One customer/distributor accounted for 13 % of net revenue for the six months ended June 30, 2020. We had three customers/distributors that accounted for 42 % of accounts receivable as of June 30, 2021. Three customers/distributors accounted for 36 % of accounts receivable as of December 31, 2020. NOTE 18. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the SEC. There were no reportable subsequent events. 29 Table of Contents