TOMI Environmental Solutions, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guaranteeing future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “TOMI” as used herein refers collectively to TOMI Environmental Solutions, Inc. unless otherwise stated. The following discussion should be read in conjunction with the 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. Quarterly Highlights Business Update As we exited 2020 and began 2021, the Company refocused its core customers, product development and market penetration. As a result of the global COVID-19 pandemic, we experienced an increase of demand for our products and introduction to a new set of customers, which was beneficial to the Company as it brought awareness to all of our product offerings and opened the door to a new customer base. These customers, mainly in our TOMI Service Network (TSN) and Commercial division, were initially looking for products that would aid in their ability to keep their businesses open as companies provided essential services. As the customer base expanded, we worked with them to evaluate our current products as well as exploring new product offerings to meet our customer needs. Our customers have requested a more mobile and lighter weight product and Tomi has introducing the SteraPak. The TOMI Research & Development department has done a tremendous job the past few quarters on the development, testing, and validation of multiple new products. In addition to the SteraPak, TOMI will be releasing the SteraMist Select Plus and the SteraMist Transport CES (Custom Engineered System). As the quarantines continued and more businesses were closed, the Company saw a slowdown in demand for products from our customers. This slowdown continued throughout Q2 2021, primarily because certain customers in the Hospital-HealthCare, TOMI Service Network, and Commercial divisions, have deemphasized the need for disinfection equipment such as SteraMist as compared to the same time last year following the initial surge of the COVID-19 pandemic. As the COVID vaccine are distributed, some of our customers are evaluating the necessity of deep cleaning and in some cases no longer consider it a priority and are evaluating the on-going decontamination and disinfecting processes. Nonetheless, TOMI and its current customers who have been using SteraMist believe that disinfection products will be critical in post-COVID environment, and we continue to educate our current and potential customer base on the capabilities of our products. As stated, our existing life sciences customers closed early last year due to COVID and remained closed into 2021. Starting early 2021, the Life Sciences customers and potential opportunities quickly resumed. TOMI is working with the appropriate departments to get approvals for existing purchase orders for Environment Systems throughout existing and new Life Sciences clients with purchase orders in the six-figure range. 30 Table of Contents Product Development As many industrial companies are reducing R&D and capital expenditures spending due to the economic impact of the pandemic, we are moving ahead with many new products in development. In 2021, we intend to increase capital expenditures (CapEx) and operating expenditures (OpEx) including development of new products, services and process technologies to sharpen our competitive advantage. In addition, we intend to expand our commercial service location to meet the expanding needs of our customers. The second half of 2020 showed us that our customers prefer a lower cost disinfection device like electrostatic sprayers (ESS), even if it provides the end-user with less efficacy and the potential of causing damage to its personal property and delicate equipment which were dangerous and causing explosions with many resulting in fires. To respond to our customer demands of a lower cost and more versatile product, we developed a Backpack (SteraPak) solution that includes our award winning 6-log and above kill technology and speed without the damage to space and materials. We expect our SteraPak to be competitively priced and open SteraMist to the largest cleaning market in the world-members of ISSA (International Sanitary Supply Association) and its divisions IEHA (Integrated Environment and Health Assessment) and EMEA (Europe, Middle East & Africa). These organizations have historically been price conscious and were resistant early on to our SteraMist pricing of our professional decontamination equipment (SteraMist Surface and Environment Unit). We plan to introduce our new innovative SteraPak globally in the third quarter 2021. Other new products that have been incorporated into our product line include the Select Plus, which is a hybrid product consisting of the Company’s current Surface Select and Environment systems. The unit will allow for enhanced flexibility by using a single applicator to decontaminate full-room to small-space volume while maintaining the size of the current Surface Select unit with more robust process controls. The Transport CES has been designed for the transportation market, specifically ambulances. The Transport CES is a simple timer based fogging system that can be installed semi-permanently or permanently and used for any transport and/or cargo vehicle. It will be an easy-to-use turn-key integration system. The implementation of this product and our patented non-corrosive iHP technology should replace the number one competitor in this marketplace, which uses an extremely harsh chemical. Many of our customers are waiting for the release and demonstration of these new products, especially the SteraPak. All SteraMist systems will remain important to the marketplace as they are designed for specific needs and budgets. The Select Surface Unit perform most of the functionality that the Plus offers and is priced at a lower cost, although Select Plus will provide additional options that are appealing to certain customers, such as laboratory and pharmaceutical. The SteraPak is a more cost-effective product and designed for small areas, crawl spaces, and quick disinfection. In contrast, the Surface Unit is able to provide longer and more sustained disinfection covering larger areas during one treatment. There are many new and existing clients that are interested in the SteraPak due to the cost and mobility. These new products and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction domestically and internationally. Despite lower revenues for the quarter, the Company, its new product launches, and each division remain resilient. Overview TOMI Environmental Solutions, Inc. (“TOMI”, “we” and “our”) is a global bacteria decontamination and infectious disease control company, providing environmental solutions for indoor surface decontamination through the manufacturing, sales, service and licensing of our SteraMist ® brand of products, including SteraMist ® BIT ™ , a low percentage (7.8%) hydrogen peroxide-based fog or mist that uses Binary Ionization Technology (BIT ™ ). 31 Table of Contents Our SteraMist ® is a patented technology that produces ionized Hydrogen Peroxide (iHP ™ ) using cold plasma science created under a grant by the United States Defense Advanced Research Projects Agency (DARPA). Our EPA registered BIT ™ Solution is composed of a low concentration of hydrogen peroxide converted to iHP ™ after passing the trade secret blended solution including its sole active ingredient of 7.8% hydrogen peroxide through an atmospheric cold plasma arc. The newly formed iHP ™ fog and mist consists of submicron’s to 3-micron radical particles that are carried throughout the treatment area in a fog or mist moving with the same velocity and characteristics of a gas. This allows the ionized hydrogen peroxide fog or mist to affect all surfaces and air space throughout the targeted treatment area, over, above and beyond the ability of a manual cleaning processes. iHP ™ damages pathogenic organisms through the oxidation of proteins, carbohydrates, and lipids. SteraMist ® no-touch disinfection and or decontamination treat areas mechanically, causing cellular disruptions and/or dysfunctions resulting in a 6-log (99.9999%) and greater kill or inactivation of all pathogens in the treatment area. Under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), we are required to register with the EPA and certain state regulatory authorities as a seller of disinfectants. In June 2015, SteraMist ® BIT ™ was registered with the EPA as a hospital-healthcare disinfectant and general broad-spectrum surface disinfectant for use as a misting/fogging agent. SteraMist ® BIT ™ now holds EPA registrations (# 90150-2) for mold control, and air and surface remediation (# 90150-1). In February 2016, we expanded our label with the EPA to include Clostridium difficile Spores and MRSA, as well as the influenza (Avian) virus h1n1, which we believe has better positioned us to penetrate all industries including the biodefense and healthcare industry. In August 2017, our EPA label was further expanded to include efficacy against Salmonella and Norovirus. As of January 27, 2017, our technology is one of 53 of the EPA’s “Registered Antimicrobial Products Effective against Clostridium difficile Spores”, as published on the EPA’s K List. Further, in December 2017, SteraMist ® was included in the EPA’s list G (Norovirus), L (Ebola) and M (Avian Flu). In March 2020, our EPA label was further amended to include Emerging Viral Pathogens claims, thus meeting the criteria against Enveloped viruses and Large Non-enveloped viruses and included on List N (Emerging Viral Pathogens including SARS-CoV-2). SteraMist ® BIT ™ brings to the world a mechanical and automated method of cleaning using a game-changing technology and EPA registered Hospital-HealthCare disinfectant providing an upgrade to existing disinfecting and cleaning protocols while limiting liability in a facility when it comes to resistant infectious pathogens. We maintain this registration in all fifty (50) states, Canada, and approximately thirty-five (35) other countries. Markets Our SteraMist ® products are designed to address a wide spectrum of industries using iHP ™ . Our operations consist of five main divisions based on our current target industries: Hospital-HealthCare, Life Sciences, TOMI Service Network (TSN), Food Safety and Commercial. We continue to offer our customers a wide range of innovative mobile products designed to be easily incorporated into their existing disinfection and decontamination procedures and protocols. Our newly soon to be released SteraPak, among other product lines will allow us to progress further into market share, specifically for our Hospital-HealthCare, Life Sciences, TSN, and Commercial divisions. Additionally, we offer integrated facility equipment installations known as Custom Engineered Systems (CES), routine & emergency iHP Corporate Service, essential training packages, validations and qualifications, and onsite performance maintenance requests. Each of these are structured to address the unique disinfection and decontamination needs of our customers worldwide regardless of industry requiring or requesting SteraMist ® disinfection decontamination. Divisions Hospital-Healthcare The SteraMist ® line of products, specifically the SteraMist ® Surface Unit and SteraMist ® Total Disinfection Cart, are our main solutions to aid our Hospital-HealthCare customers in providing high quality of safety to their patients and personnel by disinfecting operating rooms, pharmacies, ambulances, and emergency environments throughout a healthcare facility. TOMI’s latest product, the SteraPak, further assists healthcare communities with an easy-to-use, cordless disinfection solution, creating a more mobile solution. Our team of technicians and representatives train, maintain, and service capital equipment throughout the world for our Hospital-HealthCare customers. As our Training and Implementation department expands, we expect continued growth and purchases in our Hospital-HealthCare division. TOMI provides protocol development and implementation of SteraMist ® as it is critical in the healthcare setting. During 2020 the use of our SteraMist ® in such campuses increased due to our comprehensive training for their day and night shift maintenance and housekeeping departments. By late 2021, we anticipate annual comparison case studies from many of these facilities who were onboarded in 2020, which may show lower transmission infection rates in COVID, Clostridium difficile Spores and overall, HAI cases. 32 Table of Contents UCLA recently completed a successful collection of critical data for the Shield Study. The Shield Study is a multi-year study comparing SteraMist with manual clean. The Study was conducted by multiple well-established hospitals. Initial findings have been positive regarding ease of use, overall efficacy, and quick turnaround time of patient rooms. TOMI looks forward to announcing the full results as soon as they are available to make public. Life Sciences The SteraMist ® Environment System, Custom Engineered Systems (CES), the SteraMist ® Select Surface Unit (Plus), SteraBox, 90 Degree Applicator and our iHP ™ Corporate Service Division, are designed to be tailored to provide a complete solution to address the regulatory inspections of disinfecting/decontaminating and Installation Qualification (IQ)-Operational Qualification (OQ)–Performance Qualification (PQ) validation processes within the life sciences industry. The pandemic halted capital equipment and service sales in our Life Sciences division and its verticals. As operations reconvene for these verticals, we are already seeing an increased demand from this division. Long term, ongoing projects and validations resumed, along with proposals and interest for our CES permanent decontamination room. As these are longer lead-time sales that can take months to design, build and implement., we expect installations to have impact to our results in late 2021 and into 2022. Further, post COVID pandemic has brought some attention to the SteraMist product line, as our CES in Pfizer Missouri was recently showcased in a New York Times article as they featured their COVID vaccine processes. In addition, our iHP Corporate Service team treated one of four fill lines in a North Carolina pharmaceutical company that manufactures one of the COVID vaccines, with the remaining three lines set to be decontaminated in the future with SteraMist. TOMI Service Network The TOMI Service Network, or TSN, is an expansive network consisting of professionals throughout North America who are exclusively licensed and trained to use the SteraMist ® products. With the purchase of SteraMist and joining TSN, TOMI trains and services a wide array of professional remediation companies in the use of SteraMist ® throughout the TSN division. TSN allows for increased accessibility and brand awareness of iHP ® services to facilities in need of local routine and emergency disinfection and decontamination. The TOMI Service Network (TSN) division experienced greater impact from the COVID-19 pandemic quarter over quarter than any other division. We believe that cleaning protocols have changed permanently due to the COVID-19 pandemic, and our network is expected to play a significant role in facilitating and maintaining these protocols throughout the United States and Canada. The urgency for emergency disinfection services may have declined, but the education and support of such services that TOMI personnel provide to our members creates an advantage by maintaining strong business relationships while they service thousands of SteraMist customers, and the world returns to the new normal. We also expect our SteraPak release to be an important factor for this market that will increase the new member onboarding number quarter over quarter moving forward. With the much-anticipated release of the SteraPak, the TSN should grow quarter over quarter. Food Safety Food Safety presents significant potential as an opportunity for substantial growth with continued product research and compliance testing. With the food safety industry in North America coming under closer scrutiny with the implementation and enforcement of new and established guidelines. This concentration has previously been approved by the USDA and FDA for direct food and crop application and will allow SteraMist ® to expand use sites beyond food processing machinery, restaurants, and food contact areas. This will assist compliance with the newly established Food Safety Modernization Act guidelines set in place by the FDA, as well as the Safe Food for Canadians Act and Safe Food for Canadians Regulations in Canada. TOMI continues to work with premium companies in testing and validating SteraMist ® technology in the Food Safety and seed industries. In 2021, we have made progress in enhancing brand awareness by promoting and marketing this division. We are receiving an increase in inquiries within the Food Safety division directly from these efforts. 33 Table of Contents With the global population explosion, we anticipate an increase in the demand for a mechanical way to disinfect our food supply. Every day there are news articles around the world pertaining to the contamination of food supply. The many published articles that the USDA in cooperation with TOMI have demonstrated that our technology offers a consistent alternative to the decade’s old chemical disinfection process. SteraMist will deliver more consistent and quicker results in all areas of our food supply- From Farm to Market, Processing to packaging and Storage to delivery. We plan on pursuing all these avenues. One of the most exciting is the elimination of fungus, virus, and bacteria contamination from seeds pre-packaging. Commercial Our Commercial division includes but is not limited to use sites such as aviation, airports, police and fire, prisons, manufacturing companies, automobile, military, cruise ships, shipping ports, preschool education, primary and secondary schools, colleges including dormitories, all modes of public and private transportation, regulatory consulting agencies, retail, housing and recreation, and of course emergency preparedness for counties and cities to use SteraMist ® throughout their community. In the second quarter of 2021, interest in SteraMist disinfection within the commercial division continued to remain high. We expect SteraPak to be a popular product for this division because customers are looking for a more cost-effective solution compared to the current disinfectants on the market. As quick and mobile disinfection solution is preferred in this industry, we believe that SteraPak can generate substantial customer interest and create sales opportunities. As part of our marketing and sales strategy for our product portfolio, we are utilizing professionals that work in the digital selling space such as B2B & B2C verticals. We believe this strategy will provide us with greater global exposure and quicker sales cycle in all our verticals. Business Highlights and Recent Events Customers: Globally, we have added approximately sixteen (16) new customers for the three months ended June 30, 2021. In the short term, we expect to see healthy demand for the SteraMist ® products and services. While the initial outbreak of COVID-19 pandemic caused a surge in demand for the SteraMist ® and subsequently declined as the pandemic is under control, we expect that customer demand for our products and services will continue at a more stabilized level, and we are building a team to address the post COVID-19 pandemic market opportunities. Revenues: We experienced a decline in our revenue for the three and six months ended June 30, 2021 when compared to the same period last year primarily because of an unsustainable spike due to increased demand caused by the onset of the COVID-19 pandemic in the first half of 2020. We were positioned well to respond to the pandemic related spike in demand due to our inventory levels and increased production capacity which led to substantial revenue growth in the first and second quarter of 2020. However, during of the second half of 2020 and early 2021, many of our established vertical clients were closed or required to reduce or suspend their business operations. The markets that were negatively affected were our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies globally. In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore reduced substantially their elective surgical and clinical related services, resulting in limited non-essential onsite personnel. These trends made it more difficult for us to demo our equipment and execute our sales and marketing strategies. In addition, our customers have limited budgets for newer technologies. We anticipate that the availability of significant federal funds to our customers for pandemic preparedness should assist them in purchasing our products. We expect increased revenues in the second half of 2021 due to the marked interest in our new products, specifically our backpack solution ("SteraPak") across all verticals, especially hospital healthcare to replace the failed electrostatic sprayers at a similar price point, and from our service network members who have indicated interest in a portable SteraMist unit to add to their arsenal. Further, there has been an uptick in demand from our established life science customers for custom engineered systems with a portion of that revenue expected to be recognized in late 2021. 34 Table of Contents We believe that we possess the best technologies in the world in the disinfection and decontamination space. This pandemic has provided us with the confidence to develop a clear strategy to manufacture what may be our best product portfolio to date. In addition, we continue to move our BIT technology closer to becoming the standard in disinfection and decontamination globally. This should lead to a greater market share, increased profitability, and capability strength. Dangerous pathogens still exist “Disease X” and will exist long after we recover from this pandemic. While the United States and most of the world is currently recovering from the SARS CoV-2 coronavirus outbreak, there are many pathogens which are respiratory in nature that are still a looming threat, these cases are occurring globally to this day. SteraMist can mitigate and reduce the impact of the next pandemic as it has already proven during the outbreaks of Ebola, MERS and recently with SARS CoV-2 pandemic. The need for a speedy comprehensive mechanical disinfectant like SteraMist cannot be stressed enough and should be included as the new norm of cleaning. With all the unknown viruses and their variants in the world, preparedness is the most important measure to ensure your family and business survives. 2021 Events: On May 18, 2021, Dr. Halden Shane presented at 16 th annual Needham virtual technology and media conference while continuing to pursue and enhance SteraMist media presence across many platforms. In May 2021, we provided an update on our partnership with AV8R Solutions, a SteraMist service provider and manufacturing representative with focus on aviation industry. In June 2021, we announced the implementation of SteraMist technology in the fourth Catalent facility, and a planned expansion into a fifth location. In June 2021, we joined the Russell Microcap Index at the conclusion of the 2021 Russell indexes annual reconstitution, effective June 28, 2021. In June 2021, we received an order which secured a project to install an iHP Custom Engineered System (CES) in a pharmaceutical facility in Western Europe In August 2021, we announced the launch of the SteraPak. We are currently taking deposits from customers for the product and expects to begin filling backlog orders in the third quarter of 2021. The Company expects to sell the SteraPak product through all divisions including Hospital-Healthcare, Life Sciences, TOMI Service Network (TSN), Food Safety, and Commercial. As conferences and tradeshows are reopening in the second half of 2021 for companies to exhibit live, TOMI will be attending multiple shows across the country. It is critical for TOMI to perform live demonstrations to showcase the difference between our SteraMist iHP technology and our competitors. TOMI looks forward to making a large impact with live demonstrations of SteraMist disinfection technology throughout our multiple divisions. Research Studies: Due to the pandemic, there have been significant delays by U.S. regulatory agencies in approving new submissions, including TOMI's new 1% registration focusing on direct food and agricultural applications. The 1% label has been delayed by EPA due to the reallocation of staff resources responding to an influx of product submissions to deal with COVID-19 (TOMI successfully added Emerging Pathogen claims and was added to EPA list in March 2020.), significantly delaying all other PRIA actions, well documented delays caused by staffing vacancies, and the continuing prohibition of in person meetings. We continue to work with our German aircraft partner and Boeing in a third-party test required for the aviation industry. We will incur no costs for this work as both testing partners are clients. We anticipate the testing will be completed in the third quarter of 2021. TOMI has engaged HYGCEN Germany GmbH to perform a quantitative test of germ carriers for airborne room disinfection and testing of the effectiveness of a method for disinfecting room air to meet the new EU norm (standard) EN 17272. Certification that Binary Ionization Technology meets the new standard will continue to position iHP as the premier decontamination/disinfection technology available on the market today. 35 Table of Contents We continue to work with the Virginia State University Agricultural Research Station and its partner, Arkema on a food safety pilot study based on novel, nonthermal, and environmentally friendly technology to control foodborne pathogens on industrial hemp seed and strawberry as representative model foods. The study will investigate the efficacy of aerosolized hydrogen peroxide in inactivating foodborne pathogens – determining the optimum treatment conditions on microbial and physical quality of the two model products. We anticipate the pilot to be completed by the third quarter of 2021. We are currently working with University of Virginia on two separate studies. First, we are working on a study on SteraMist’s efficacy against SARS-CoV-2, and we have observed preliminary successful results and are waiting for the final published paper. Second, we are working on a study against Adenovirus using the handheld SteraMist Surface Unit and testing spray and contact time variables, and we are waiting for the results. We anticipate the testing will be completed by the third quarter of 2021. TOMI has partnered with the Department of Chemistry and Biochemistry of Texas Tech University to conduct a wide range of studies on spray pattern, deposition, and hydrogen peroxide content in order to compare our 1% label to other similar products on the market. TOMI's long term relationship with USDA Agricultural Research Service continues to achieve results. In March 2021, an article entitled "Hydrogen peroxide residue on tomato, apple, cantaloupe, and Romaine lettuce after treatments with cold plasma-activated hydrogen peroxide” was accepted for publication in the Journal of Food Microbiology. TOMI has also begun discussions with another ARS facility to evaluate the benefits of iHP on blueberries to prevent rot and reduce post-harvest losses. As previously reported for a couple years, we have participated in a large multi-year federal funded study, known as the “SHIELD study”, that compares hospital manual cleaning to a SteraMist ® mechanical cleaning. Preliminary results collected by the current hospitals in the study is showing a decrease in the transference of pathogens resulting in HAIs and Clostridium difficile infections in the rooms that used SteraMist ® for their terminal clean, as compared to the rooms that have been manually cleaned. We are eager to report that enough data has been collected to complete the study in 2021, and we expect that data to be provided to the examiners with a published paper to soon follow. Registrations & Intellectual Property (IP): Our portfolio includes more than twenty (20) Utility Patent applications worldwide for both method and system claims on SteraMist® BIT™, either published or undergoing prosecution. Most recently, In July 2021, we were granted allowance for our utility patent in South Korea covering our SteraMist® BIT™ technology; and we also received our second allowance of a utility patent application in Israel for a system applying our technology. Furthermore, in Taiwan, we received allowance for our utility application covering a method of controlling the aerosol particle size used in our SteraMist® BIT™ technology; this is a new dimension of patent protection, which we are pursuing in Europe, China, Brazil, Australia, and many other countries. In addition, in June 2021, our Canadian patent was issued covering our decontamination technology. In the recent past, we have obtained two related US utility patents giving us protection of our technology until the year 2038, and we are pursuing further claims to additional capabilities in on-going US and worldwide patent applications. We continue to prosecute utility patent applications in multiple countries which are all in the national stage for review under the patent prosecution highway for claims found novel and inventive by the international search authority. Once these are allowed, we will hold international patent rights for the inherited patents and our newly issued patents. We also have design patent protection for our surface-mounted applicator device in the United States, China, Japan, Taiwan, and Korea. We have filed and have been granted or have pending acceptance on thirty-two (32) separate design patents for our: Decontamination Chamber(s), Decontamination Applicator, Decontamination Cart, Applicator, and Surface Mounted Applicator 90-Degree Device. These patents are published around the world, including but not limited to United States, China, Hong Kong, Europe, United Kingdom, Singapore, Taiwan, Vietnam, Canada, South Korea, and Japan. We are engaged in the process of filing further design and utility patent applications both in the United States and internationally. In July 2021, our design patent for our decontamination cart was issued in the United States. 36 Table of Contents Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of July 23, 2021, we held a total of over two hundred trademarks (word and logo) registered or pending across the globe. TOMI registers marks in seven (7) classes of specification of goods and services: Class 1 for Chemicals for Treating Hazardous Waste, Class 5 for Disinfectants, All-Purpose for Hard Surfaces and for Treating Mold, Class 7 for Handheld Power Operated Spraying Machines, Class 11 for Sterilizers for Medical Use and Air Purification, Class 35 for Business Consultation and Management Services, Class 37 for General Disinfecting Services, and Class 40 for Chemical Decontamination and Manufacturing Services. Financial Operations Overview Our financial position as of June 30, 2021 and December 31, 2020, respectively, was as follows: June 30, 2021 Unaudited December 31, 2020 Total shareholders’ equity $ 11,141,000 $ 13,203,000 Cash and cash equivalents $ 2,488,000 $ 5,199,000 Accounts receivable, net $ 2,980,000 $ 3,717,000 Inventories $ 5,176,000 $ 3,782,000 Prepaid expenses $ 388,000 $ 421,000 Vendor Deposits $ 24,000 $ 389,000 Other Receivables $ - $ 199,000 Current liabilities $ 2,231,000 $ 2,203,000 Long-term liabilities $ 909,000 $ 1,364,000 Working Capital $ 8,826,000 $ 11,503,000 During the six months ended June 30, 2021, our debt and liquidity positions were affected by the following: · Net cash used in operations of approximately $2,512,000. · Net cash used in investing activities $198,000. · Gain upon debt extinguishment of $415,000 Results of Operations for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Revenue, Net $ 1,466,000 $ 10,028,000 $ (8,562,000 ) -85 % $ 3,539,000 $ 17,082,000 $ (13,543,000 ) -79 % Gross Profit 942,000 5,565,000 (4,623,000 ) -83 % 2,177,000 10,053,000 (7,876,000 ) -78 % Total Operating Expenses (1) 2,135,000 1,908,000 227,000 12 % 4,881,000 3,737,000 1,144,000 31 % Income (Loss) from Operations (1,193,000 ) 3,657,000 (4,850,000 ) NM (2,704,000 ) 6,316,000 (9,020,000 ) NM Total Other Income (Expense) 415,000 - 415,000 NM 414,000 (40,000 ) 454,000 NM Net Income (Loss) $ (778,000 ) $ 3,657,000 $ (4,435,000 ) NM $ (2,289,000 ) $ 6,276,000 $ (8,566,000 ) NM Basic Net Income (Loss) per share $ (0.05 ) $ 0.22 $ (0.27 ) NM $ (0.14 ) $ 0.39 $ (0.53 ) NM Diluted Net Income (Loss) per share $ (0.05 ) $ 0.20 $ (0.25 NM $ (0.14 ) $ 0.35 $ (0.49 ) NM (1) Includes $0 and $114,000 in non-cash equity compensation expense for the three months ended June 30, 2021 and 2020, respectively. Includes $0 and $297,000 in non-cash equity compensation expense for the six months ended June 30, 2021 and 2020, respectively. (2) NM – Not Meaningful 37 Table of Contents Sales and Revenue Total revenue for the three months ended June 30, 2021 and 2020, was $1,466,000 and $10,028,000, respectively, representing a decrease of $8,562,000, or 85% compared to the same prior year period. For the six months ended June 30, 2021 and 2020, our total revenue was $3,539,000 and $17,082,000, respectively, representing a decrease of $13,543,000, or 79% compared to the same prior year period. We experienced a decline in our revenue for the three and six months ended June 30, 2021 as compared to the same prior year periods primarily due to the significant increase of demand caused by the onset of COVID-19 pandemic in the first half of 2020. We were positioned well to respond to the pandemic related spike in demand due to our inventory levels and increased production capacity, which led to substantial revenue growth in the first and second quarter of 2020. However, during the second half of 2020 and early 2021, many of our established vertical clients were closed or required to reduce operation due to the impact of COVID-19 pandemic on their businesses. The markets that were negatively affected included our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies globally. In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore substantially reduced elective surgical and clinical related services, resulting in limited non-essential onsite personnel. These trends made it more difficult for us to demo our equipment and execute our sales and marketing strategies. As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic subsides, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities. Net Revenue Product and Service Revenue For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % SteraMist Product $ 1,026,000 $ 9,235,000 $ (8,209,000 ) -89 % $ 2,673,000 $ 15,880,000 $ (13,207,000 ) -83 % Service and Training 440,000 793,000 (353,000 ) -45 % 866,000 1,202,000 (336,000 ) -28 % Total $ 1,466,000 $ 10,028,000 $ (8,562,000 ) -85 % $ 3,539,000 $ 17,082,000 $ (13,543,000 ) -79 % SteraMist product-based revenues for the three months ended June 30, 2021 and 2020, were $1,026,000 and $9,235,000, representing a decrease of ($8,209,000) or (89%) when compared to the same prior year period. Product based revenues for the six months ended June 30, 2021 and 2020, were $2,673,000 and $15,880,000, representing a decrease of ($13,207,000) or (83%) when compared to the same prior year period. Our service-based revenue for the three months ended June 30, 2021 and 2020, was $440,000 and $793,000, respectively, representing a year over year decrease of (45%). For the six months ended June 30, 2021 and 2020, our service-based revenue was $866,000 and $1,202,000, representing a decrease of ($336,000) or (28%) when compared to the same prior period in 2020. Revenue by Geographic Region For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % United States $ 1,184,000 $ 8,392,000 $ (7,208,000 ) -86 % $ 2,989,000 $ 11,961,000 $ (8,972,000 ) -75 % International 282,000 1,636,000 (1,354,000 ) -83 % 550,000 5,121,000 (4,571,000 ) -89 % Total $ 1,466,000 $ 10,028,000 $ (8,562,000 ) -85 % $ 3,539,000 $ 17,082,000 $ (13,543,000 ) -79 % Our domestic revenue for the three months ended June 30, 2021 and 2020 was $1,184,000 and $8,392,000, respectively, a decrease of ($7,208,000), or (86%) when compared to the same prior year period. For the six months ended June 30, 2021 and 2020, our domestic revenues were $2,989,000 and $11,961,000, representing a decrease of ($8,972,000) or (75%.) 38 Table of Contents Internationally, our revenue for the three months ended June 30, 2021 and 2020, was approximately $282,000 and $1,636,000, respectively, representing a decrease of ($1,354,000) or (83%) when compared to the second quarter of 2020. For the six months ended June 30, 2021 and 2020, our international revenues were $550,000 and $5,121,000, representing a decrease of ($4,571,000) or (89%.) Cost of Sales For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Cost of Sales $ 524,000 $ 4,464,000 $ (3,940,000 ) -88 % $ 1,362,000 $ 7,029,000 $ (5,667,000 ) -81 % Cost of sales was $524,000 and $4,464,000 for the three months ended June 30, 2021 and 2020, respectively, a decrease of $3,940,000, or 88%, compared to the prior year. The primary reason for the decline in cost of sales is attributable to lower revenue in the current quarter. Our gross profit as a percentage of sales for the three months ended June 30, 2021 was 64.3% compared to 55.5% in the same prior period, respectively. The higher gross profit is attributable to the product mix in sales. Cost of sales was $1,362,000 and $7,029,000 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $5,667,000, or 81%, compared to the prior year. The primary reason for the decline in cost of sales is attributable to lower revenue in the current quarter. Our gross profit as a percentage of sales for the six months ended June 30, 2021 was 61.5% compared to 58.9% in the same prior period, respectively. The higher gross profit is attributable to the product mix in sales. As revenues continue to grow and we are able to negotiate more favorable pricing from our vendors, we anticipate that our cost per unit could decrease. Professional Fees For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Professional Fees $ 107,000 $ 55,000 $ 52,000 95 % $ 280,000 $ 191,000 $ 89,000 47 % Professional fees are comprised mainly of legal, accounting, and financial consulting fees. Professional fees were $107,000 and $55,000 for the three months ended June 30, 2021 and 2020, respectively, an increase of approximately $52,000, or 95%, in the current year period. The increase is attributable to additional professional fees in connection with the maintenance of our intellectual property. Professional fees were $280,000 and $191,000 for the six months ended June 30, 2021 and 2020, respectively, an increase of approximately $89,000, or 47%, in the current year period. The increase is attributable to additional professional fees in connection with the maintenance of our intellectual property. 39 Table of Contents Depreciation and Amortization For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Depreciation and Amortization $ 72,000 $ 172,000 $ (100,000 ) -58 % $ 156,000 $ 344,000 $ (188,000 ) -55 % Depreciation and amortization were approximately $72,000 and $172,000 for the three months ended June 30, 2021 and 2020, respectively, representing a decrease of $100,000, or 58%. The decline is due to intangible assets that became fully amortized in 2020 which has led to a lower amortization expense in the current year period. Depreciation and amortization were approximately $156,000 and $344,000 for the six months ended June 30, 2021 and 2020, respectively, representing a decrease of $188,000, or 55%. The decline is due to intangible assets that became fully amortized in 2020 which has led to a lower amortization expense in the current year period. Selling Expenses For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Selling Expenses $ 335,000 $ 389,000 $ (54,000 ) -14 % $ 810,000 $ 767,000 $ 43,000 6 % Selling expenses for the three months ended June 30, 2021 were approximately $335,000, as compared to $389,000 for the quarter ended June 30, 2020, representing a decrease of approximately $54,000 or 14%. The decline is selling expense is due to the reduced revenue and lower sales commissions. Selling expenses for the six months ended June 30, 2021 were approximately $810,000, as compared to $767,000 for the six months ended June 30, 2020, representing an increase of approximately $43,000 or 6%. The increase in selling expense is attributable to a higher employee headcount and the related increase in payroll. We continue to invest and allocate resources into our sales, marketing and advertising initiatives and have increased efforts in the current year in order to further develop our brand recognition and grow our base of customers. Research and Development For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Research and Development $ 206,000 $ 141,000 $ 65,000 46 % $ 401,000 $ 201,000 $ 200,000 100 % Research and development expenses for the three months ended June 30, 2021 were approximately $206,000, as compared to $141,000 for the quarter ended June 30, 2020, representing an increase of approximately $65,000, or 46%. Research and development expenses for the six months ended June 30, 2021 were approximately $401,000, as compared to $201,000 for the six months ended June 30, 2020, representing an increase of approximately $200,000, or 100%. The increase in research and development expenses is attributable to new product development and increased testing. Equity Compensation Expen se For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Equity Compensation Expense $ - $ 114,000 $ (114,000 ) -100 % $ - $ 297,000 $ (297,000 ) -100 % Equity compensation expense was $0 and $114,000 for the three months ended June 30, 2021 and 2020, respectively, representing a decrease of $114,000. Equity compensation expense was $0 and $297,000 for the six months ended June 30, 2021 and 2020, respectively, representing a decrease of $297,000. The decrease in equity compensation expense relates to the timing of warrants and options issued to executives and consultants in 2020. 40 Table of Contents Consulting Fees For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Consulting Fees $ 96,000 $ 70,000 $ 26,000 37 % $ 202,000 $ 151,000 $ 51,000 34 % Consulting fees were $96,000 and $70,000 for the three months ended June 30, 2021 and 2020, respectively, representing an increase of $26,000, or 37%, in the current quarter period. Consulting fees were $202,000 and $151,000 for the six months ended June 30, 2021 and 2020, respectively, representing an increase of $51,000, or 34%, in the current period. The increase is due to the timing of certain projects that occurred in the current year that did not occur in the same prior year period. General and Administrative Expense For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % General and Administrative $ 1,319,000 $ 967,000 $ 352,000 36 % $ 3,032,000 $ 1,785,000 $ 1,247,000 70 % General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense and product registration costs. General and administrative expense was $1,319,000 and $967,000 for the three months ended June 30, 2021 and 2020, respectively, an increase of $352,000, or 36%, in the current period. General and administrative expense was $3,032,000 and $1,785,000 for the six months ended June 30, 2021 and 2020, respectively, an increase of $1,247,000, or 70%, in the current period. The increase in general and administrative expense is primarily attributable to a higher employee headcount and higher wages. Other Income and Expense For the three months ended June 30, Change For the six months ended June 30, Change 2021 2020 $ % 2021 2020 $ % Gain Upon Debt Extinguishment 415,000 - 415,000 NM 415,000 - 415,000 NM Interest Income - 1,000 (1,000 ) NM 1,000 2,000 (1,000 ) NM Interest Expense - (1,000 ) 1,000 NM (1,000 ) (41,000 ) 40,000 98% Other Income (Expense) $ 415,000 $ - $ 415,000 NM $ 415,000 $ (39,000 ) $ 454,000 NM Gain upon debt extinguishment of $415,000 in connection with the forgiveness of a loan payable. Interest income was approximately $0 and $1,000 for the three months ended June 30, 2021 and 2020, respectively. Interest income was approximately $1,000 and $2,000 for the six months ended June 30, 2021 and 2020, respectively. Interest expense was $0 and $1,000 for the three months ended June 30, 2021 and 2020, respectively. Interest expense was $1,000 and $41,000 for the six months ended June 30, 2021 and 2020, respectively. 41 Table of Contents Liquidity and Capital Resources As of June 30, 2021, we had cash and cash equivalents of $2,488,000 and working capital of $8,826,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of public company reporting requirements. We have historically funded our operations through funds generated through operations and debt and equity financings. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all. For the six months ended June 30, 2021, we incurred a loss from operations of ($2,704,000) and for the six months ended June 30, 2020, we generated income from operations of $6,316,000. Cash used in operations for the six months ended June 30, 2021, was ($2,512,000). Cash provided from operations was $5,385,000 for the six months ended June 30, 2020. A breakdown of our statement of cash flows for the six months ended June 30, 2021 and 2020 is provided below: For the six months ended June 30, 2021 2020 Net Cash Provided By (Used) in Operating Activities $ (2,512,000 ) $ 5,385,000 Net Cash Used in Investing Activities $ (198,000 ) $ (46,000 ) Net Cash Provided by Financing Activities: $ - $ 32,000 Operating Activities Cash used in operating activities for the six months ended June 30, 2021 was ($2,512,000), compared to cash provided by operations for the three months ended June 30, 2020 of $5,385,000. Our cash provided by operations declined in the current year period as a result of lower revenue and an increase in net loss. Investing Activities Cash used in investing activities for the six months ended June 30, 2021 and 2020 was $198,000 and $46,000, respectively. The increase is attributable to fixed assets purchased in the year and capitalized patent and trademark costs. Financing Activities Cash provided by financing activities for the six months ended June 30, 2021 and 2020 was $0 and $32,000 respectively. The cash provided by financing activities in the prior year period was due to proceeds from the exercise of warrants and options in the amount of $121,000 and proceeds from a loan payable of $411,000 offset by the repayment of the principal balance of the convertible note of $500,000. Liquidity Our revenues can fluctuate due to the following factors, among others: · global response to the COVID-19 pandemic and market demand for our products; · ramp up and expansion of our internal sales force and manufacturers’ representatives; · length of our sales cycle; · expansion into new territories and markets; and · timing of orders from distributors. We could incur operating losses and an increase of costs related to the continuation of product and technology development, and sales expense as we continue to grow our sales teams and geographic presence, tooling capital expenditures as we ramp up and streamline our production and administrative activities including compliance with the Sarbanes-Oxley Act of 2002 Section 404. 42 Table of Contents Management has taken and will endeavor to continue to take a number of actions in order to improve our results of operations and the related cash flows generated from operations in order to strengthen our financial position, including the following items: · expanding our label with the EPA to further our product registration internationally; · continued expansion of our internal sales force and manufacturer representatives in an effort to drive global revenue in all verticals; · Continue research and development and add new products to our “Stera” product line · source alternative lower-cost suppliers; · expansion of international distributors; and · continued growth in all of our verticals. We expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources. We believe that our existing balance of cash and cash equivalents and amounts expected to be provided by operations will provide us with sufficient financial resources to meet our cash requirements for operations, working capital and capital expenditures over the next twelve months. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates. The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following policies to be critical to an understanding of our condensed consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows. 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. 43 Table of Contents 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. S ignificant 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. Use of Estimates The preparation of 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. 44 Table of Contents 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 them 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. 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. 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 new 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 new standard to all comparative periods presented. 45 Table of Contents 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 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. Accrued Warranties Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. 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 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. 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 and is recognized as expense over the requisite service period. 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 625,000 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; awards under the 2016 Plan are expressly conditioned upon such agreements. 46 Table of Contents On December 30, 2020, we received shareholder approval to restate and amend the 2016 Equity Incentive Plan to increase the maximum number of shares of common stock authorized from issuance by 1,375,000, from 625,000 shares to 2,000,000. 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. 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 Consolidated Financial Statements. Recently Issued Accounting Pronouncements See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 above. Off-Balance Sheet Arrangements We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements. Available Information The Company periodically provides certain information for investors on its corporate website, www.tomimist.com, and its investor relations page of its website, www.investor.tomimist.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites and referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only. 47 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not Applicable