TOMI Environmental Solutions, Inc. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations relates to the years ended December 31, 2021 and 2020. This discussion and analysis should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. 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™). Our solution and process are environmentally friendly as the only biproduct from our decontamination process is oxygen and humidity. Our solution is organically listed in the United States and Canada it is sustainably a green product with no or very little carbon footprint. Most of our competitors in the disinfection space leave significant byproducts and are corrosive. SteraMist is not corrosive, and it does not damage equipment or facilities. 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. 23 Table of Contents 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). In 2021, the EPA granted SteraMist® BIT™ 0.35% hydrogen peroxide – EPA registration number 90150-3. 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, Washington DC, 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 released SteraPak, among other product lines will allow us to progress further into market share, specifically for our Life Science, Hospital-HealthCare, 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 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. Long term, ongoing projects and validations continue to be a focus and lead to 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 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. For the 2022 year and beyond TOMI expects growth in SteraMist Custom Engineered Systems (CES) bids and the manufacturing and implementation of these fully automated decontamination systems. The first CES system was completed in 2016 for Dana Farber Cancer Institute, as Dana Farber was designing a new vivarium, they had the opportunity to integrate several new technologies to advance overall efficiency, quality, and design. One such technology, was the use of our ionized Hydrogen Peroxide (iHP) decontamination. SteraMist’s Custom Engineered System (CES) has become a leading solution to growing customer demands. TOMI’s CES is an automated system that can be fully integrated into any company’s infrastructure, enabling decontamination, without burdening manual use and with the collaboration of current premier customers and partners, TOMI has further perfected the system. The CES eliminates issues such as human error, guarantees accuracy that is unmatched by competitors, and decreases a client’s labor cost and downtime, and in a short time the CES may make up a majority of TOMI’s revenue. 24 Table of Contents 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 customers that have successfully adopted our technology in Hospital-Healthcare facilities, have recurring revenue and reorder rates of our BIT ™ Solution. We plan to continue to expand our marketing, advertising and educational campaigns targeted at the Hospital-Healthcare marketing in an effort to grow our customer base and increase adoption of our SteraMist ® line of products. 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. Annual comparison case studies from healthcare facilities are now available, which shows lower transmission infection rates in COVID, Clostridium difficile Spores and overall, HAI cases. 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. TOMI anticipates this study will assist in the expansion of current HealthCare customers to follow the model of Gila River Health Care. Gila River is one of TOMI’s largest Healthcare customers owning a total of fourteen (14) Surface Units and Two (2) SteraPaks. The Gila River Indian Community (GRIC) is an Indian reservation in Arizona that is made up of seven (7) districts and is home to the Akimel O’oodham (Pima) and the Pee-Posh (Maricopa) tribes. Gila River Health Care, a premier Native American healthcare system, provides high quality patient care, delivering a wide variety of medical services such as general surgery, dental, and emergency medicine, as well as associated health services such as pharmacy and laboratory operations, skilled nursing and rehabilitation. 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 is addressing the cleaning protocols that 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. Our SteraPak release is an important factor for this market that we will increase the new member onboarding. Current members are showing interest in purchasing the SteraPak to expand their current SteraMist offerings. 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. 25 Table of Contents 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. 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. With the continued testing and need for the market coupled with our new .35% label, should make pursuing these opportunities successful. In addition, our solution and process is environmentally friendly in that the biproduct of SteraMist is only oxygen and humidity. We have our solution listed on OMRI and labeled as organic. Most disinfectants leave residue on furniture, objects, and foods. SteraMist does not leave any chemical residue on any surface. We have a very low carbon footprint, if any. 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. Interest in SteraMist disinfection within the commercial division remains high. The SteraPak is 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 will generate substantial customer interest and create sales opportunities. Currently our customers are purchasing our SteraPak in all of our divisions to provide quick disinfection throughout various sites in their facilities. We have listed the SteraPak on Amazon to better enhance consumer sales and accessibility in this division. Working alongside a full-service Amazon consulting agency, ORCA Pacific, we can better position ourselves with optimized content and increase customer traffic with enhanced advertising. Business Highlights and Recent Events Registered Direct Offering: In September 2021, we closed a registered direct offering of shares of our common stock priced at the market, resulting in net proceeds of $4,581,651, after deducting the placement agent’s fees and other offering expenses. The proceeds from the offering were used for sales and marketing expenses associated with our products, advertising, purchase of inventory and other general corporate purposes. Revenues: During the first half of 2020, the COVID-19 pandemic contributed to significant increase of our customer demand and sales growth, but it also caused a decline in our revenue in most of 2021 as many of our established vertical clients were closed or required to reduce operation due to the impact of COVID-19 pandemic on their business. The markets that were negatively affected included our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential global pharmaceutical research companies. In addition, the healthcare industry shifted 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 difficult for us to demo our equipment and execute our sales and marketing strategies. In addition, our customers have limited budgets for newer technologies. As we move out of the pandemic, many companies throughout the world are including pandemic preparedness in their operation plans. The United States has earmarked federal funds for disinfection. 26 Table of Contents During 2021, our vendors and customers experienced supply and logistic related challenges which negatively impacted procurement, manufacturing lead times and transit times, which contributed to the delayed launch our SteraPak and pushed out certain capital projects involving the installation and integration of our disinfection engineered systems into our customers’ facilities. While the pandemic created short term volatility in our year over year revenue, it also contributed to a rapid expansion of our customer base and overall brand recognition in the industry. Over the last two years, we have grown our user base substantially, which contributed to the growth in our solution revenue and recurring orders. Our solution sales for 2021 were down compared to 2020 due to the spike in demand at the onset of the COVID-19 pandemic in 2020. However, our solution revenue grew by 48% in 2021 as compared to 2019 due to the expansion of users we acquired over the last two years. In addition, our customer recurring solution orders increased 63% in 2021 as compared to 2019 prior to the pandemic. We believe this positive trend demonstrate a wider adoption of our technology in the marketplace which is consistent with our long-term business strategy. During the years ended December 31, 2021, and 2020, our revenue declined by 69%. Our overall revenue, grew by 22% for the year ended December 31, 2021, when compared to the year ended December 31, 2019, our last full calendar year prior to the pandemic. The 2021 verse 2019 growth fell short of our expectations due to certain projects in our sales pipeline that were deferred into our 2022 calendar year as a result of supply chain issues with our customers and vendors. During the second half of 2021, we began to see positive signs from our prospective and existing customers as businesses began to reopen their standard business operations and locations, which has bolstered our future sales pipeline and led to 20% growth in our revenue for the last six months of 2021 when compared to the first six months of 2021. In December 2021, we announced the launch of our Amazon store where we featured the SteraPak and BIT solution. As the most cost effective SteraMist system, the SteraPak is primed to effectively target both businesses and consumer end users, making it, we believe, ideal flagship SteraMist product for sale on Amazon. Amazon is also an excellent branding opportunity for our new product. We continue to gain market share in the Life Science and Pharmaceutical industries where our brand name and technology is well known and respected. We continue to see demand for our iHP Customer Engineered Systems. During the third quarter of 2021, we received an order by a major pharmaceutical company in Europe to build an iHP Customer Engineered System which was delivered and permanently installed into their facility in the fourth quarter of 2021. In addition, in July 2021, we received a purchase order from a global biopharmaceutical company for our SteraMist Environment system and its validation service. After creating a new companywide decontamination standard for this biopharmaceutical company TOMI has received an order for a new facility resulting in an opportunity to expand with this company to multiple locations across the world. As we begin 2022, we are seeing continued positive trends and have received orders for our custom engineered systems of approximately $1,307,000 which will be recognized in our current (2022) calendar year. We expect increased revenues in 2022 when compared to 2021 due to the launch of our new products, specifically our backpack solution ("SteraPak") across all verticals, continued expansion of our existing products with our existing customers and increased solution sales as the world exits the pandemic. We believe that our Customer Engineered Systems (CES) will add significant revenue in 2022. 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 develop and manufacture additional products to add to our portfolio. In addition, we continue to move our BIT technology as a standard in disinfection and decontamination globally. This should lead to increased market share, profitability, and capability strength. Our products are an environmentally friendly solution and process which address the concerns of sustainability. Customers are requesting and discussing the positive results of our product and the environmentally friendly results compared to the caustic results of other disinfectants. Dangerous pathogens still exist 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. We believe SteraMist can mitigate and reduce the impact of the next pandemic as it has already proved during the outbreaks of Ebola, MERS and recently with SARS CoV-2 pandemic. We believe the need for a speedy comprehensive mechanical disinfectant like SteraMist cannot be stressed enough and should be included as the new norm of cleaning. 27 Table of Contents 2021 Highlights: On August 4, 2021, we introduced our SteraPak, which was launched in September 2021 and made available on Amazon in December 2021. The Company is currently marketing the SteraPak product through all divisions. On August 10, 2021, we secured a project to install an iHP Custom Engineered System (CES) for a major pharmaceutical company in Europe and are currently working with their locations in Brazil, Mexico, Germany, and Canada to purchase and implement SteraMist as their standard decontamination solution. On September 13, 2021, we launched a new Amazon store for the recently launched SteraPak, in the USA. On September 16, 2021, our technology has passed the EN 17272 evaluation. The EN 17272 is the European standard for airborne room disinfection in the form of gas, steam and/or aerosol. On September 27, 2021, we entered into definitive agreements with several institutional investors for the issuance and sale of 2,869,442 shares of its common stock in a registered direct offering priced at-the-market under Nasdaq rules On October 5, 2021, we received a purchase order from a multinational top five pharmaceutical company. On October 11, 2021, we obtained EPA registration for its 0.35% hydrogen peroxide BIT Solution, an all-in-one disinfectant for use across the entire food supply chain. As conferences and tradeshows are reopening for companies to exhibit live, TOMI will be attending multiple shows across the country in 2022. 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. 2022 Highlights to Date: TOMI recently received purchase orders, acceptance of CES proposals, and completed the supplier questionnaire (the first step to receiving a purchase order) for CES’s of approximately $1.3M. These orders include a multi-national pharmaceutical company who locally has chosen SteraMist in two of their areas requiring superior decontamination. The latter is a renowned institute that focuses on immunology and infection disease. Research Studies: The EPA has registered our 0.35% hydrogen peroxide product for the use in green houses, pre harvests and post harvests. We continue to pursue acceptance of the additional 1% hydrogen peroxide label with the EPA for direct food application. Due to the pandemic, there have been significant delays by U.S. regulatory agencies in approving new submissions, including TOMI's new 1% registration. 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 to compare our 1% label to other similar products on the market. TOMI has also once again partnered with USDA Agricultural Research Service for continued research on 1% solution. TOMI's long term relationship with USDA ARS 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 and we are excepting another paper to be published by the end of the year. 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 first quarter of 2022. As previously discussed, 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. On September 16, 2021, we announced that our technology has passed the EN 17272 evaluation. The EN 17272 is the European standard for airborne room disinfection in the form of gas, steam and/or aerosol. 28 Table of Contents October 2021, Applied Biosafety published a paper titled “Mechanisms of Sporicidal Activity Induced by Ionized Hydrogen Peroxide in the Spores of Bacillus astrophaeus.” This study reviewed the effects of iHP on the structure of the spores of Bacillus atrophaeus by observing its effects using transmission electron microscopy (TEM) and by evaluating the existence of DNA damage by fiuorescence-based quantitative polymerase chain reaction (qPCR). The results of the qPCR analysis showed two initial stages of damage to DNA with very noticeable damage at 12 h contact time, which confirms the observations of the TEM micrographs for the B. atrophaeus spores. In short, the study demonstrated damage to the spore core DNA. 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. Sufficient 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. Product Development: As many industrial companies are reducing R&D and capital expenditures spending due to the economic impact of the pandemic, TOMI continues its capital and operating expenditures. We have orders for supplies and materials that are required in our equipment and are prepared to continue the manufacturing of all our products and should not be impacted by supply and material shortages. Further, TOMI has multiple suppliers, outsourced engineers, and software programmers to turn to for the manufacturing and installation of its SteraMist products. For the 2022 year and beyond TOMI expects measurable growth in winning SteraMist Custom Engineered Systems (CES) bids and the manufacturing and implementation of these fully automated decontamination systems. The first CES system was completed in 2016 for Dana Farber Cancer Institute, as Dana Farber was designing a new vivarium, they had the opportunity to integrate several new technologies to advance overall efficiency, quality, and design. One such technology, was the use of ionized Hydrogen Peroxide (iHP) decontamination. SteraMist’s Custom Engineered System (CES) has become a leading solution to growing customer demands. TOMI’s CES is an automated system that can be fully integrated into any company’s infrastructure, enabling decontamination, without burdening manual use and with the collaboration of current premier customers and partners, TOMI has further improved the system. The CES eliminates issues such as human error, improves accuracy that is unmatched by competitors, and decreases a client’s labor cost and downtime. We are in the process of developing two new product lines: The Select Plus: The Select Plus remains in the final design phase. This 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 rotating applicator to decontaminate full-room to small-space volume with more robust process controls. In addition, this product will be smaller and lighter than its current Select model. We developed this product line in collaboration with Catalent. As Catalent has been working closely and directly with the TOMI Tech team, three location facilities already have purchase orders in approval with their procurement office. The Transport CES: The Transport CES has been designed for the transportation market, specifically ambulances and boxed EMS vehicles. 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. We believe 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. We expect this product to roll out during 2022 fiscal year. Currently, one of our large hospital healthcare system customers has budgeted to implement the Transport CES into their fleet of ambulances. 29 Table of Contents This latest designed CES will use a 5-gallon container of BIT Solution. This is in addition to our original 55-gallon drums used by current CES customers. Our mobile units continue to use the 1-gallon BIT Solution containers sold in a case of 4, and for the SteraPak we use a 32-ounce bottle sold in a case of 8. TOMI logistics has also implemented a 10-liter bottle for the initial purchase by a top 5 global bio-pharmaceutical company we announced in early October 2021. All BIT Solution options remain secure and protected with our RFID reader and label during usage. Supply Chain: We have orders for supplies and materials that are required in our equipment and are prepared to continue the manufacturing of all our products. Further, TOMI has multiple suppliers, outsourced engineers, and software programmers to turn to for the manufacturing and installation of its SteraMist products to reduce the risks associated with the current supply chain environment. Financial Operations Overview Our financial position as of December 31, 2021 and 2020, respectively, was as follows: December 31, 2021 December 31, 2020 Total shareholders’ equity $ 13,595,000 $ 13,203,000 Cash and cash equivalents $ 5,317,000 $ 5,199,000 Accounts receivable, net $ 1,965,000 $ 3,717,000 Inventories, net $ 4,743,000 $ 3,782,000 Prepaid expenses $ 344,000 $ 421,000 Vendor Deposits $ 289,000 $ 389,000 Other Receivables $ 236,000 $ 199,000 Current liabilities $ 1,816,000 $ 2,203,000 Long-term liabilities $ 861,000 $ 1,364,000 Working Capital $ 11,077,000 $ 11,503,000 During the year ended December 31, 2021, our debt and liquidity positions were affected by the following: · Net cash used in operations of approximately $3,825,000. · Net cash used in investing activities $638,000. · Gain upon debt extinguishment of $415,000. · Net proceeds from the sale of stock and warrants of $4,582,000 Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 For The Years Ended December 31, Change 2021 2020 $ Revenue, Net $ 7,754,000 $ 25,028,000 $ (17,274,000 ) Gross Profit 4,587,000 15,043,000 (10,456,000 ) Total Operating Expenses (1) 9,511,000 10,534,000 (1,023,000 ) Income (Loss) from Operations (4,924,000 ) 4,509,000 (9,433,000 ) Total Other Income (Expense) 415,000 (40,000 ) 455,000 Provision for (benefit from) Income Taxes (74,000 ) 77,000 (151,000 ) Net Income (Loss) $ (4,435,000 ) $ 4,392,000 (8,827,000 ) Basic Net Income (Loss) per share $ (0.25 ) $ 0.27 $ (0.52 ) Diluted Net Income (Loss) per share $ (0.25 ) $ 0.23 $ (0.48 ) (1) Includes $18,000 and $3,131,000 in non-cash equity compensation expense for the years ended December 31, 2021 and 2020, respectively. 30 Table of Contents Sales During the years ended December 31, 2021 and 2020, we had net revenue of approximately $7,754,000 and $25,028,000, respectively, representing a decrease in revenue of approximately $17,274,000. We experienced a significant decline in our revenue for the year ended December 31, 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, including continuing focus on cleaning and disinfection protocols of existing and new customers. Net Revenue Product and Service Revenue For The Years Ended December 31, Change 2021 2020 $ SteraMist Product $ 6,179,000 $ 22,971,000 $ (16,792,000 ) Service and Training 1,575,000 2,057,000 (482,000 ) Total $ 7,754,000 $ 25,028,000 $ (17,274,000 ) SteraMist product-based revenues for the years ended December 31, 2021 and 2020, were $6,179,000 and $22,971,000, representing a decrease of $16,792,000 when compared to the same prior year period. Our service-based revenue for the years ended December 31, 2021 and 2020, was $1,575,000 and $2,057,000, respectively, representing a year over year decrease of $482,000. Revenue by Geographic Region For The Years Ended December 31, Change 2021 2020 $ United States $ 6,403,000 $ 18,367,000 $ (11,964,000 ) International 1,351,000 6,661,000 (5,310,000 ) Total $ 7,754,000 $ 25,028,000 $ (17,274,000 ) 31 Table of Contents Our domestic revenue for the years ended December 31, 2021 and 2020, was $6,403,000 and $18,367,000, respectively, a decrease of $11,964,000 when compared to the same prior year period. Internationally, our revenue for the years ended December 31, 2021 and 2020, was approximately $1,351,000 and $6,661,000, respectively, representing a decrease of $5,310,000. Cost of Sales For The Years Ended December 31, Change 2021 2020 $ Cost of Sales $ 3,167,000 $ 9,985,000 (6,818,000 ) Cost of sales was $3,167,000 and $9,985,000 for the years ended December 31, 2021 and 2020, respectively, a decrease of $6,818,000, compared to the prior year. The primary reason for the decline in cost of sales is attributable to lower sales and revenue in the current year. Our gross profit as a percentage of sales for the years ended December 31, 2021 was 59.2% compared to 60.1% in the same prior period, respectively. The lower gross profit is attributable to the product mix in sales. In the prior year period and due to the pandemic, there was a higher concentration of solution-based revenue due to panic buying and hoarding of disinfection products by our clients as our solution sales carried a higher gross profit. Professional Fees For The Years Ended December 31, Change 2021 2020 $ Professional Fees $ 538,000 $ 681,000 $ (143,000 ) Professional fees are comprised mainly of legal, accounting, and financial consulting fees. Professional fees were $538,000 and $681,000 for the years ended December 31, 2021 and 2020, respectively, a decrease of approximately $143,000 in the current year period. The decrease is attributable to additional professional fees in connection with the maintenance of our intellectual property that occurred in the same prior year period and legal costs incurred in connection with our up-listing to Nasdaq. Depreciation and Amortization For The Years Ended December 31, Change 2021 2020 $ Depreciation and Amortization $ 295,000 $ 720,000 $ (425,000 ) Depreciation and amortization were approximately $295,000 and $720,000 for the years ended December 31, 2021 and 2020, respectively, representing a decrease of $425,000. 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 Years Ended December 31, Change 2021 2020 $ Selling Expenses $ 1,674,000 $ 1,247,000 $ 427,000 32 Table of Contents Selling expenses for the year ended December 31, 2021 were approximately $1,674,000, as compared to $1,247,000 for the year ended December 31, 2020, representing an increase of approximately $427,000. The increase in selling expense is attributable to a higher employee headcount and the related increase in payroll as well as increased advertising and marketing costs incurred in the current year period. 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 Years Ended December 31, Change 2021 2020 $ Research and Development $ 573,000 $ 455,000 $ 118,000 Research and development expenses for the year ended December 31, 2021 were approximately $573,000, as compared to $455,000 for the year ended December 31, 2020, representing an increase of approximately $118,000. The increase in research and development expenses is attributable to new product development and increased testing. Consulting Fees For The Years Ended December 31, Change 2021 2020 $ Consulting Fees $ 326,000 $ 327,000 $ (1,000 ) Consulting fees were $326,000 and $327,000 for the years ended December 31, 2021 and 2020, respectively. General and Administrative Expense For The Years Ended December 31, Change 2021 2020 $ General and Administrative $ 6,104,000 $ 7,103,000 $ (999,000 ) General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense, product registration costs and bad debt expense. General and administrative expense was $6,104,000 and $7,103,000 for the years ended December 31, 2021 and 2020, respectively, a decrease of $999,000 in the current year period. The increase in general and administrative expense is primarily attributable to increase in our allowance for doubtful accounts receivable, higher insurance and listing fees associated with the up-listing to the Nasdaq Capital Market as well as a higher employee headcount resulting in an increase in wages. 33 Table of Contents Other Income and Expense For The Years Ended December 31, Change 2021 2020 $ Gain Upon Debt Extinguishment 415,000 - 415,000 Interest Income 1,000 3,000 (2,000 ) Interest Expense (1,000 ) (44,000 ) 43,000 Other Income (Expense) $ 415,000 $ (41,000 ) $ 456,000 Gain upon debt extinguishment of $415,000 in connection with the forgiveness of a loan payable received under the Payroll Protection Program of the CARES Act. Interest income was approximately $1,000 and $3,000 for the years ended December 31, 2021 and 2020, respectively. Interest expense was $1,000 and $44,000 for the years ended December 31, 2021 and 2020, respectively. Provision for Income Taxes For The Years Ended December 31, Change 2021 2020 $ Provision for Income Tax Expense (Benefit) $ (74,000 ) $ 77,000 $ (151,000 ) Income tax benefit was $74,000 for the year ended December 31, 2020 and provision for income tax expense was $77,000 for the year ended December 31, 2020. Liquidity and Capital Resources As of December 31, 2021, we had cash and cash equivalents of approximately $5,300,000 and working capital of $11,077,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of compliance with 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. We have no plans of incurring any debt or equity financing. In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering to certain institutional investors and issued warrants to purchase 1,434,721 shares of common stock in a concurrent private placement. We received net proceeds from the transaction of $4,581,651, after deducting the placement agent’s fees and other offering expenses. The Warrants are exercisable at an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance. For the year ended December 31, 2021, we incurred a loss from operations of ($4,924,000) and for the year ended December 31, 2020, we generated income from operations of $4,509,000. Cash used in operations for the year ended December 31, 2021, was ($3,825,000). Cash provided from operations was $4,578,000 for the year ended December 31, 2020. 34 Table of Contents A breakdown of our statement of cash flows for the year ended December 31, 2021 and 2020 is provided below: For the Year Ended December 31, 2021 2020 Net Cash Provided By (Used) in Operating Activities $ (3,825,000 ) $ 4,578,000 Net Cash Used in Investing Activities $ (638,000 ) $ (401,000 ) Net Cash Provided By Financing Activities: $ 4,582,000 $ 124,000 Operating Activities Cash used in operating activities for the year ended December 31, 2021 was $3,825,000, compared to cash provided by operations for the year ended December 31, 2020 of $4,578,000. Investing Activities Cash used in investing activities for the years ended December 31, 2021 and 2020 was $638,000 and $401,000, respectively. Financing Activities Cash provided by financing activities for the years ended December 31, 2021 and 2020 was $4,582,000 and $124,000 respectively. The cash provided by financing activities increased as a result of the proceeds we received in connection with the sale of our common stock and warrants. Liquidity Our revenues can fluctuate due to the following factors, among others: · ramp up and expansion of our internal sales force and manufacturers’ representatives; · length of our sales cycle; · global response to the outbreak of COVID-19 Pandemic; · 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, sales expense as we continue to grow our sales teams, inventory as we continue to ensure we have products needed 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. 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. 35 Table of Contents 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 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 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. 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. 36 Table of Contents Contract Balances As of December 31, 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. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying consolidated financial statements and 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. 37 Table of Contents 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 net realizable value 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 We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease. As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense when recognized. 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. 38 Table of Contents 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. On December 30, 2020, we received shareholder approval to amend and restate 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 years ended December 31, 2021 and 2020. 39 Table of Contents Recent Accounting Pronouncements Recently issued accounting pronouncements not yet adopted In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. This ASU is currently not expected to have a material impact on our consolidated financial statements. In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832). This ASU requires business entities to disclose information about government assistance they receive if the transactions were accounted for by analogy to either a grant or a contribution accounting model. The disclosure requirements include the nature of the transaction and the related accounting policy used, the line items on the balance sheets and statements of operations that are affected and the amounts applicable to each financial statement line item and the significant terms and conditions of the transactions. The ASU is effective for annual periods beginning after December 15, 2021. The disclosure requirements can be applied either retrospectively or prospectively to all transactions in the scope of the amendments that are reflected in the financial statements at the date of initial application and new transactions that are entered into after the date of initial application. The ASU is currently not expected to have a material impact on our consolidated financial statements. Recently adopted accounting pronouncements In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses, and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, the ASU requires that entities recognize franchise tax based on an incremental method and requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination. We adopted ASU 2019-12 starting 2021, which did not have a material impact on our consolidated financial statements.