TOMI Environmental Solutions, Inc. 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management conducted an evaluation of the effectiveness of our disclosure controls and procedures (as is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, our management has concluded that, as of as of December 31, 2021, our disclosure controls and procedures were not effective at the reasonable assurance level because we have identified a material weakness in our internal control over financial reporting as discussed below. . Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. 40 Table of Contents Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our internal control over financial reporting was not effective as a result of the material weakness described below. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm as we are not an accelerated filer, nor a large accelerated filer. Material Weakness in Internal Control Over Financial Reporting A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management have concluded that, as of December 31, 2021, we did not maintain effective controls over the preparation, review, presentation and disclosure of our financial statements relating to bad debt. Specifically, we noted the following · We did not design or maintain effective controls with respect to the review of the accounting for bad debt reserves, including maintaining effective controls to prevent or detect errors in the assessment of bad debt reserves. Specifically, our policy for bad debt reserves was primarily based on customer relationships and managements view of the collectability of the receivables. The bad debt expense analysis resulted in a material adjustment to accounts receivable and bad debt expense for the year ended December 31, 2021. · We did not maintain effective controls to identify and maintain segregation of duties to support the identification, authorization, approval, accounting for, and the disclosure of bad debt reserves. These control deficiencies did not result in a misstatement to our consolidated financial statements for the year ended December 31, 2021 following the adjustment to accounts receivable as discussed above. However, these control deficiencies, if not remediated, could result in a misstatement to the annual or interim consolidated financial statements which would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that these control deficiencies constitute material weaknesses. Remediation Plans Our management, with oversight from our Audit Committee, is in the process of developing and implementing remediation plans in response to the identified material weaknesses described above. Specifically, we are revising our bad debt reserve policy to consider the time of the balances outstanding along with the credit worthiness of the customer and revising our review and approval policies and procedures to include segregation of duties and approvals. We believe the measures described above will remediate the control deficiencies we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. Changes in Internal Control Over Financial Reporting During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. Item 9B. OTHER INFORMATION None. 41 Table of Contents PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Our directors and executive officers and their ages and positions as of March 8, 2022 are presented below. Name Age Position Halden S. Shane 77 Chief Executive Officer and Chairman of the Board Elissa J. Shane 42 Chief Operating Officer and Director Nick Jennings 44 Chief Financial Officer Walter C. Johnsen 71 Director Kelly J. Anderson 54 Director Lim Boh Soon 66 Director Halden S. Shane : Dr. Shane has been our Chief Executive Officer and Chairman of the Board since October 15, 2007, when we commenced our current operations. Dr. Shane also served as President and CEO of Tiger Management International, a private management company that deals in business management of private and public companies. Dr. Shane resigned all positions and closed Tiger Management International in 2009. Dr. Shane was founder and CEO of Integrated Healthcare Alliance, Inc. and also founder and General Partner of Doctors Hospital West Covina, California. Prior thereto, Dr. Shane practiced Podiatric Surgery specializing in ankle arthroscopy. Dr. Shane received his Bachelor of Science degree from the University of Miami in 1969, his Bachelor of Medical Science degree from California College of Podiatric Medicine in 1971, and his Doctor of Podiatric Medicine Degree from the California College of Podiatric Medicine in 1973. He is Board Certified by the American Board of Podiatric Surgery, American Board of Orthopedics, and the American Board of Quality Assurance and Review. Dr. Shane’s extensive expertise and business experience in the medical and finance industry, as well as his knowledge of our day-to-day operations and strategic initiatives provide our Board of Directors with valuable insights and in-depth understanding of our Company. Elissa J. Shane : Ms. Shane has been our Chief Operating Officer since January 2018. On July 30, 2021, at the recommendation of the Nominating and Governance Committee, the Board appointed Ms. Elissa J. Shane to serve as a member of the Board. Previously, she served as our Chief Regulatory and Compliance Officer from September 2015 to December 2017 and as our Corporate Secretary in 2016. From January 2014 to September 2015, Ms. Shane served as a paralegal with Levi Lubarsky Feigenbaum & Weiss LLP, where she worked with the firm’s managing partners and staff attorneys and directed all operational aspects of the litigation cycle from inception through appeal. From September 2009 to January 2014, she served as a paralegal with Olshan Frome Wolosky LLP, where she managed all regulatory and compliance issues, litigation procedures and advertising and promotional matters. Ms. Shane received a B.A. in Psychology and Communications with a minor in Economics from the University of Southern California in 2001. Nick Jennings : Mr. Jennings has been our Chief Financial Officer since October 2014. From July 2014 until his employment by the Company, Mr. Jennings was self-employed and provided consulting, accounting and tax compliance services to private-owned companies. From November 2006 until June 2014, Mr. Jennings was a senior manager at Richardson Kontogouris Emerson LLP, where he worked with various public and private companies providing services in a variety of business areas including tax compliance, tax consulting, general accounting, and business assurance. He is a graduate of Loyola Marymount College with a degree in accounting and is a member of the American Institute of Certified Public Accountants. Walter C. Johnsen : Mr. Johnsen has been one of our directors since January 29, 2016. Since January 1, 2007, Mr. Johnsen has served as Chairman of the Board and Chief Executive Officer of Acme United Corporation, a leading worldwide supplier of innovative branded cutting, measuring and safety products in the school, home, office, hardware & industrial markets. From November 30, 1995 to December 31, 2006, he held the titles of President and Chief Executive Officer at Acme United. Mr. Johnsen previously served as Vice Chairman and a principal of Marshall Products, Inc., a medical supply distributor. Mr. Johnsen holds a Bachelor of Science in Chemical Engineering and a Master of Science in Chemical Engineering from Cornell University, and a Master of Business Administration from Columbia University. The Board concluded that Mr. Johnsen’s business and operations experience allows him to serve as one of our directors. Kelly J. Anderson : Ms. Anderson has been one of our directors since January 29, 2016. Ms. Anderson is the Chief Executive Officer of CXO Executive Solutions, LLC, a provider of executive services. Between 2015 and July 2020, Ms. Anderson served a partner in C Suite Financial Partners, a financial consulting services company dedicated to serving private, public, private equity, entrepreneurial, family office and government-owned firms in all industries. Ms. Anderson is an inactive California CPA and a 1989 graduate of the College of Business and Economics at California State University, Fullerton. The Board concluded that Ms. Anderson’s experience in finance qualifies her to serve as one of our directors. 42 Table of Contents Dr. Lim Boh Soon : Dr. Lim Boh Soon: Dr. Lim has served as a member of the Board since January 2018. Dr. Lim has more than 25 years of experience in the banking and finance industry. For more than the past five years, he has been a fellow of the Singapore Institute of Directors and is currently an independent non-executive director on the board of two publicly listed companies on the Singapore Stock Exchange. Dr. Lim has served in various directorship roles throughout the past including with CSE Global Limited until April 2017, Across Asia Limited (Cayman Islands) until August 2017, and OUE Commercial REIT Management Private Limited until September 2019. In addition to his role with Tomi Environmental Solutions Inc., Dr. Lim holds current directorship positions with the following companies, Arise Asset Management Pte, Ltd., OUE Limited, Jumbo Group Limited, TPT Corporation (Cayman Islands), Asri Asset Management Pte. Ltd., EpicQuant Pte. Ltd., Kairos Asia Outreach, and TML FinTech Pte. Ltd. Further, Dr. Lim has worked in various senior management positions for several regional and multi-national organizations, including UBS Capital Asia Pacific Limited, The NatSteel Group, Rothschild Ventures Asia Limited and The Singapore Technologies Group. Dr. Lim was also a member of the Regional Investment Committee for UBS AG in Asia. Dr. Lim graduated with a First-Class Honors in Mechanical Engineering from The University of Strathclyde in the United Kingdom (formerly The Royal College of Science & Technology) in 1981 and obtained his Doctor of Philosophy in Mechanical Engineering from The University of Strathclyde in the United Kingdom in 1985. We believe that Dr. Lim’s experience as a director of public companies and in the finance industry qualifies him to serve on the Board. Family Relationships Ms. Elissa J. Shane, our Chief Operating Officer and Director, is the daughter of Dr. Halden Shane, our Chief Executive Officer and Chairman of the Board. Board Composition The Board currently consists of five directors divided into three classes, with each class holding office for a three-year term. Each director serves until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. Our Board is responsible for the business and affairs of our Company and considers various matters that require its approval. Our executive officers are appointed by our Board and serve at its discretion. Audit Committee Our Audit Committee was established in June 2009 and currently is comprised of Ms. Anderson, Mr. Johnsen and Dr. Lim. Ms. Anderson serves as chairperson of the Audit Committee. The Board has determined that Ms. Anderson qualifies as an audit committee financial expert within the meaning of SEC regulations and meets Nasdaq’s financial sophistication requirements. In making this determination, the Board has considered Ms. Anderson’s extensive financial experience and business background. The Audit Committee operates under a written charter, which is available at http://investor.tomimist.com/corporate-governance/audit-committee-charter. The purpose of the Audit Committee is to assist the Board in monitoring the integrity of the annual, quarterly and other financial statements of the Company, the independent auditor’s qualifications and independence, the performance of the Company’s independent auditors and the compliance by the Company with legal and regulatory requirements. The Audit Committee also reviews and approves all related-party transactions. Our Board has determined that Ms. Anderson is an “audit committee financial expert” as defined by the regulations promulgated by the SEC. Code of Ethics The Board adopted a Code of Ethics in 2008 that applies to, among other persons, Board members, officers (including our Chief Executive Officer), contractors, consultants and advisors. Our Code of Ethics, which is available at http://investor.tomimist.com/TOMZ/code_of_ethics/2139, sets forth written standards designed to deter wrongdoing and to promote: 1. honest and ethical conduct including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; 2. full, fair, accurate, timely and understandable disclosure in reports and documents that we file with or submit to the SEC and in other public communications made by us; 3. compliance with applicable governmental laws, rules and regulations; 43 Table of Contents 4. the prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and 5. accountability for adherence to the Code of Ethics. Item 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth the total compensation paid to or earned by our named executive officers for the years ended December 31, 2021 and 2020, respectively: Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) (1) Option/ Warrant Awards ($) (1) All Other Compensation ($) Total ($) Halden S. Shane 2021 500,000 50,000 (6) — — 314,500 (3) 864,500 Chairman and CEO (2) 2020 400,833 — — 2,835,090 (2) — 3,235,923 Elissa J. Shane (4) 2021 270,000 30,000 (6) — — 13,500 (4) 313,500 COO 2020 226,083 40,000 (6) — 226,950 (4) 13,500 (4) 506,533 Nick Jennings (5) 2021 175,000 20,000 (6) — — — 195,000 CFO 2020 165,225 50,000 (6) — 24,846 (5) — 240,071 _______________ (1) The amounts shown in this column represent the aggregate grant date fair value of stock, option and/or warrant award, as applicable, granted during the year computed in accordance with FASB ASC Topic 718. See Note 2 of the notes to our audited consolidated financial statements contained in this Annual Report on Form 10-K for a discussion of valuation assumptions made in determining the grant date fair value of the awards. (2) During the year ended December 31, 2020, we issued Dr. Shane five and ten-year warrants to purchase an aggregate of 543,750 shares of common stock as executive compensation. The exercise price of the warrants range was $1.20-6.95 per share, based on the three-day trailing VWAP on the date of issuance. Utilizing the Black-Scholes pricing model, we determined the fair value of the warrants issued to Dr. Shane was approximately $2,835,000, with the following assumptions: volatility, 136%-173%; expected dividend yield, 0%; risk free interest rate, 0.67%-1.64%; and a life of 5-10 years. The grant date fair value of each share of common stock underlying the warrants range was $1.04-6.99. We recognized equity-based compensation to Dr. Shane of approximately $2,835,000 on the warrants during the year ended December 31, 2020 pursuant to an employment agreement. Please refer to Item 11 Employment Agreements for additional details of Dr. Shane’s annual compensation. (3) On February 11, 2021, we agreed to amend (the “Warrant Amendment”) the warrant to purchase 125,000 shares of common stock, par value $0.01 (the “Common Stock”), issued to Dr. Halden S. Shane on February 11, 2014 (the “Warrant”), to provide us with an option to repurchase the Warrant from Dr. Shane at a negotiated price. In connection with the Warrant Amendment, we repurchased the warrant from Dr. Shane (the “Repurchase”) for an aggregate cash consideration of $314,500, representing a 15% discount of the net exercise cash value of the Warrant, which was calculated using the closing price of the Common Stock on the Nasdaq on February 11, 2021 of $5.36, less the exercise price of the warrants in the amount of $2.40. The Warrant Amendment and the Repurchase was considered, approved and adopted by a disinterested majority of Our board of directors. The $314,500 is included as other compensation. (4) During the year ended December 31, 2020, we issued Ms. Shane a ten-year warrant to purchase an aggregate of 6,250 shares of common stock as executive compensation. The exercise price of the warrant was $4.00 per share. Utilizing the Black-Scholes pricing model, we determined the fair value of the warrants issued to Ms. Shane was approximately $25,000, with the following assumptions: volatility, 173%; expected dividend yield, 0%; risk free interest rate, 0.68%; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrants was $4.00. During the year ended December 31, 2020, we issued Ms. Shane’s options to purchase an aggregate of 31,250 shares of common stock as executive compensation. The exercise price of the option was $7.06 per share. Utilizing the Black-Scholes pricing model, we determined the fair value of the option issued to Ms. Shane was approximately $202,000, with the following assumptions: volatility, 154%; expected dividend yield, 0%; risk free interest rate, 0.67%; and a life of 5 years. The grant date fair value of each share of common stock underlying the options was $6.47. In aggregate, we recognized equity-based compensation to Ms. Shane of approximately $227,000 on the options during the year ended December 31, 2020. The other compensation in the amount of $13,500 represents an auto allowance pursuant to Ms. Shane’s employment agreement. Please refer to Item 11 Employment Agreements for additional details of Ms. Shane’s annual compensation. (5) During the year ended December 31, 2020, we issued Mr. Jennings a ten-year warrant to purchase an aggregate of 6,250 shares of common stock as executive compensation. The exercise price of the warrant was $4.00 per share. Utilizing the Black-Scholes pricing model, we determined the fair value of the warrants issued to Mr. Jennings was approximately $25,000, with the following assumptions: volatility, 173%; expected dividend yield, 0%; risk free interest rate, 0.68%; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrants was $4.00. We recognized equity-based compensation to Mr. Jennings of approximately $25,000 on the options during the year ended December 31, 2020. Please refer to Item 11 Employment Agreement for additional details of Mr. Jennings’ annual compensation. (6) In January 2022, the compensation committee approved cash bonuses to the COO and CFO which were paid in January 2022. The cash bonuses were accrued for as of December 31, 2021. 44 Table of Contents Outstanding Equity Awards at 2021 Fiscal Year-End The following table sets forth certain information with respect to outstanding options and warrants to purchase common stock previously awarded to our named executive officers as of December 31, 2020. Name Number of Securities Underlying Unexercised Warrants / Options Exercisable (1) (#) Number of Securities Underlying Unexercised Warrants / Options Unexercisable (#) Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Warrants (#) Exercise Price (1) ($) Expiration Date Halden S. Shane 31,250 (3) — — $ 0.80 7/17/2022 437,500 (4) — — $ 0.96 12/22/2022 31,250 (5) — — $ 0.64 11/19/2023 125,000 (6) — — $ 0.80 1/26/2024 156,250 (7) — — $ 1.20 1/31/2025 12,500 (8) — — $ 4.00 4/24/2030 375,000 (9) — — $ 6.95 10/01/2030 Elissa J. Shane 12,500 (10) — — $ 0.96 1/5/2023 31,250 (11) — — $ 0.88 1/03/2024 12,500 (12) — — $ 0.96 1/03/2025 18,750 (13) — — $ 0.80 1/15/2025 6,250 (14) — — $ 4.00 4/24/2030 31,250 (15) — — $ 7.06 10/1/2025 Nick Jennings 6,250 (16) — — $ 0.80 1/26/2023 6,250 (17) — — $ 4.00 4/24/2030 ________________ (1) Reflects the 1-for-8 reverse stock split of our Common Stock and Series A Preferred Stock effected on September 10, 2020. (2) Warrants vested in increments of 125,000 on February 11, 2014, February 11, 2015, and February 11, 2016 and have a term of five years. (3) Warrants vested on July 17, 2017 and have a term of five years. (4) Warrants vested on December 22, 2017 and have a term of five years. (5) Warrants vested on November 19, 2018 and have a term of five years. (6) Warrants vested on January 26, 2019 and have a term of five years. (7) Warrants vested on January 31, 2020 and have a term of five years. (8) Warrants vested on April 24, 2020 and have a term of ten years. (9) Warrants vested on October 01, 2020 and have a term of ten years. (10) Options pursuant to the 2016 Plan vested on January 5, 2018 and have a term of five years. (11) Options pursuant to the 2016 Plan vested on January 3, 2019 and have a term of five years. (12) Options pursuant to the 2016 Plan vested on January 3, 2020 and have a term of five years. (13) Options pursuant to the 2016 Plan vested on January 15, 2020 and have a term of five years. (14) Warrants vested on April 24, 2020 and have a term of ten years. (15) Options pursuant to the 2016 Plan vested on October 01, 2020 and have a term of five years. (16) Options pursuant to the 2016 Plan vested on January 26, 2018 and have a term of five years. (17) Warrants vested on April 24, 2020 and have a term of ten years. Employment Agreements, Termination of Employment and Change-in-Control Arrangements Except as described below, we currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control. Employment Agreements We have entered into employment agreements with each of the named executive officers and generally include the named executive officer’s initial base salary and an indication of equity compensation opportunities. 45 Table of Contents Halden S. Shane On September 22, 2020, we entered into a three year employment agreement with Dr. Shane, effective October 1, 2020. The agreement provides for a base annual salary of $500,000. The agreement also provides for a signing bonus of 375,000 warrants. Dr. Shane is also entitled to a cash performance bonus and an annual issuance of an option to purchase 31,250 shares of common stock from the 2016 Plan at the discretion of the Board. The agreement also provides that we will reimburse Dr. Shane for the expenses associated with the use of an automobile up to $750 a month. The term of the agreement is three years. In the event Dr. Shane is terminated as CEO as a result of a change in control, Dr. Shane will be entitled to a lump sum payment of two years’ salary at the time of such termination. Elissa J. Shane On October 1, 2020, we entered into an employment agreement with Elissa J. Shane, effective October 1, 2020. Pursuant to her employment agreement, Ms. Shane will receive an annual base salary of at least $270,000, subject to annual review and discretionary increase by the Compensation Committee of the Board. Ms. Shane is eligible to receive an annual cash bonus and other annual incentive compensation. The agreement originally provided for a grant of 93,750 warrants. Additionally, in connection with the execution of her employment agreement, on October 1, 2020, we issued Ms. Shane a warrant to purchase 93,750 shares of Common Stock at an exercise price of $6.17 per share. These provisions were subsequently amended to provide for the issuance to Ms. Shane of 31,250 options from the 2016 Equity Plan at the closing price of $7.06 on the date of grant in lieu of the warrant grant and the 93,750 warrants were cancelled. Ms. Shane acknowledged that the 31,250 options were in full consideration of the amount she was entitled to under the agreement. Her employment agreement also provides that we will reimburse Ms. Shane for reasonable and necessary business and entertainment expenses that she incurs in performing her duties. During the term of her employment, Ms. Shane will also be entitled to up to four weeks of paid vacation time annually, which will accrue up to six weeks, and to participate in our benefit plans and programs, including but not limited to all group health, life, disability and retirement plans. Ms. Shane is also entitled to the sum of $1,000 per month as a vehicle allowance. The initial term of her employment agreement is three years, which may be automatically extended for successive one-year terms, unless either party provides the other with 120 days’ prior written notice of its intent to terminate the agreement. In the event Ms. Shane is terminated as COO as a result of a change in control, Ms. Shane will be entitled to a lump sum payment of one and a half years’ salary at the time of such termination. Nick Jennings On September 2, 2015, we entered into a new employment agreement with Mr. Jennings, which superseded his prior agreement, pursuant to which he continues to serve as our Chief Financial Officer. Mr. Jennings’ annual salary is $132,000, which is reviewed annually. On January 26, 2016, we issued Mr. Jennings a five-year warrant to purchase up to 12,500 shares of common stock at an exercise price of $4.40 per share. The agreement also provided for the issuance of an additional five-year warrant to purchase 12,500 shares of common stock in 2016, however, this provision was modified to grant a salary increase in lieu of the options. In October 2020, Mr. Jennings’ annual salary was increased to $175,000 per year. Mr. Jennings is also entitled to additional equity compensation based upon superior performance of his responsibilities, as determined by the Board in its sole discretion. The agreement also provides that we will reimburse Mr. Jennings for certain business and entertainment expenses. In the event of a change in control of the Company that results in his termination, Mr. Jennings will be entitled to a lump sum payment of one year’s salary and all equity awards will be accelerated and fully vested. In the event his employment is terminated other than for cause, Mr. Jennings will receive an amount equal to his annual salary as of such termination date after the second employment anniversary. 46 Table of Contents Director Compensation Each of our non-employee directors receives cash fees and stock as compensation for their service on the Board and the committees of the Board on which they are a member. The tables below set forth cash and stock compensation earned by each non-employee director during the fiscal year ended December 31, 2021. Name Fees earned or paid in cash ($) Stock awards ($) Option awards ($) Other Compensation ($) Total ($) Harold W. Paul (1) 33,333 52,625 — 99,000 132,333 Walter Johnsen (2) 40,000 52,625 — — 92,625 Kelly Anderson (3) 45,000 52,625 — — 97,625 Lim Boh Soon (4) 40,000 52,625 — — 92,625 (1) Mr. Paul also received $99,000 in cash compensation in exchange for legal services rendered during 2021. In January 2021, we issued Mr. Paul 12,500 shares of common stock that were valued at $52,625. Mr. Paul resigned from his position as a director with the company on August 2, 2021. (2) Mr. Johnsen was elected to the Board on January 29, 2016. The term of his agreement as director commenced on February 1, 2016 for up to two years and until a successor is elected, or resignation or removal. Mr. Johnsen was re-elected to the board for a 3-year term at our 2019 annual meeting. Our agreement with Mr. Johnsen provides for an annual fee in the amount of $40,000 paid on a quarterly basis and an annual grant of shares of common stock. In January 2021, we issued Mr. Johnsen 12,500 shares of common stock that were valued at $52,625. (3) Ms. Anderson was elected to the Board on January 29, 2016 and serves as the chairperson of our Audit Committee. The term of her agreement as director commenced on February 1, 2016 for up to two years and until a successor is elected, or resignation or removal. Ms. Anderson was re-elected to the board for a 3-year term at our 2019 annual meeting. Our agreement with Ms. Anderson provides for an annual fee in the amount of $45,000 paid on a quarterly basis and an annual grant of shares of common stock. In January 2021, we issued Ms. Anderson 12,500 shares of common stock that were valued at $52,625. (4) Mr. Lim was elected to the Board on January 29, 2018. The term of his agreement as director commenced on February 1, 2018 for up to three years unless re-elected or until a successor is elected, or resignation or removal. Mr Lim was re-elected to the board for a 3-year term at our 2021 annual meeting. Our agreement with Mr. Lim provides for an annual fee in the amount of $40,000 paid on a quarterly basis and an annual grant of shares of common stock. In January 2021, we issued Mr. Lim 12,500 shares of common stock that were valued at $52,625. 47 Table of Contents Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information We currently maintain one compensation plan: the 2016 Plan. The 2016 Plan was approved by the Board on January 29, 2016 and received shareholder approval on July 7, 2017. The 2016 Plan authorized the issuance of 625,000 shares of common stock. On August 25, 2015, the Board terminated the 2008 Plan, which we had maintained previously and which our shareholders had approved. Accordingly, we will issue future awards under the 2016 Plan. 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. The following table provides information as of December 31, 2021 with respect to compensation plans under which our equity securities are authorized for issuance. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) Weighted-average exercise price of outstanding options, warrants and rights (1) Number of securities remaining available for future issuance under equity compensation plans (1) Equity compensation plans approved by security holders 143,000 (2) $ 2.66 1,599,000 (4) Equity compensation plans not approved by security holders 940,625 (3) $ 4.03 — Total 1,073,125 $ 3.79 — (1) Reflects the 1-for-8 reverse stock split of our Common Stock and Series A Preferred Stock effected on September 10, 2020. (2) Prior to August 25, 2015, we granted awards under the 2008 Plan. (3) Represents shares of common stock issuable upon the exercise of warrants issued to executive officers, employees and consultants in exchange for services rendered. (4) On July 7, 2017, the 2016 Plan received shareholder approval, which permits the grant up to 625,000 shares of common stock. On December 30, 2020, we received shareholder approval to amend and restate the 2016 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. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information with respect to the beneficial ownership of our common stock and Series A preferred stock (together, “Voting Stock”) as of February 25, 2022 for: · each person (or group of affiliated persons) known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock or Series A preferred stock; · each of our directors and nominees for election to the Board; · each of the executive officers named in the summary compensation table; and · all of our directors and executive officers as a group. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the following table have sole voting and investment power with respect to all shares of Voting Stock that they beneficially own, subject to applicable community property laws. 48 Table of Contents Applicable percentage ownership is based on 16,811,513 shares of common stock and 63,750 shares of Series A preferred stock outstanding at February 25, 2022. In computing the number of shares of Voting Stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of Voting Stock subject to options, warrants or other convertible securities held by that person or entity that are currently exercisable or releasable or that will become exercisable or releasable within 60 days of February 25, 2022. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the address of each person or entity in the following table is c/o TOMI Environmental Solutions, Inc., 8430 Spires Way., Suite N, Frederick, MD 21701. Shares Beneficially Owned % of Total Common Stock Series A Preferred Stock Voting Name of Beneficial Owner Shares % of Class Shares % of Class Power (1) 5% Shareholders: Lau Sok Huy (2) 2,170,139 11.0 % — — 11.0 % Named Executive Officers and Directors: Halden S. Shane (1)(3) 4,052,664 19.0 % 63,750 100.0 % 21.2 % Elissa J. Shane (4) 437,664 2.1 % — — 2.0 % Nick Jennings (5) 79,019 * — — * Walter Johnsen (6) 68,750 * — — * Kelly Anderson (7) 68,750 * — — * Lim Boh Soon (8) 123,774 * — — * Executive Officers and Directors as a Group (9) 4,830,620 22.6 % — — 22.9 % * Denotes ownership of less than 1%. (1) Percentage of total voting power represents voting power with respect to all shares of our Common Stock and Series A Preferred Stock, as a single class. The holders of Common Stock and Series A Preferred Stock are each entitled to one vote per share. (2) Based on Form 3 filed with the SEC by Lau Sok Huy on January 24, 2018. (3) Consists of: (i) 2,523,914 shares of Common Stock held of record by Dr. Shane; (ii) 187,500 shares of Common Stock held of record by the Shane Family Trust; (iii) 125,000 shares of Common Stock held of record by Belinha Shane; and (iv) 1,341,250 shares of Common Stock issuable upon the exercise of warrants and options to purchase Common Stock held by Dr. Shane that are exercisable or will become exercisable within 60 days of February 25, 2022. Dr. Shane is a co-trustee of the Shane Family Trust and may be deemed to share voting and investment power over the securities held by the trust. Belinha Shane is Dr. Shane’s wife. Dr. Shane disclaims ownership of such shares held by his wife, except to the extent of his pecuniary interest. (4) Consists of: (i) 236,414 shares of Common Stock held of record by Ms. Shane; and (ii) 201,250 shares of Common Stock issuable upon the exercise of warrants and options to purchase Common Stock held by Ms. Shane that are exercisable or will become exercisable within 60 days of February 25, 2022. (5) Consists of: (i) 26,519 shares of Common Stock held of record by Mr. Jennings; and (ii) 52,500 shares of Common Stock issuable upon the exercise of warrants and options to purchase Common Stock held by Mr. Jennings that are exercisable or will become exercisable within 60 days of February 25, 2022. (6) Consists of: (i) 68,750 shares of Common Stock held of record by Mr. Johnsen; and (ii) 3,125 shares of Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of February 25, 2022. (7) Consists of: (i) 68,750 shares of Common Stock held of record by Ms. Anderson; and (ii) 3,125 shares of Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of February 25, 2022. (8) Consists of 123,774 shares of Common Stock held of record by Dr. Lim. (9) Consists of: (i) 3,229,370 shares of Common Stock; (ii) 1,181,250 shares of Common Stock issuable upon the exercise of warrants to purchase Common Stock; and (iii) 420,000 shares of Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of February 25, 2022. Changes in Control We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our Company. 49 Table of Contents Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Transactions with Related Persons None. Independence of the Board Based upon information submitted by Mr. Johnsen, Ms. Anderson, and Dr. Lim, the Board has determined that each of them is “independent” under Nasdaq corporate governance rules. Dr. Shane and Elissa Shane are not independent directors as they are employees of the Company. No director will be considered “independent” unless the Board affirmatively determines that the director has no direct or indirect material relationship with the Company. Our Board has three separate standing committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. We have made each of our committee charters available on our website at http://investor.tomimist.com/. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES On August 30, 2021, the Audit Committee of the Company determined that it is in the best interest of the Company to change the Company’s independent registered public accounting firm, Wolinetz, Lafazan & Company, P.C. (“Wolinetz, Lafazan & Company”), because the lead partner announced his decision to resign for personal reasons, and the firm would no longer have sufficient resources to continue to serve as the Company’s independent registered public accounting firm. Accordingly, the Audit Committee terminated the engagement of Wolinetz, Lafazan & Company, effective as of August 30, 2021. The reports of Wolinetz, Lafazan & Company on the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2020 and 2019 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principle. During two fiscal years ended December 31, 2020 and the subsequent interim period through August [30], 2021, there were no disagreements as described under Item 304(a)(1)(iv) of Regulation S-K with Wolinetz, Lafazan & Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Wolinetz, Lafazan & Company’s satisfaction, would have caused Wolinetz, Lafazan & Company to make reference to the subject matter thereof in connection with its reports on the financial statements of the Company for such years. In addition, during the two fiscal years ended December 31, 2020 and the subsequent interim period through August 30, 2021, there were no reportable events as described under Item 304(a)(1)(v) of Regulation S-K. The Company has provided Wolinetz, Lafazan & Company with a copy of a Current Report on Form 8-K announcing the resignation and appointment, and requested that Wolinetz, Lafazan & Company furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of Wolinetz, Lafazan & Company’s letter, dated September 1, 2021, was attached hereto as Exhibit 16.1 to the Form 8-K. Effective as of August 30, 2021, the Audit Committee approved the engagement of Rosenberg Rich Baker Berman, P.A as the Company’s independent registered public accounting firm to audit the Company’s consolidated financial statements as of and for the year ending December 31, 2021 subject to Rosenberg Rich Baker Berman, P.A. completion of its standard client acceptance procedures. During the years ended December 31, 2020 and December 31, 2019 and the subsequent interim period through August 30, 2021, the Company did not consult with Rosenberg Rich Baker Berman, P.A. with respect to (i) the application of accounting principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us by Rosenberg Rich Baker Berman, P.A. that was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any other matter that was the subject of a disagreement or a “reportable event.” 50 Table of Contents Accountant Fees The following table presents the aggregate fees billed for audit and other services provided by our independent registered public accounting firms, Wolinetz, Lafazan & Company and and Rosenberg Rich Baker Berman, P.A, during the 2021 and 2020 fiscal years: For the Fiscal Years Ended December 31, 2021 2020 Audit Fees (1) $ 161,000 $ 138,000 Audit-Related Fees (2) — — Tax Fees (3) — — All Other Fees (4) — — Total $ 161,000 $ 138,000 (1) Audit Fees- Audit fees represent the professional services rendered for the audit of our annual financial statements and the review of our financial statements included in quarterly reports, along with services normally provided by the accounting firm in connection with statutory and regulatory filings or engagements. (2) Audit-Related Fees- Audit-related fees represent professional services rendered for assurance and related services by Wolinetz, Lafazan & Company, P.C. and Rosenberg Rich Baker Berman, P.A that were reasonably related to the performance of the audit or review of our financial statements that are not reported under audit fees. (3) Tax Fees- Tax fees represent professional services rendered by the accounting firm for tax compliance, tax advice, and tax planning. (4) All Other Fees- All other fees represent fees billed for products and services provided by Wolinetz, Lafazan & Company, P.C and Rosenberg Rich Baker Berman, P.A other than the services reported for the other categories. Pre-Approval Policies and Procedures of the Audit Committee Consistent with the rules and regulations promulgated by the Securities and Exchange Commission, the Audit Committee approves the engagement of our independent registered public accounting firm and is also required to pre-approve all audit and non-audit expenses. All of the services described above were approved by the Audit Committee in accordance with its procedure. We do not otherwise rely on pre-approval policies and procedures. 51 Table of Contents PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: (1) Financial Statements. See Index to Financial Statements and Schedule on page F-1. (2) Schedules to Financial Statements. All financial statement schedules have been omitted because they are either inapplicable or the information required is provided in our consolidated financial statements and the related notes thereto, included in Part II, Item 8 of this Annual Report on Form 10-K. (3) The exhibits listed on the accompanying Exhibit Index are filed (or incorporated by reference herein) as part of this Annual Report on Form 10-K. 52 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: March 29, 2022 TOMI ENVIRONMENTAL SOLUTIONS, INC. /s/ HALDEN S. SHANE Halden S Shane Chairman of the Board and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY The undersigned directors and officers of TOMI Environmental Solutions, Inc. constitute and appoint Halden S. Shane and Nick Jennings, or either of them, as their true and lawful attorney and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney and agent shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ HALDEN S. SHANE Chairman of the Board and Chief Executive March 29, 2022 Halden S. Shane Officer (Principal Executive Officer) /s/ NICK JENNINGS Chief Financial Officer (Principal Financial March 29, 2022 Nick Jennings Officer and Principal Accounting Officer) /s/ ELISSA J. SHANE Director March 29, 2022 Elissa J. Shane /s/ WALTER C. JOHNSEN Director March 29, 2022 Walter C. Johnsen /s/ KELLY J. ANDERSON Director March 29, 2022 Kelly J. Anderson /s/ LIM BOH SOON Director March 29, 2022 Lim Boh Soon 53 Table of Contents EXHIBIT INDEX Exhibit Number Description of Exhibit Form File No. Date Exhibit Filed Herewith 3.1 Articles of Restatement of the Registrant, effective October 6, 2009 S-1 333-162356 10/6/09 3.1 3.2 Articles of Amendment of Articles of Incorporation of the Registrant, effective October 24, 2011 8-K 000-09908 11/07/11 3 3.3 Articles of Amendment of Articles of Incorporation of the Registrant, effective September 10, 2020 8-K 000-09908 9/14/20 3.1 3.4 Amended Bylaws of the Registrant, adopted effective November 2, 2007 10-Q 000-09908 5/16/16 3.2 3.5 Amendment to Amended Bylaws of the Registrant, adopted effective January 29, 2016 8-K 000-09908 2/1/16 3.2 4.1 Specimen certificate evidencing shares of common stock of the Registrant S-3 333-249850 11/4/20 4.1 4.2 Description of Registrants Securities X 4.3 Form of Warrant to Purchase Common Stock 10-Q 000-09908 05/17/21 4.1 4.4 Form of Non-Qualified Stock Option Agreement 10-Q 000-09908 05/17/21 4.2 4.5 Form of Common Stock Purchase Warrant 8-K 000-09908 09/26/21 4.1 4.6 Form of Placement Agent Warrant 8-K 000-09908 09/26/21 4.2 10.1+ Amended and Restated 2016 Equity Incentive Plan, as adopted by the Registrant’s stockholders on December 30, 2020 DEF 14A 001-39574 12/2/20 Appendix A 10.2+ Offer Letter, dated January 15, 2016, by and between the Registrant and Dr. Halden Shane 10-Q 000-09908 5/16/16 10.1 10.4+ Offer Letter, dated September 2, 2015, by and between the Registrant and Nick Jennings 10-Q 000-09908 5/16/16 10.3 10.6+ Form of Appointment to the Board of Directors as Independent Director of the Registrant 10-Q 000-09908 5/16/16 10.5 10.7 Restated Manufacturing and Development Agreement, dated November 10, 2016, by and between the Registrant and RG Group 10-Q 000-09908 9/30/16 10.1 10.8+ Employment Agreement, entered into as of January 5, 2018, by and between the Registrant and Elissa J. Shane, effective as of January 1, 2018 8-K 000-09908 1/8/18 10.1 10.9 Form of Securities Purchase Agreement dated as of September 26, 2021, between the Registrant and the purchasers named therein 8-K 000-09908 09/26/21 10.1 14.1 Code of Ethics 10-K 000-09908 3/31/09 14 21.1 Subsidiaries of the Registrant X 24.1 Power of Attorney (included in signature page) X 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1# Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 54 Table of Contents 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema X 101.CAL XBRL Taxonomy Extension Calculation Linkbase X 101.DEF XBRL Taxonomy Extension Definition Linkbase X 101.LAB XBRL Taxonomy Extension Label Linkbase X 101.PRE XBRL Taxonomy Extension Presentation Linkbase X + Indicates a management contract or compensatory plan. # The information in Exhibit 32.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this report), unless the Registrant specifically incorporates the foregoing information into those documents by reference. 55 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firms [PCAOB No. 89 ] F-2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-5 Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 F-6 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2021 and 2020 F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 F-8 Notes to Consolidated Financial Statements F-10 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of TOMI Environmental Solutions, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of TOMI Environmental Solutions, Inc. (the Company) as of year ended December 31, 2021, and the related consolidated statements of operations, shareholders’ equity, and cash flow for the year then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of year ended December 31, 2021 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for doubtful accounts As described further in Note 2 to the consolidated financial statements, the Company maintains an allowance for doubtful accounts against its accounts receivable balances based on the future estimated credit losses. As of December 31, 2021, the allowance for doubtful accounts was $1.7 million, or 47% of total accounts receivable. This estimate is determined based on internally developed qualitative and quantitative factors derived from the aging of receivables, the Company’s past collection history with customers, and economic trends and conditions. We identified the estimates used to determine the allowance for doubtful accounts as a critical audit matter. We have identified the evaluation of the Company’s estimation of allowance for doubtful accounts as a critical audit matter. There is a high degree of subjectivity in assessing the assumptions, which are used in estimating losses related to customer receivables. There is also a high degree of subjectivity in management's assessment of the completeness and accuracy of the allowance for doubtful accounts, specifically the portion of the receivable expected to be collected, which requires a heightened level of auditor judgement in auditing the estimate. Our audit procedures related to the allowance for doubtful accounts included: · Testing the mathematical accuracy of management’s allowance for doubtful accounts calculation as of December 31, 2021 by recalculating the historical loss rates for each risk pool, as well as recalculating the aging of receivables based on underlying source documentation. · Recomputing current and historical collection rates for customer receivable balances and comparing the historical loss rates against the current period estimated loss rates within the respective risk pools, and performing a retrospective analysis of the subsequent collections on customer receivables with certain risk characteristics, · Evaluating the reasonableness of management’s qualitative adjustments against the allowance for doubtful accounts by obtaining corroborating evidence which supports the adjustments and assumptions made by management in determining the allowance. /s/ Rosenberg Rich Baker Berman, P.A. We have served as the Company’s auditor since 2021. Somerset, New Jersey March 29, 2022 F-2 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of TOMI Environmental Solutions, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of TOMI Environmental Solutions, Inc. and Subsidiary (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. F-3 Table of Contents Revenue Recognition — Refer to Note 2 to the financial statements Critical Audit Matter Description The Company generates revenue primarily from the manufacture, license, service and sale of its products. The Company’s contracts with customers may include multiple performance obligations. The Company enters into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. Management applies significant judgment in identifying and accounting for each performance obligation as a result of evaluating terms and conditions in contracts. The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter include the following: · Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together. · The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. · Identification of specific or key contract terms that may impact the timing and amount of revenue recognized. Given these factors and due to the volume of transactions, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The primary procedures we performed to address this critical audit matter included the following: · Considering the effectiveness of controls relating to the revenue recognition process, including controls over the identification and evaluation of the contractual terms and conditions that impact the identification of performance obligations and determination of revenue recognition. · Testing the completeness and accuracy of management’s identification and evaluation of the terms and conditions in contracts with customers by examining customer agreements on a test basis including reviewing and evaluating management’s identification of performance obligations. WOLINETZ, LAFAZAN & COMPANY, P.C. We have served as the Company's auditor since 2004. Rockville Centre, NY March 30, 2021 F-4 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED BALANCE SHEET S December 31, 2021 December 31, 2020(1) ASSETS Current Assets: Cash and Cash Equivalents $ 5,317,443 $ 5,198,842 Accounts Receivable - net 1,964,776 3,716,701 Other Receivables 235,904 198,951 Inventories (Note 3) 4,743,280 3,781,515 Vendor Deposits (Note 4) 288,586 388,712 Prepaid Expenses 343,573 421,305 Total Current Assets 12,893,562 13,706,027 Property and Equipment – net (Note 5) 1,488,319 1,298,103 Other Assets: Intangible Assets – net (Note 6) 956,284 722,916 Operating Lease - Right of Use Asset (Note - 7) 583,271 631,527 Capitalized Software Development Costs - net (Note 8) 10,476 52,377 Other Assets 341,006 358,935 Total Other Assets 1,891,037 1,765,755 Total Assets $ 16,272,918 $ 16,769,885 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 1,054,040 $ 1,501,469 Accrued Expenses and Other Current Liabilities (Note 13) 664,608 501,849 Customer Deposits 6,000 118,880 Current Portion of Long-Term Operating Lease (Note 7) 91,775 81,223 Total Current Liabilities 1,816,423 2,203,421 Long-Term Liabilities: Loan Payable (Note 15) - 410,700 Long-Term Operating Lease, Net of Current Portion (Note 7) 861,415 953,190 Total Long-Term Liabilities 861,415 1,363,890 Total Liabilities 2,677,838 3,567,311 - - Shareholders’ Equity: Cumulative Convertible Series A Preferred Stock; par value $ 0.01 per share, 1,000,000 shares authorized; 63,750 shares issued and outstanding at December 31, 2021 and December 31, 2020 638 638 Cumulative Convertible Series B Preferred Stock; $1,000 stated value; 7.5% Cumulative dividend; 4,000 shares authorized; none issued and outstanding at December 31, 2021 and December 31, 2020 - - Common stock; par value $ 0.01 per share, 250,000,000 shares authorized; 19,680,955 and 16,761,513 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively. 196,810 167,615 Additional Paid-In Capital 56,941,209 52,142,399 Accumulated Deficit ( 43,543,576 ) ( 39,108,078 ) Total Shareholders’ Equity 13,595,080 13,202,574 Total Liabilities and Shareholders’ Equity $ 16,272,918 $ 16,769,885 The accompanying notes are an integral part of the consolidated financial statements. (1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information. F-5 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended December 31, 2021 2020 (1) Sales, net $ 7,753,582 $ 25,027,637 Cost of Sales 3,166,891 9,985,046 Gross Profit 4,586,691 15,042,591 Operating Expenses: Professional Fees 538,093 681,377 Depreciation and Amortization 294,665 719,760 Selling Expenses 1,674,466 1,247,444 Research and Development 572,700 455,046 Consulting Fees 326,614 327,232 General and Administrative 6,104,363 7,102,942 Total Operating Expenses 9,510,901 10,533,801 Income (loss) from Operations ( 4,924,210 ) 4,508,789 Other Income (Expense): Gain Upon Debt Extinguishment 414,583 - Interest Income 1,076 2,915 Interest Expense ( 1,034 ) ( 43,538 ) Total Other Income (Expense) 414,625 ( 40,623 ) Income (loss) before income taxes ( 4,509,585 ) 4,468,166 Provision for Income Taxes (Note 16) ( 74,086 ) 77,000 Net Income (loss) $ ( 4,435,499 ) $ 4,391,166 Net income (loss) Per Common Share Basic $ ( 0.25 ) $ 0.27 Diluted $ ( 0.25 ) $ 0.23 Basic Weighted Average Common Shares Outstanding 17,538,994 16,512,126 Diluted Weighted Average Common Shares Outstanding 17,538,994 18,757,509 (1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information. The accompanying notes are an integral part of the consolidated financial statements. F-6 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (1) Series A Preferred Common Stock Additional Paid Accumulated Total Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at January 1, 2020 63,750 $ 638 15,587,552 $ 155,876 $ 44,232,274 $ ( 43,499,244 ) $ 889,543 - Equity Compensation 3,158,175 3,158,175 Common Stock Issued for Services Provided 50,500 505 49,685 50,190 Conversion of Notes Payable into Common Stock 1,041,667 10,417 4,489,584 4,500,000 Warrants and Options Exercised 79,296 793 212,707 213,500 Reverse stock split adjustment 2,499 25 ( 25 ) - Net Income 4,391,166 4,391,166 Balance at December 31, 2020 63,750 $ 638 16,761,514 $ 167,616 $ 52,142,399 $ ( 39,108,078 ) $ 13,202,574 Equity Compensation 18,354 18,354 Common Stock Issued for Services Provided 50,000 500 227,500 228,000 Common Stock Issued in Private Placement 2,869,442 28,694 4,552,957 4,581,651 Net (Loss) ( 4,435,499 ) ( 4,435,499 ) Balance at December 31, 2021 63,750 $ 638 19,680,955 $ 196,810 $ 56,941,209 $ ( 43,543,576 ) $ 13,595,080 (1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information. The accompanying notes are an integral part of the consolidated financial statements. F-7 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2021 2020 Cash Flow From Operating Activities: Net Income (Loss) $ ( 4,435,499 ) $ 4,391,166 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used) In Operating Activities: Depreciation and Amortization 294,665 719,760 Amortization of Right of Use Asset 157,315 157,315 Amortization of Software Costs 41,902 41,900 Equity Compensation Expense 18,354 3,130,986 Value of Equity Issued for Services 228,000 50,190 Reserve for Bad Debt 1,288,000 280,000 Inventory Reserve - ( 100,000 ) Gain Upon Debt Extinguishment ( 414,583 ) - Changes in Operating Assets and Liabilities: Decrease (Increase) in: Accounts Receivable 463,925 ( 2,502,043 ) Inventory ( 961,765 ) ( 1,388,986 ) Prepaid Expenses 77,732 ( 233,642 ) Vendor Deposits 100,126 ( 247,660 ) Other Receivables ( 36,953 ) ( 198,951 ) Other Assets ( 100,149 ) ( 294,659 ) Increase (Decrease) in: Accounts Payable (447,429 ) 788,247 Accrued Expenses 166,644 78,926 Accrued Interest - ( 66,667 ) Customer Deposits ( 112,880 ) 118,880 Lease Liability ( 151,088 ) ( 146,688 ) Net Cash Provided (Used) in Operating Activities ( 3,823,684 ) 4,578,076 Cash Flow From Investing Activities: Capitalized Patent and Trademark Costs ( 126,697 ) ( 111,386 ) Purchase of Property and Equipment ( 512,669 ) ( 289,270 ) Net Cash (Used) in Investing Activities ( 639,366 ) ( 400,655 ) The accompanying notes are an integral part of the consolidated financial statements. F-8 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED For the Years Ended December 31, 2021 2020 Cash Flow From Financing Activities: Proceeds from Issuance of Stock and Warrants 4,581,651 - Proceeds from Exercise of Warrants and Options - 213,500 Proceeds from Loan Payable - 410,700 Repayment of Principal Balance on Convertible Note - ( 500,000 ) Net Cash From Financing Activities: 4,581,651 124,200 Increase In Cash and Cash Equivalents 118,601 4,301,620 Cash and Cash Equivalents - Beginning 5,198,842 897,223 Cash and Cash Equivalents – Ending $ 5,317,443 $ 5,198,842 Supplemental Cash Flow Information: Cash Paid For Interest $ - $ 107,356 Cash Paid for Income Taxes $ 75,000 $ 800 Non-Cash Investing and Financing Activities: Accrued Equity Compensation $ - $ 27,189 Conversion of Note Payable into Common Stock $ - $ 4,500,000 Equipment, net Transferred to Inventory $ - $ 22,685 Patent and trademark costs reclassified from Other Assets $ 118,078 $ 49,758 The accompanying notes are an integral part of the consolidated financial statements. F-9 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS TOMI Environmental Solutions, Inc., a Florida corporation (“TOMI”, the “Company”, “we”, “our” and “us”) is a global provider of disinfection and decontamination essentials through our premier Binary Ionization Technology® (BIT™) platform, under which we manufacture, license, service and sell our SteraMist® brand of products, including SteraMist® BIT™, a hydrogen peroxide-based mist and fog. Our 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. Our business is organized into five divisions: Healthcare, Life Sciences, TOMI Service Network, Food Safety and Commercial. Invented under a defense grant in association with the Defense Advanced Research Projects Agency (DARPA) of the U.S. Department of Defense, BIT™ is registered with the U.S. Environmental Protection Agency (EPA) and uses a low percentage hydrogen peroxide as its only active ingredient to produce a fog composed mostly of a hydroxyl radical ( . OH ion), known as ionized Hydrogen Peroxide (iHP™). Represented by the SteraMist® brand of products, iHP™ produces a germ-killing aerosol that works like a visual non-caustic gas. Our products are designed to service a broad spectrum of commercial structures, including, but not limited to, hospitals and medical facilities, bio-safety labs, pharmaceutical facilities, meat and produce processing facilities, universities and research facilities, vivarium labs, other service industries including cruise ships, office buildings, hotel and motel rooms, schools, restaurants, military barracks, police and fire departments, prisons, and athletic facilities. Our products are also used in single-family homes and multi-unit residences. Additionally, our products have been listed on the EPA’s List N as products that help combat COVID-19 and are actively being used for this purpose. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of TOMI and its wholly owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. All intercompany accounts and transactions have been eliminated in consolidation. Reclassification of Accounts Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These reclassifications had no material effect on previously reported results of operations or financial position. Use of Estimates The preparation of the 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. F-10 Table of Contents 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. 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 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. At December, 2021 and 2020 there were no cash equivalents. Accounts Receivable Our accounts receivable are typically from credit worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of their status and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Bad debt expense for the years ended December 31, 2021 and 2020 was $ 1,605,660 and $ 332,027 , respectively. At December 31, 2021 and December 31, 2020, the allowance for doubtful accounts was $ 1,678,000 and $ 390,000 , respectively. 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 and raw materials. We expense costs to maintain certification to cost of goods sold as incurred. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable. Our reserve for obsolete inventory was $ 0 as of December 31, 2021 and December 31, 2020, respectively. Property and Equipment We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter. F-11 Table of Contents 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. Amortization expense for both the years ended December 31, 2021 and 2020, was $ 41,900 . Accounts Payable As of December 31, 2021, two vendors accounted for approximately 53 % of accounts payable. As of December 31, 2020, two vendors accounted for approximately 32 % of accounts payable. For the year ended December 31, 2021, two vendors accounted for 65 % of cost of sales. For the year ended December 31, 2020, two vendors accounted for 76 % of 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 from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. As of December 31, 2021, and December 31, 2020, our warranty reserve was $ 68,000 (See Note 14). Income Taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with Accounting Standards Codification (ASC) Topic 740: Income Taxes. Net deferred tax benefits have been fully reserved at December 31, 2021 and December 31, 2020. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. F-12 Table of Contents Net Income (Loss) Per Share Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the treasury stock method and includes the effect from potential issuance of shares of common stock, such as shares issuable pursuant to the exercise of options and warrants and conversions of preferred stock or debentures. Potentially dilutive securities as of December 31, 2021 consisted of 3,381,021 shares of common stock issuable upon exercise of outstanding warrants, 143,000 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Potentially dilutive securities as of December 31, 2020 consisted of 2,049,133 shares of common stock issuable upon exercise of outstanding warrants, 132,500 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Diluted net income or (loss) per share is computed similarly to basic net income or (loss) per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if such additional shares were dilutive. Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately 3.6 million and 2.2 million shares of common stock were outstanding at December 31, 2021 and 2020, respectively, but were excluded from the computation of diluted net loss per share at December 31, 2021 due to the anti-dilutive effect on net loss per share. For the Years Ended December 31, 2021 2020 Net Income (Loss) $ ( 4,435,499 ) $ 4,391,166 Adjustments for convertible debt - as converted Interest on convertible debt - 40,689 Net income (loss) attributable to common shareholders $ ( 4,435,599 ) $ 4,431,855 Weighted average number of shares of common stock outstanding: Basic 17,538,994 16,512,126 Diluted 17,538,994 18,757,509 Net income (loss) attributable to common shareholders per share: Basic $ ( 0.25 ) $ 0.27 Diluted $ ( 0.25 ) $ 0.23 F-13 Table of Contents The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented: For the Years Ended December 31, 2021 2020 Numerator: Net Income (Loss) $ ( 4,435,599 ) $ 4,391,166 Denominator: Basic weighted-average shares 17,538,994 16,512,126 Effect of dilutive securities Warrants - 2,049,133 Convertible Debt - - Options - 132,500 Preferred Stock - 63,750 Diluted Weighted Average Shares 17,538,994 18,757,509 Net Income (Loss) Per Common Share: Basic $ ( 0.25 ) $ 0.27 Diluted $ ( 0.25 ) $ 0.23 Note: Warrants, options and preferred stock for the years ended December 31, 2021 are not included in the computation of diluted weighted average shares as such inclusion would be anti-dilutive. Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations. We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. Title and risk of loss generally pass to our customers upon shipment. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from Customers. Disaggregation of Revenue The following table presents our revenues disaggregated by revenue source. F-14 Table of Contents 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 ) 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 ) 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 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. 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. F-15 Table of Contents The valuation methodology used to determine the fair value of options and warrants issued as compensation during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment. On July 7, 2017, our shareholders approved the 2016 Equity Incentive Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 2,000,000 shares of common stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of common stock for numerous reasons, including, but not limited to, shares of common stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award, and awards under the 2016 Plan are expressly conditioned upon such agreements. For the years ended December 31, 2021 and 2020, we issued 50,000 and 50,000 shares of common stock, respectively, out of the 2016 Plan. 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. Advertising and Promotional Expenses We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses included in selling expenses for the years ended December 31, 2021 and 2020 were approximately $ 701,000 and $ 276,000 , respectively. Research and Development Expenses We expense research and development expenses in the period in which they are incurred. For the years ended December 31, 2021 and 2020, research and development expenses were approximately $ 573,000 and $ 455,000 , respectively. Business Segments We currently have one reportable business segment due to the fact that we derive our revenue primarily from one product. A breakdown of revenue is presented in “Revenue Recognition” in Note 2 above. F-16 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. NOTE 3. INVENTORIES Inventories consist of the following at: December 31, 2021 December 31, 2020 Finished goods $ 4,293,080 $ 3,404,025 Raw Materials 450,200 377,490 $ 4,743,280 $ 3,781,515 NOTE 4. VENDOR DEPOSITS On December 31, 2021 and December 31, 2020, we maintained vendor deposits of $288,586 and $388,712, respectively, for open purchase orders for inventory. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at: December 31, 2021 December 31, 2020 Furniture and fixtures $ 357,236 $ 357,236 Equipment 1,688,236 1,580,743 Vehicles 60,703 60,703 Computer and software 232,017 203,704 Leasehold improvements 386,120 386,120 Tenant Improvement Allowance 405,000 405,000 Capitalized Costs in Progress – Tooling and Molds 376,864 - 3,506,176 2,993,507 Less: Accumulated depreciation 2,017,857 1,695,404 $ 1,488,319 $ 1,298,103 For the years ended December 31, 2021 and 2020, depreciation was $ 283,259 and $ 342,523 , respectively. For the years ended December 31, 2021 and 2020, amortization of tenant improvement allowance was $ 39,194 and was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations. NOTE 6. INTANGIBLE ASSETS Intangible assets consist of patents and trademarks related to our Binary Ionization Technology. We amortize the patents over the estimated remaining lives of the related patents. The trademarks have an indefinite life. Amortization expense was $ 11,406 and $ 377,237 for the years ended December 31, 2021 and 2020, respectively. F-17 Table of Contents Definite life intangible assets consist of the following: December 31, 2021 December 31, 2020 Intellectual Property and Patents $ 3,065,584 $ 3,000,012 Less: Accumulated Amortization 2,868,397 2,856,991 Patents, net $ 197,187 $ 143,021 Indefinite life intangible assets consist of the following: Trademarks 759,097 578,895 Total Intangible Assets, net $ 956,284 $ 722,916 Approximate future amortization is as follows: Approximate future amortization is as follows: Year Ended : Amount December 31, 2022 10,000 December 31, 2023 10,000 December 31, 2024 10,000 December 31, 2025 10,000 December 31, 2026 10,000 Thereafter 147,000 $ 197,000 NOTE 7. LEASES In April 2018, we entered into a 10 -year lease agreement for a new 9,000 -square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement was scheduled to commence on December 1, 2018 or when the property was ready for occupancy. The agreement provided for annual rent of $ 143,460 , an escalation clause that increases the rent 3 % year over year, a landlord tenant improvement allowance of $ 405,000 and additional landlord work as discussed in the lease agreement. We took occupancy of the property on December 17, 2018 and the lease was amended in March 2019 to provide for a 4-month rent holiday and a commencement date of April 1, 2019. A 7 % discount rate was determined using used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The balances for our operating lease where we are the lessee are presented as follows within our consolidated balance sheet: Operating leases: December 31, 2021 December 31, 2020 Assets: Operating lease right-of-use asset $ 583,271 $ 631,527 Liabilities: Current Portion of Long-Term Operating Lease $ 91,775 $ 81,223 Long-Term Operating Lease, Net of Current Portion 861,415 953,190 $ 953,190 $ 1,034,413 The components of lease expense are as follows within our consolidated statement of operations: For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 Operating lease expense $ 157,315 $ 157,315 F-18 Table of Contents Other information related to leases where we are the lessee is as follows: December 31, 2021 December 31, 2020 Weighted-average remaining lease term: Operating leases 7.25 years 8.25 years Discount rate: Operating leases 7.00 % 7.00 % Supplemental cash flow information related to leases where we are the lessee is as follows: For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities: $ 151,088 $ 146,688 As of December 31, 2021, the maturities of our operating lease liability are as follows: Year Ended: Operating Lease December 31, 2022 $ 155,621 December 31, 2023 160,290 December 31, 2024 165,098 December 31, 2025 170,051 December 31, 2026 175,153 Thereafter 399,978 Total minimum lease payments 1,226,191 Less: Interest 273,001 Present value of lease obligations 953,190 Less: Current portion 91,775 Long-term portion of lease obligations $ 861,415 NOTE 8. CAPITALIZED SOFTWARE DEVELOPMENT COSTS In accordance with ASC 985-20 we capitalized certain software development costs associated with updating our continuing line of product offerings. Capitalized software development costs consist of the following at: December 31, 2021 December 31, 2020 Capitalized Software Development Costs $ 125,704 $ 125,704 Less: Accumulated Amortization ( 115,229 ) ( 73,327 ) $ 10,475 $ 52,377 Amortization expense for the years ended December 31, 2021 and 2020 was $ 41,900 and $ 41,900 , respectively. NOTE 9. CLOUD COMPUTING SERVICE CONTRACT In May 2020 we entered into a cloud computing service contract with a vendor. The contract provides for annual payments in the amount of $ 30,409 and has a term of 5 years. The annual contract payments are capitalized as a prepaid expense and amortized over a twelve-month period. We have incurred implementation costs of $ 66,857 in connection with the cloud computing service contract which have been capitalized in prepaid expenses and other assets as of December 31, 2021. In accordance with ASU No. 2018-15, such implementation costs are being amortized over the remaining contract terms beginning January 1, 2021, which was when the cloud-based service contract was placed in service. Amortization expense for the years ended December 31, 2021 and 2020 were $ 14,232 and $ 17,745 , respectively. F-19 Table of Contents NOTE 10. SHAREHOLDERS’ EQUITY Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up by us before any payment is made to the holders of our common stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock. Reverse Stock Split On September 9, 2020, the Board approved a reverse stock split of our common stock and our Convertible Series A Preferred Stock, in each case, at a ratio of 1-for-8 and without any change to the respective par value thereof (the “Reverse Stock Split”), and, on September 10, 2020 , we filed an Articles of Amendment to our Articles of Incorporation with the Department of State of the State of Florida to effect the Reverse Stock Split. The Reverse Stock Split became effective as of September 10, 2020. All per-share and share amounts have been retroactively restated. Convertible Series A Preferred Stock Our authorized Convertible Series A Preferred Stock, $ 0.01 par value, consists of 1,000,000 shares. At December 31, 2021 and 2020, there were 63,750 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock. Convertible Series B Preferred Stock Our authorized Convertible Series B Preferred Stock, $1,000 stated value, 7.5% cumulative dividend, consists of 4,000 shares. At December 31, 2021 and 2020, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock. Common Stock During the year ended December 31, 2020, we issued 50,000 shares of common stock valued at $ 48,000 to members of our Board (see Note 13). During the year ended December 31, 2020, we issued 500 shares of common stock valued at $ 2,190 to a consultant. In March 2020, 1,041,667 shares of common stock were issued in connection with the conversion of convertible notes payable aggregating $ 4,500,000 . In March 2020, 10,417 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $ 57,500 . In May 2020, 2,500 shares of common stock were issued in connection with the exercise of options for which we received proceeds of $ 1,000 . In June 2020, 26,940 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $ 62,500 . In July 2020, 26,940 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $ 62,500 . In October 2020, 12,500 shares of common stock were issued to our CFO in connection with the exercise of warrants for which we received proceeds of $ 30,000 . F-20 Table of Contents In January 2021, we issued 50,000 shares of common stock valued at $ 228,000 to members of our Board (see Note 12). In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering and issued 1,434,721 warrants 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 estimated 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. In addition, we issued 172,167 warrants to the placement agent which have a term of five years and an exercise price of $ 2.18 . Stock Options In January 2020, we issued two options to purchase an aggregate of 31,250 shares of common stock to our Chief Operating Officer at an exercise price of $ 0.80 and $ 0.96 per share pursuant to her employment agreement with us. The options were valued at a total of $ 23,595 and have a term of 5 years. We utilized the Black-Scholes method to fair value the options received by the COO with the following assumptions: volatility, 135 %; expected dividend yield, 0 %; risk free interest rate, 1.64 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the options was $0.72 and $ 0.80 . The value of the stock option was included in accrued expenses at December 31, 2019. In October 2020, we issued options to purchase an aggregate of 31,250 shares of common stock to our Chief Operating Officer at an exercise price of $ 7.06 per share pursuant to her employment agreement with us. The options were valued at a total of $ 202,104 and have a term of 5 years. We utilized the Black-Scholes method to fair value the options received by the COO with the following assumptions: volatility, 154 %; expected dividend yield, 0 %; risk free interest rate, 0.67 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the options was $ 6.47 . In December 2021, we issued options to purchase an aggregate of 10,500 shares of common stock to employees at an exercise price of $ 1.93 per share. The options were valued at a total of $ 18,354 and have a term of 5 years. We utilized the Black-Scholes method to fair value the options received by the employees with the following assumptions: volatility, 156 %; expected dividend yield, 0 %; risk free interest rate, 1.25 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the options was $ 1.75 . The following table summarizes stock options outstanding as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Outstanding, beginning of period 132,500 $ 2.72 77,500 $ 2.56 Granted 10,500 1.93 62,500 3.96 Exercised - - ( 2,500 ) 0.40 Expired - - ( 5,000 ) 16.80 Outstanding, end of period 143,000 $ 2.66 132,500 $ 2.72 F-21 Table of Contents Options outstanding and exercisable by price range as of December 31, 2021 were as follows: Outstanding Options Average Weighted Exercisable Options Range Number Remaining Contractual Life in Years Number Weighted Average Exercise Price $ 0.80 27,500 3.20 27,500 $ 0.80 $ 0.88 31,250 2.01 31,250 $ 0.88 $ 0.96 25,000 2.02 25,000 $ 0.96 $ 1.93 10,500 4.96 10,500 $ 1.93 $ 2.16 5,000 3.00 5,000 $ 2.16 $ 4.40 12,500 4.10 12,500 $ 4.40 $ 7.06 31,250 3.75 31,250 $ 7.06 143,000 2.89 143,000 $ 2.66 Stock Warrants In January 2020 we issued a warrant to purchase 156,250 shares of common stock to our Chief Executive Officer at an exercise price of $ 1.20 per share pursuant to an employment agreement. The warrant was valued at $ 164,201 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 136 %; expected dividend yield, 0 %; risk free interest rate, 1.64 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.04 . In January 2020 we issued a warrant to purchase 5,208 shares of common stock to an employee at an exercise price of $ 0.96 per share. The warrant was valued at $ 3,594 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 135 %; expected dividend yield, 0 %; risk free interest rate, 1.58 %; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 0.72 . The value of the warrants was expensed in the fourth quarter of 2019 and included in accrued expenses at December 31, 2019. In February 2020 we issued a warrant to purchase 18,750 shares of common stock to an employee at an exercise price of $ 1.20 per share. The warrant was valued at $ 18,571 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 155 %; expected dividend yield, 0 %; risk free interest rate, 1.64 %; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $ 0.96 . In April 2020 we issued a warrant to purchase 12,500 shares of common stock to our Chief Executive Officer at an exercise price of $ 4.00 per share pursuant to an employment agreement. The warrant was valued at $ 49,693 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . In April 2020 we issued a warrant to purchase 6,250 shares of common stock to our Chief Operating Officer at an exercise price of $ 4.00 per share pursuant to an employment agreement. The warrant was valued at $ 24,846 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Operating Officer with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . In April 2020 we issued a warrant to purchase 6,250 shares of common stock to our Chief Financial Officer at an exercise price of $ 4.00 per share pursuant to an employment agreement. The warrant was valued at $ 24,846 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Financial Officer with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . F-22 Table of Contents In April 2020 we issued a warrant to purchase 3,750 shares of common stock to a consultant at an exercise price of 4.00 per share. The warrant was valued at $ 14,908 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the consultant with the following assumptions: volatility, 173 %; expected dividend yield, 0 %; risk free interest rate, 0.68 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 4.00 . In August 2020 we issued a warrant to purchase 893 shares of common stock to a consultant at an exercise price of $ 8.40 per share. The warrant was valued at $ 6,372 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the consultant with the following assumptions: volatility, 166 %; expected dividend yield, 0 %; risk free interest rate, 0.13 %; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $ 7.13 . In August 2020 we issued a warrant to purchase 595 shares of common stock to a consultant at an exercise price of $ 8.40 per share. The warrant was valued at $ 4,249 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the consultant with the following assumptions: volatility, 166 %; expected dividend yield, 0 %; risk free interest rate, 0.13 %; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $ 7.14 . In October 2020 we issued a warrant to purchase 375,000 shares of common stock to our Chief Executive Officer at an exercise price of $ 6.95 per share pursuant to an employment agreement. The warrant was valued at $ 2,621,196 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 162 %; expected dividend yield, 0 %; risk free interest rate, 0.67 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 6.99 . On February 11, 2021, we agreed to amend (the “Warrant Amendment”) the warrant to purchase 125,000 shares of TOMI common stock, par value $0.01 (the “Common Stock”), issued by TOMI to Dr. Halden S. Shane, TOMI’s Chief Executive Officer and a director on TOMI’s board of directors, on February 11, 2014 (the “Warrant”), to provide TOMI an option to repurchase the Warrant from Dr. Shane at a negotiated price. In connection with the Warrant Amendment, TOMI repurchased the warrant from Dr. Shane (the “Repurchase”) for an aggregate cash consideration of $314,500, representing a 15% discount of the net exercise cash value of the Warrant, which was calculated using the closing price of the Common Stock on the Nasdaq on February 11, 2021 of $5.36, less the exercise price of the warrants in the amount of $2.40. On the same date, the Warrant Amendment and the Repurchase was considered, approved and adopted by a disinterested majority of TOMI’s board of directors. The $ 314,500 charge in connection with the warrant amendment has been included in General and Administrative expenses for the year ended December 31, 2021. In September 2021, we issued 1,434,721 warrants in a private placement in connection with the sale common stock through a registered direct offering. 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. In addition, we issued 172,167 warrants to the placement agent which have a term of five years and an exercise price of $ 2.18 . The following table summarizes the outstanding common stock warrants as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 Number of Warrants Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Outstanding, beginning of period 2,049,133 $ 2.55 2,155,065 $ 3.12 Granted 1,606,888 1.73 585,447 4.97 Exercised - - ( 76,796 ) ( 2.77 ) Expired ( 262,500 ) ( 2.65 ) ( 614,583 ) ( 6.40 ) Outstanding, end of period 3,381,021 $ 2.22 2,049,133 $ 2.55 F-23 Table of Contents Warrants outstanding and exercisable by price range as of December 31, 2021 were as follows: Outstanding Warrants Exercisable Warrants Exercise Price Number Average Weighted Remaining Contractual Life in Years Number Weighted Average Exercise Price $ 0.64 31,250 1.90 31,250 $ 0.64 $ 0.80 158,125 1.76 158,125 $ 0.80 $ 0.96 473,958 0.94 473,958 $ 0.96 $ 1.12 6,250 2.30 6,250 $ 1.12 $ 1.20 175,000 2.88 175,000 $ 1.20 $ 1.36 1,250 0.82 1,250 $ 1.36 $ 1.68 1,434,721 1.75 1,434,721 $ 1.68 $ 2.18 172,167 4.75 172,167 $ 2.18 $ 2.32 523,061 0.18 523,061 $ 2.32 $ 4.00 28,750 8.32 28,750 $ 4.00 $ 6.95 375,000 8.75 375,000 $ 6.95 $ 8.40 1,488 1.62 1,488 $ 8.40 3,381,021 3.66 3,381,021 $ 2.22 There were no unvested warrants outstanding as of December 31, 2021. NOTE 11. COMMITMENTS AND CONTINGENCIES Legal Contingencies We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operations or cash flows. In addition, from time to time, we may have to file claims against parties that infringe on our intellectual property. Product Liability As of December 31, 2021 and 2020, there were no claims against us for product liability. COVID-19 Pandemic The COVID-19 pandemic has increased the global demand for disinfection products and services that help prevent the spread and transmission of COVID-19 virus. The Company’s products have been identified as an essential disinfectant and decontamination vendor by various agencies and countries, which have materially affected its business and results of operations. The Company experienced a substantial increase in demand for our products and services in 2020 due to the pandemic. Throughout 2021, the Company experienced a reduction of demand due to various factors, including the closure of our major customers’ business operations due to the pandemic, which resulted in the suspension of many of its ongoing long-term projects. It is difficult to predict how COVID-19 pandemic will affect the Company’s financial performance in the remainder of 2022, as the global economy gradually reopens, customers adjust and change their operations, and the Company implements new marketing and sales strategies in response. NOTE 12. CONTRACTS AND AGREEMENTS Executive Agreements Halden S. Shane On September 22, 2020, we entered into a three-year employment agreement with Dr. Shane, effective October 1, 2020. The agreement provides for a base annual salary of $ 500,000 . The agreement also provides for a signing bonus of 375,000 warrants. Dr. Shane is also entitled to a cash performance bonus and an annual issuance of an option to purchase 31,250 shares of common stock from the 2016 Plan at the discretion of the Board. The agreement also provides that we will reimburse Dr. Shane for the expenses associated with the use of an automobile up to $ 750 a month. The term of the agreement is three years. F-24 Table of Contents In the event Dr. Shane is terminated as CEO as a result of a change in control, Dr. Shane will be entitled to a lump sum payment of two years’ salary at the time of such termination. Elissa J. Shane On October 1, 2020, we entered into an employment agreement with Elissa J. Shane, effective October 1, 2020. Pursuant to her employment agreement, Ms. Shane will receive an annual base salary of at least $ 270,000 , subject to annual review and discretionary increase by the Compensation Committee of the Board. Ms. Shane is eligible to receive an annual cash bonus and other annual incentive compensation. The agreement originally provided for a grant of 93,750 warrants. Additionally, in connection with the execution of her employment agreement, on October 1, 2020, we issued Ms. Shane a warrant to purchase 93,750 shares of Common Stock at an exercise price of $6.17 per share. These provisions were subsequently amended to provide for the issuance to Ms. Shane of 31,250 options from the 2016 Equity Plan at the closing price of $ 7.06 on the date of grant in lieu of the warrant grant and the 93,750 warrants were cancelled. Ms. Shane acknowledged that the 31,250 options were in full consideration of the amount she was entitled to under the agreement. Her employment agreement also provides that we will reimburse Ms. Shane for reasonable and necessary business and entertainment expenses that she incurs in performing her duties. During the term of her employment, Ms. Shane will also be entitled to up to four weeks of paid vacation time annually, which will accrue up to six weeks, and to participate in our benefit plans and programs, including but not limited to all group health, life, disability and retirement plans. Ms. Shane is also entitled to the sum of $ 1,000 per month as a vehicle allowance. The initial term of her employment agreement is three years , which may be automatically extended for successive one-year terms, unless either party provides the other with 120 days’ prior written notice of its intent to terminate the agreement. In the event Ms. Shane is terminated as COO as a result of a change in control, Ms. Shane will be entitled to a lump sum payment of one and a half years’ salary at the time of such termination. Agreements with Directors In December 2017, we increased the annual fee to the members of our Board to $ 40,000 , to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee we increased to $ 45,000 , also to be paid in cash on a quarterly basis. Director compensation also includes the annual issuance of our common stock. For the year ended December 31, 2020, we issued an aggregate of 50,000 shares of common stock that were valued at $ 48,000 to members of our Board. For the year ended December 31, 2021, we issued an aggregate of 50,000 shares of common stock that were valued at $ 48,000 to members of our Board. Manufacturing Agreement In June 2020 we entered into a manufacturing agreement with Planet Innovation Products, Pty Ltd (“PI”). The agreement does not provide for any minimum purchase commitments and is for a term of three years . The agreement also provides for a warranty against product defects. F-25 Table of Contents Cloud Computing Service Contract In May 2020 we entered into an agreement for a cloud computing service contract. The contract provides for annual payments in the amount of $ 30,409 and has a term of 5 years. Approximate minimum payments under the contract are as follows: Year Ended : Amount December 31, 2022 $ 30,000 December 31, 2023 30,000 December 31, 2024 30,000 December 31, 2025 - $ 90,000 Other Agreements TOMI Service Network (“TSN”) is a national service network composed of existing full-service restoration industry specialists that have entered initially into licensing agreements with us to become Primary Service Providers (“PSPs”). The licensing agreements originally granted protected territories to PSPs to perform services using our SteraMist ® platform of products and also provide for potential job referrals to PSPs whereby we are entitled to referral fees. Additionally, the agreement provides for commissions due to PSPs for equipment and solution sales they facilitate to other service providers in their respective territories. As part of these agreements, we are obligated to provide to the PSPs various training, ongoing support and facilitate a referral network call center. As of December 31, 2021, we have 205 network companies in TSN. The nature and terms of our TSN agreements may represent multiple deliverable arrangements. Each of the deliverables in these arrangements typically represent a separate unit of accounting. There is no exclusivity in our TSN network. NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following at: December 31, 2021 December 31, 2020 Commissions $ 228,665 $ 151,709 Payroll and related costs 241,434 84,000 Director fees 31,250 41,250 Sales Tax Payable 19,411 9,784 Income Taxes Payable (Note 16) - 77,000 Accrued warranty (Note 14) 68,000 68,000 Other accrued expenses 75,848 70,106 Total $ 664,608 $ 501,849 NOTE 14. ACCRUED WARRANTY Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. The warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate warranty costs based on historical warranty claim experience. The following table presents warranty reserve activities at: December 31, 2021 December 31, 2020 Beginning accrued warranty costs $ 68,000 $ 30,000 Provision for warranty expense 75,618 101,041 Settlement of warranty claims ( 75,618 ) ( 63,041 ) Ending accrued warranty costs $ 68,000 $ 68,000 NOTE 15. LOAN PAYABLE On April 21, 2020, we received $ 410,700 in loan funding from the Paycheck Protection Program (the "PPP") established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act") and administered by the U.S. Small Business Administration ("SBA"). The unsecured loan (the "PPP Loan") is evidenced by a promissory note of the Company, dated April 21, 2020 (the "Note") in the principal amount of $ 410,700 with City National Bank (the "Bank"), the lender. F-26 Table of Contents Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0 % per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. In May of 2021, the loan principal and related interest was forgiven and we recognized a gain upon debt extinguishment in our statement of operations in the amount of $ 414,583 for the year ended December 31, 2021. NOTE 16. INCOME TAXES The Company’s income tax expense (benefit) consisted of: For the Year Ended December 31, December 31, 2021 2020 Current: Federal $ - $ - State ( 74,000 ) 77,000 Foreign - - ( 74,000 ) 77,000 Deferred: Federal - - State - - Foreign - - - - Total $ ( 74,000 ) $ 77,000 The Company’s net income (loss) before income tax consisted of: For the Year Ended December 31, December 31, 2021 2020 United States $ ( 4,509,585 ) $ 4,468,166 Foreign - - Total $ ( 4,509,585 ) $ 4,468,166 Our income tax expense differed from the amounts computed by applying the United States statutory corporate income tax rate for the following reasons: On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The Tax Act did not give rise to any material impact on the consolidated balance sheets and consolidated statements of operations due to our historical loss position and the full valuation allowance on our net U.S. deferred tax assets. F-27 Table of Contents The reconciliation of taxes at the federal and state statutory rate to our provision for income taxes for the years ended December 31, 2021 and 2020 was as follows: For the Year Ended December 31, December 31, 2021 2020 Income (Loss) before income tax $ ( 4,509,585 ) $ 4,468,166 US statutory corporate income tax rate 28.00 % 28.00 % Income tax expense computed at US statutory corporate income tax rate ( 1,002,844 ) 1,251,086 Reconciling items: Change in valuation allowance on deferred tax assets 1,334,294 ( 2,050,485 ) Provision to prior year tax return ( 60,646 ) - Incentive stock options and warrants 5,139 876,676 Gain Upon Debt Extinguishment ( 116,083 ) Meals and Entertainment - 1,300 Other 25,894 ( 1,577 ) Income tax expense (benefit) $ ( 74,086 ) $ 77,000 Components of our deferred income tax assets (liabilities) are as follows: December 31, December 31, 2021 2020 Deferred tax assets: Reserve for Bad Debt $ 470,000 $ 109,000 Accrued Vacation 81,000 82,000 Warranty Reserve 19,000 19,000 Intangible Assets 404,000 412,000 Operating lease right-of-use liabilities 267,000 290,000 Net operating losses 4,124,000 3,100,000 Valuation Allowance ( 4,941,000 ) ( 3,530,000 ) Deferred Tax Assets 424,000 482,000 Deferred tax liabilities: Operating lease right-of-use assets ( 277,000 ) ( 290,000 ) Property and Equipment ( 147,000 ) ( 192,000 ) ( 424,000 ) ( 482,000 ) Net Deferred Tax Assets and Liabilities $ - $ - Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized; in accordance with ASC guidance for income taxes. As of December 31, 2021, we recorded a valuation allowance of $ 4,941,000 for the portion of the deferred tax assets that we do not expect to be realized. The valuation allowance on our net deferred taxes increased by $ 1,411,000 during the year ended December 31, 2021, primarily due to U.S. deferred tax assets incurred in the current year that cannot be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. For income tax purposes in the United States, we had available federal net operating loss carryforwards (“NOL”) as of December 31, 2021 and 2020 of approximately $ 15,312,000 and $ 11,465,000 respectively to reduce future federal taxable income. For income tax purposes in the United States, we had available state NOL carryforwards as of December 31, 2021 and 2020 of approximately $ 11,881,000 and $ 9,663,000 respectively to reduce future state taxable income. If any of the NOL’s generated prior to 2018 are not utilized, they will expire at various dates through 2037. NOL’s generated after 2017 carry forward indefinitely. There may be certain limitations as to the future annual use of the NOLs due to certain changes in our ownership. F-28 Table of Contents We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2021, and 2020, the management of the Company determined there were no reportable uncertain tax positions. NOTE 17. CUSTOMER CONCENTRATION The Company had certain customers whose accounts receivable balances individually represented 10 % or more of the Company’s accounts receivable. As of December 31, 2021, three customers accounted for 42 % of our gross accounts receivable. As of December 31, 2020, three customers accounted for 36 % of our gross accounts receivable. For the years ended December 31, 2021 and 2020, we had no customers who represented 10 % or more of revenue. NOTE 18. SUBSEQUENT EVENTS Pursuant to the agreement with our Board of Directors, in January 2022, we issued an aggregate of 51,750 shares of common stock valued at approximately $ 54,000 to independent directors of the Board. The agreements with our Board provide for the annual issuance of shares of our common stock. In January 2022 we issued an option to purchase 172,500 shares of common stock to our Chief Executive Officer at an exercise price of $ 1.12 per share pursuant to an employment agreement. The option was valued at $ 190,239 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 151 %; expected dividend yield, 0 %; risk free interest rate, 1.75 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.10 . In January 2022 we issued an option to purchase 57,500 shares of common stock to our Chief Operating Officer at an exercise price of $ 1.12 per share pursuant to an employment agreement. The option was valued at $ 63,413 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 151 %; expected dividend yield, 0 %; risk free interest rate, 1.75 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.10 . In January 2022 we issued an option to purchase 40,000 shares of common stock to our Chief Financial Officer at an exercise price of $ 1.12 per share pursuant to an employment agreement. The option was valued at $ 44,113 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 151 %; expected dividend yield, 0 %; risk free interest rate, 1.75 %; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.10 . F-29