TOMI Environmental Solutions, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guaranteeing future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “TOMI” as used herein refers collectively to TOMI Environmental Solutions, Inc. unless otherwise stated. The following discussion should be read in conjunction with the 2021 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. 0 Quarterly Highlights Business Update The third quarter delivered continued growth in customer sales orders, sequential quarterly growth in revenue and improved financial operating results. In evaluating sales related performance, management analyzes our revenue recognized for GAAP purposes which is presented in our quarterly and annual statement of operations as well our sales orders we receive from customers during those same accounting periods. We define a “sales order” as a document we generate for our internal use in processing a customer order. Our sales orders essentially translate the format of the customer purchase orders we receive from our customers into the format used by us. We also evaluate our “customer sales backlog” which is defined as pending sales orders where revenue has not yet been recognized. Management believes analyzing the sales order and backlog metrics are useful in measuring our overall sales and business development performance as it gauges the overall volume of sales and business development activities. With the current years increase in demand for our Custom Engineered Systems (CES), we have seen our current sales orders and revenue pipeline increase when compared to the same period last year. The increase in customer sales orders has resulted in a customer sales backlog of approximately $2,659,000 as of September 30, 2022. Our customer orders or contracts for mobile equipment, CES systems and iHP services are subject to the delivery timelines requested by our customers which affect the timing of the related revenue recognition. For the three months ended September 30, 2022, we received approximately $2,300,000 in sales orders and/or winning contract bids from our customers, which represents 5% growth when compared to the same prior year period. For the nine months ended September 30, 2022, we have received $7,900,000 in sales orders from including key global fortune 500 customers of which revenue recognition will be upon delivery throughout 2022 and 2023. This represents 25% growth when compared to the first half of 2022. The increase in sales orders is largely attributable to increased demand for our CES as well routine and new iHP Service engagements. A key driver to our longer-term growth is the solid demand for our CES by referrals to the product line hosting tours of current installed systems, continuing brand awareness via our domestic independent manufacturing sales representatives and growing the network of international partners. 27 Table of Contents We have secured several new orders for our iHP CES and expect to receive additional new order in the near future for which revenue will be recognized upon delivery for the remainder of 2022 and 2023. As we install CES units, we can expect to see the increase in solution sales as these units are contracted to be used at set regular schedules. For example, two of the installs currently being manufactured are expected to generate $250,000 in BIT Solution revenue annually starting at the end of the 2023. As of September 30, 2022, our customer sales backlog was as follows: As of September 30, 2022 Expected Revenue Recognition Value of Contracts or Sales Orders Cash Deposits For the Three Months Ending December 31, 2022 For the Year Ending December 31, 2023 Customer Sales Backlog $ 2,659,000 $ 1,155,000 $ 1,434,000 $ 1,225,000 As the market shifted to fully automatic disinfection decontamination, TOMI continues to market and submit bids on CES projects and building the pipeline for these installations. Further, TOMI has expanded bandwidth to meet the demands for the product line and has not been significantly affected by the global supply chain issues. Our customer orders or contracts for CES systems could be subject to vendor and supply chain constraints as well construction and delivery timelines set forth by our customers which could affect the timing of revenue recognition for those orders. Our revenue increased sequentially for the three months ended September 30, 2022 by 20% as compared to the three months ended June 30, 2022 due to increased demand for our SteraMist mobile equipment. Our financial operating results also showed sequential quarterly improvement compared to the second quarter of 2022 with 24% reduction in our loss from operations due to the higher revenue, gross profit and lower operating expenses. The financial operating results for nine months ended September 30, 2022, improved in comparison to the same prior year period as our operating expenses declined by 16%. Our loss from operations for the nine months ended September 30, 2022 improved by 32% when compared to the same prior year periods. Through September 30, 2022, we used approximately $929,000 in cash from operations, an approximate $2,894,000 improvement over the cash used in operations of $3,823,000 during the nine months ended September 30, 2022. The improved cash flow is primarily due to the lower reported loss and cash deposits we received in the current year in connection with deferred revenue as well as inventory purchases in the prior period as our stock was replenished. The deferred revenue is attributable to customer deposits which primarily represent down payments made by our customers for orders that will be recognized into revenue as the projects are completed and delivered. As our customer base grows, we continue to address the need for timely responses to inquiries, questions, orders and support. We have increased staff since our last report, specifically adding members to our customer experience, sales, and technology departments. Recently, TOMI hired a sales director with significant sales experience in the clinical healthcare industry. Part of this background includes using the TOMI SteraMist system during his emergency medical support (EMS) service for the past seven years. Our new sales director is an innovative sales leader with an extensive record of success in developing, supporting, and implementing strategic plans to increase market share and penetration, TOMI expects to increase use of SteraMist in many of its Commercial industries (i.e., Schools, Emergency Services, and Transportation). Another recent sales director hire has worked many years as an independent manufacturing representative with a focus on the Life Science and vivarium market. Since his tenure with TOMI, he has expanded into the food safety industry and is working on opportunities to acquire new customers for our products. TOMI’s new launch of the SteraMist Support Portal now available on desktop as well as via a mobile app provides ease of use for sales support, branding, and assistance to our TOMI Service Network providers, sales representatives, and international distributors and end users. 28 Table of Contents Our manufacturing capacity and capabilities were improved in the first half of 2022 with the addition of ARM Enertech Associates who manufactures our CES in their Pennsylvania facility. Furthermore, our existing manufacturer Planet Innovation has expanded into California providing easier access to our internal technology team and a lower cost in domestic shipment charges. We also added staff to our Technology department with the hiring of an electrical mechanical engineer and an electrical engineer to assist in research & development, prototype testing, and assembly of our products. We anticipate these developments to reduce overall costs and manufacturing lead times. Product Development Our recent products developed and launched are as follows: After the release of the SteraPak, the TOMI technology team quickly began designing new SteraMist products, which include the Select Plus-a hybrid product consisting of the Company’s current Surface Select and Environment systems. The unit will provide enhanced flexibility by using a single applicator to decontaminate full-room to small-space volume while maintaining the size of the current Surface Select unit with more robust process controls. The iHP SteraMist Transport System has been designed for the transportation market, specifically ambulances. The iHP SteraMist Transport System is a timer based fogging system that can be installed semi-permanently or permanently and used for any transport and/or cargo vehicle. It will be an easy-to-use turn-key integration system. The implementation of this product and our patented non-corrosive iHP technology will certainly replace the number one competitor in this marketplace, which uses an extremely harsh chemical. We are currently testing prototypes for each of these two units which will be released before the end of 2022. All SteraMist systems will remain important to the marketplace as they are designed for specific needs and budgets. The Select Surface Unit performs most of the functionality that the Plus offers and is priced at a lower cost, although Select Plus will provide additional options that are appealing to certain customers, such as laboratory and pharmaceutical companies. The SteraPak is a more cost-effective product and designed for residential and commercial real estate including large buildings and public space, any area that needs quick consistent disinfection. There are many new and existing clients that are interested in the SteraPak due to the cost and mobility. In the fourth quarter of 2022, TOMI launched its fourth generation SteraMist Environment System. The system will now be 24 voltages, allowing for universal outlet usage and convert even more of the hydrogen peroxide BIT Solution to hydroxyl radicals thus lowering H 2 O 2 PPM levels allowing for faster turnaround time. In addition, the unit will have eight (8) outputs where four (4) are dedicated to our regular process of Injection, Dwell, and Aeration along with a light beacon status bar and four (4) are programmable to meet the customer needs for any external equipment they may desire to work with the system. In third quarter of 2021, we expanded our SteraMist ® BIT ™ solution product line with a 32-ounce bottle for the SteraPak, and the introduction of a ten (10) liter and five (5) gallon bottle. These three new additions bring the BIT Solution product line to a total of five (5) options provided to our customers, which should also benefit our razor razor-blade business model. We expect these new products and service introductions will positively impact our net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction domestically and internationally. Overview TOMI Environmental Solutions, Inc. (“TOMI”, “we” and “our”) is a global bacteria decontamination and infectious disease control company, providing environmental solutions for indoor surface decontamination through the manufacturing, sales, service and licensing of our SteraMist® brand of products, including SteraMist® BIT™, a low percentage (7.8%) hydrogen peroxide-based fog or mist that uses Binary Ionization Technology (BIT™). Our solution and process are environmentally friendly as the only by-product 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 carbon footprint. Most of our competitors in the disinfection space leave significant by-products and are corrosive. SteraMist is not corrosive, and it does not damage equipment or facilities. 29 Table of Contents Our SteraMist® is a patented technology that produces ionized Hydrogen Peroxide (iHP™) using cold plasma science created under a grant by the United States Defense Advanced Research Projects Agency (DARPA). Our EPA registered BIT™ Solution is composed of a low concentration of hydrogen peroxide converted to iHP™ after passing the trade secret blended solution including its sole active ingredient of 7.8% hydrogen peroxide through an atmospheric cold plasma arc. The newly formed iHP™ fog and mist consists of submicron’s to 3-micron radical particles that are carried throughout the treatment area in a fog or mist moving with the same velocity and characteristics of a gas. This allows the ionized hydrogen peroxide fog or mist to affect all surfaces and air space throughout the targeted treatment area, over, above and beyond the ability of a manual cleaning processes. iHP™ damages pathogenic organisms through the oxidation of proteins, carbohydrates, and lipids. SteraMist® no-touch disinfection and or decontamination treat areas mechanically, causing cellular disruptions and/or dysfunctions resulting in a 6-log (99.9999%) and greater kill or inactivation of all pathogens in the treatment area. This is a science that world needs to follow. Under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), we are required to register with the EPA and certain state regulatory authorities as a seller of disinfectants. In June 2015, SteraMist® BIT™ was registered with the EPA as a hospital-healthcare disinfectant and general broad-spectrum surface disinfectant for use as a misting/fogging agent. SteraMist® BIT™ now holds EPA registrations (# 90150-2) for mold control, and air and surface remediation (# 90150-1). In February 2016, we expanded our label with the EPA to include Clostridium difficile Spores and MRSA, as well as the influenza (Avian) virus h1n1, which we believe has better positioned us to penetrate all industries including the biodefense and healthcare industry. In August 2017, our EPA label was further expanded to include efficacy against Salmonella and Norovirus. As of January 27, 2017, our technology is one of 53 of the EPA’s “Registered Antimicrobial Products Effective against Clostridium difficile Spores”, as published on the EPA’s K List. Further, in December 2017, SteraMist® was included in the EPA’s list G (Norovirus), L (Ebola) and M (Avian Flu). In March 2020, our EPA label was further amended to include Emerging Viral Pathogens claims, thus meeting the criteria against Enveloped viruses and Large Non-enveloped viruses and included on List N (Emerging Viral Pathogens including SARS-CoV-2). In 2021, the EPA granted SteraMist® BIT™ 0.35% hydrogen peroxide – EPA registration number 90150-3. SteraMist® BIT™ brings to the world a mechanical and automated method of cleaning using a game-changing technology and EPA registered Hospital-HealthCare disinfectant providing an upgrade to existing disinfecting and cleaning protocols while limiting liability in a facility when it comes to resistant infectious pathogens. We maintain this registration in all fifty (50) states, Washington DC, Canada, and approximately forty (40) other countries receive our product. Markets Our SteraMist ® products are designed to address a wide spectrum of industries using iHP ™ . Our operations consist of five main divisions based on our current target industries: Hospital-HealthCare, Life Sciences, TOMI Service Network (TSN), Food Safety and Commercial. We continue to offer our customers a wide range of innovative mobile products designed to be easily incorporated into their existing disinfection and decontamination procedures and protocols. Our newly released SteraPak, among other product lines will allow us to progress further into market share, specifically for our Life Science, Hospital-HealthCare, TSN, and Commercial divisions. Additionally, we offer integrated facility equipment installations known as Custom Engineered Systems (CES), routine & emergency iHP Corporate Service, essential training packages, validations and qualifications, and onsite performance maintenance requests. Each of these are structured to address the unique disinfection and decontamination needs of our customers worldwide regardless of industry requiring or requesting SteraMist ® disinfection decontamination. A brief overview of the target industries is presented below: Life Sciences The SteraMist ® Environment System, Custom Engineered Systems (CES), the SteraMist ® Select Surface Unit (Plus), SteraBox, 90 Degree Applicator and our iHP ™ Corporate Service Division, are designed to be tailored to provide a complete solution to address the regulatory inspections of disinfecting/decontaminating and Installation Qualification (IQ)-Operational Qualification (OQ)–Performance Qualification (PQ) validation processes within the life sciences industry. 30 Table of Contents Long term, ongoing projects and validations continue to be a focus and lead to proposals and interest for our CES permanent decontamination room. As these are longer lead-time sales and manufactured upon order that can take months to design, procure, assemble, and implement, we expect installations to have impact to our results in 2022. TOMI’s iHP service department continues to grow with new and existing customers in several divisions. In the life science sector, TOMI’s iHP service department has kept its relationships with large pharmaceuticals (Pfizer/ThermoFisher) as well as adding several smaller life science companies (ForDoz/Lonza) to a regular decontamination schedule. In addition to these productions’ facilities, TOMI has treated four BSL-3 research laboratories in all parts of the country within the last two months (UNM/UNC/Bioqual/Scripps). The food safety department steadily gains traction as several plant/produce companies have expressed interest as new and emerging bacteria, toxins, and fungi hamper production. Finally, the commercial division is a stable source of revenue for TOMI and its service network as many public facilities are feeling the effects of Hurricane Ian. For 2022 and beyond, TOMI expects growth in SteraMist CES bids and the manufacturing and implementation of these fully automated decontamination systems. The installed CES will also result in increased solution sales for Life Sciences as the CES’s are used at regular intervals. The first CES system was completed in 2016 for Dana Farber Cancer Institute, as Dana Farber was designing a new vivarium and had the opportunity to integrate several new technologies to advance overall efficiency, quality, and design. One such technology was the use of our ionized Hydrogen Peroxide (iHP) decontamination. TOMI’s CES is an automated system that can be fully integrated into any company’s infrastructure, enabling decontamination, without burdening manual use and with the collaboration of current premier customers and partners, TOMI has further perfected the system. The CES eliminates issues such as human error, guarantees accuracy that is unmatched by competitors, and decreases a client’s labor cost and downtime, and in a short time the CES may make up a majority of TOMI’s revenue. Since its launch, SteraMist’s CES has become a leading solution to growing customer demands. Hospital-Healthcare The SteraMist ® line of products, specifically the SteraMist ® Surface Unit and SteraMist ® Total Disinfection Cart, are our main solutions to aid our Hospital-HealthCare customers in providing high quality of safety to their patients and personnel by disinfecting operating rooms, pharmacies, ambulances, and emergency environments throughout a healthcare facility. TOMI’s latest product, the SteraPak, further assists healthcare communities with an easy-to-use, cordless disinfection solution, creating a more mobile solution. Our customers that have successfully adopted our technology in Hospital-Healthcare facilities, have recurring revenue and reorder rates of our BIT ™ Solution. We plan to continue to expand our marketing, advertising and educational campaigns targeted at the Hospital-Healthcare marketing to grow our customer base and increase adoption of our SteraMist ® line of products. Our team of technicians and representatives train, maintain, and service capital equipment throughout the world for our Hospital-HealthCare customers. As our Training and Implementation department expands, we expect continued growth and purchases in our Hospital-HealthCare division. TOMI provides protocol development and implementation of SteraMist ® as it is critical in the healthcare setting, including pandemic preparedness. TOMI anticipates expansion of current HealthCare customers to follow the model of Gila River Health Care. Gila River is one of TOMI’s largest Healthcare customers owning a total of fourteen (14) Surface Units and six (6) SteraPaks. The Gila River Indian Community (GRIC) is an Indian reservation in Arizona that is made up of seven (7) districts and is home to the Akimel O’oodham (Pima) and the Pee-Posh (Maricopa) tribes. Gila River Health Care, a premier Native American healthcare system, provides high quality patient care, delivering a wide variety of medical services such as general surgery, dental, and emergency medicine, as well as associated health services such as pharmacy and laboratory operations, skilled nursing, rehabilitation, and medical transport. TOMI Service Network The TOMI Service Network, or TSN, is an expansive network consisting of professionals throughout North America who are exclusively licensed and trained to use the SteraMist ® products. With the purchase of SteraMist and joining TSN, TOMI trains and services a wide array of professional remediation companies in the use of SteraMist ® throughout the TSN division. TSN allows for increased accessibility and brand awareness of iHP ® services to facilities in need of local routine and emergency disinfection and decontamination. 31 Table of Contents The TOMI Service Network (TSN) division is addressing the cleaning protocols that have changed permanently due to the COVID-19 pandemic, and our network is expected to play a significant role in facilitating and maintaining these protocols throughout the United States and Canada. The urgency for emergency disinfection services is starting to pick up due to employees returning to work, increasing number of contagious variants and the potential of monkeypox becoming more of a world concern. Our education and support of such services that TOMI personnel provide to our members creates an advantage by maintaining strong business relationships while they service thousands of SteraMist customers, and the world returns to the new normal which will always focus on emerging pathogens. Our SteraPak release is an important factor for this market that we will increase the new member onboarding. Current members are showing interest in purchasing the SteraPak to expand their current SteraMist offerings. Food Safety Food Safety presents an opportunity for growth with continued product research and compliance testing. With the food safety industry in North America coming under closer scrutiny with the implementation and enforcement of new and established guidelines. This concentration has previously been approved by the USDA and FDA for direct food and crop application and will allow SteraMist ® to expand use sites beyond food processing machinery, restaurants, and food contact areas. This will assist compliance with the newly established Food Safety Modernization Act guidelines set in place by the FDA, as well as the Safe Food for Canadians Act and Safe Food for Canadians Regulations in Canada. Today’s Geopolitical aspects of farming and ranching has created an extra layer of concern for the protection of our global limited food supply including food transportation. TOMI continues to work with premium companies in testing and validating SteraMist ® technology in the Food Safety and seed industries. In 2022, we look to make further progress in enhancing brand awareness by promoting and marketing this division. We are receiving an increase in inquiries within the Food Safety division directly from these efforts. With the global population explosion, we anticipate an increase in the demand for a mechanical way to disinfect our food supply. Every day there are news articles around the world pertaining to the contamination of food supply. The many published articles that the USDA in cooperation with TOMI have demonstrated that our technology offers a consistent alternative to the decade’s old chemical disinfection process. SteraMist will deliver more consistent and quicker results in all areas of our food supply- From Farm to Market, Processing to packaging and Storage to delivery. We plan on pursuing all these avenues. With the continued testing and need for the market coupled with our new .35% label, should make pursuing these opportunities successful. In addition, our solution and process are environmentally friendly in that the by-product of SteraMist is only oxygen and water in the form of humidity. We have our solution listed on OMRI and labeled as organic. Most disinfectants leave residue on furniture, objects, and foods. SteraMist does not leave any chemical residue on any surface. We have a very low carbon footprint, if any. Commercial Our Commercial division includes but is not limited to use sites such as aviation, airports, police and fire, prisons, manufacturing companies, automobile, military, cruise ships, shipping ports, preschool education, primary and secondary schools, colleges including dormitories, all modes of public and private transportation, regulatory consulting agencies, retail, housing and recreation, and of course emergency preparedness for counties and cities to use SteraMist ® throughout their community. The SteraPak is a popular product for this division because customers are looking for a more cost-effective solution compared to the current disinfectants on the market. As quick and mobile disinfection solution is preferred in this industry, we believe that SteraPak will generate customer interest and create sales opportunities. Currently our customers are purchasing our SteraPak in all of our divisions to provide quick disinfection throughout various sites in their facilities. The recent increase in Monkey Pox is creating again more interest in better disinfection like the needs of COVID in 2020-2021. 32 Table of Contents Business Highlights and Recent Events Revenues: We have received $2,300,000 and $7,900,000 in customer sales orders for the three and nine months ended September 30, 2022, respectively, of which we expect $2,659,000 will be recognized as revenue in the remainder of 2022 through our next calendar year 2023. This represents 5% and 25% growth in sales orders received for the three and nine months ended September 30, 2022 when compared to the same prior year accounting periods. The growth in our orders was due to increased demand for our mobile equipment and CES from both the life science and hospital sectors. Total revenue for the three months ended September 30, 2022 and 2021, was $1,760,000 and $2,205,000, respectively, representing a decrease of $445,000, or 20% compared to the same prior year period. During the third quarter of 2022, we received customer sales orders of $2,300,000 which represents 5% growth over the same prior year period and our deferred revenue increased $548,000. For the nine months ended September 30, 2022 and 2021, our total revenue was $5,527,000 and $5,744,000, respectively, representing a decrease of $217,000, or 4% compared to the same prior year period. The decline in revenue is due to the customer-imposed delivery restrictions for equipment and CES orders and the related impact to the timing of our revenue recognition and deferred revenue. During the nine months ended September 30, 2022, we received $7,900,000 in customer sales orders, which represents 25% growth of the same prior year period and our deferred revenue increased $1,149,000. As of September 30, 2022, our balance sheet has deferred revenue of $1,155,000 which represents down payments on future equipment and CES orders that are expected to be recognized into revenue in future accounting periods. We believe that we possess the best technologies in the world in the disinfection and decontamination space. The COVID-19 pandemic has provided us with the opportunity and motivation to implement a clear strategy to develop and manufacture additional products to add to our portfolio. In addition, we continue to move our BIT technology as a standard in disinfection and decontamination globally, which we believe will lead to increased market share, profitability, and capability strength. Our products are an environmentally friendly solution and process which address the concerns of sustainability. Customers are requesting and discussing the positive results of our product and the environmentally friendly results compared to the caustic results of other disinfectants. SteraMist has a long past with fighting pandemics and outbreaks and implementing SteraMist for emergency preparedness is vital. As coronavirus has taken the world by surprise, history has shown that other pandemics and viruses are deemed to follow. Using a proven and trusted disinfectant, SteraMist, for emergency outbreaks and daily for preventative maintenance will alleviate the threat of infections from spreading and stop a possible outbreak. 2022 Events: As conferences and tradeshows are reopening in 2022 companies to exhibit live, TOMI will be attending multiple shows across the country. It is critical for TOMI to perform live demonstrations to showcase the difference between our SteraMist iHP technology and our competitors. TOMI looks forward to making a large impact with live demonstrations of SteraMist disinfection technology throughout our multiple divisions. On August 4, 2022, we announced received multiple purchase orders for TOMI’s iHP Custom Engineered System (CES). On August 8, 2022, we announced that SteraMist provides protection against Monkeypox and other pathogens as the world combats increasing frequency of outbreaks. On August 10, 2022, we announced SteraMist disinfection continues to make advancements in the Food Safety Industry and presented our products at the International Association for Food Production Annual Meeting, where renowned food safety, academic, and governmental professionals attended. The Company demonstrated its SteraMist iHP cold plasma technology and how SteraMist preserves the shelf life of produce. A poster summarizing the fourth and latest published paper by the USDA was presented at the meeting, which stated that “H 2 O 2 residues on the surface of tomato fruit decreased rapidly after the treatment.” Disinfecting food while leaving no residue on food is particularly important to maintain the quality and freshness of the product, and we believe that SteraMist, which uses H 2 O 2 solutions, is capable of providing this important advantage. 33 Table of Contents On September 8, 2022, we announced that Dr. Halden Shane, Chief Executive Officer, will be presenting virtually at the H.C. Wainwright 24 th Annual Global Investment Conference to be held September 12-14, 2022. On September 27, 2022, we announced that a U.S. based multinational pharmaceutical company is expanding the use of SteraMist decontamination products, advancing SteraMist as this pharmaceutical company’s decontamination standard. On October 10, 2022, we announced purchase order for an iHP Custom Engineered System (CES) from Avid Bioservices, Inc. (Avid) for implementation in Avid’s new purpose-built viral vector development and manufacturing facility in Costa Mesa, California. On October 18, 2022, we announced that SteraMist is to be utilized by a world-renowned influenza vaccine company that focuses on innovative research, transformative technologies, production, and distribution. On October 20, 2022, we announced that the U.S. Department of Health and Human Services (HHS), the largest biomedical research agency in the world, has purchased SteraMist disinfection systems for its Africa-based Biosafety Level 3 Laboratory (BSL-3) laboratory. Research Studies and Publications: TOMI continues to be active in the global market, using registrations to expand sales opportunities. Currently, TOMI is in the registration process for India, and renewal to meet new requirements in the Philippines. Both markets offer excellent potential due to interest in the TOMI suite of decontamination/disinfection solutions. TOMI is in the annual process of self-audit, where all SOPs are reviewed and updated as needed, and all compliments and complains and requests for changes/new equipment are evaluated. TOMI has successfully completed a second 24-month storage stability, this one to meet US EPA requirements (first one was for EU BPR submission and had different methods/requirements). With the patented 7.8% product, Binary Ionization Technology Solution is safe to ship by air and store under normal ambient conditions. The study will be submitted for EPA review, and expiration date extended going forward upon EPA approval. The EPA has registered our 0.35% hydrogen peroxide product for the use in green houses, pre harvests and post harvests. TOMI is conducting internal studies with the 0.35% on common pathogens in the food safety market to enhance protocols. We continue to pursue acceptance of the additional 1% hydrogen peroxide label with the EPA for direct food application. Due to the pandemic, there have been significant delays by U.S. regulatory agencies in approving new submissions, including TOMI’s new 1% registration. While TOMI continues to pursue the market for these two EPA registrations, we have partnered and conducted other food safety trials which have shown success in the market. Partner Indoor Environmental Solutions and Consultants, or IESC, LLC completed their Forensic Architectural & Engineering Investigation and Decontamination Report with Kalera Indoor Farms. IESC is a state-of-the art indoor air and surface decontamination company dedicated to food and health safety. In addition to being a TSN service provider, IESC are distributor partners to iHP SteraMist technology. Kalera, a global leader in vertical community farms for greens and culinary herbs harvested on demand all year is highly motivated to have iHP SteraMist be their cleaning decontamination solution. The recently received report outlines decontamination protocols and calculated savings and estimated service and purchasing options for Kalera. Recent SteraMist food safety customers and partners are conducting further studies to prove SteraMist in the industry. Soli Organic Inc., one of the nation’s largest commercial indoor organic growing companies, obtained multiple SteraMist systems to protect their controlled indoor growing food process from costly fungus, Botrytis. The combination of all SteraMist systems purchased will be used daily, on a continuous cycle, to disinfect everything from seed trays that the soil and plants sit in, and the plants themselves. 34 Table of Contents Additional studies have been conducted with Kalera that demonstrated the efficacy of SteraMist in a large-scale CEA vertical farm. Analysis concluded dramatic reduction in fungal growth, mold spores, and yield loss from environmental bio-loads, with notable efficacy against Alternaria, a species causing 20% yield loss in all annual vegetable production. Levels went from high/ medium to non-existent/nondetectable with the following spores: Alternaria (Ulocladium), Aspergillus/Penicillium, Acremonium++, and Botrytis. SteraMist is also working with a few partners in the cannabis industry. Enviro-Mist has been testing cannabis flower incubated with Aspergillus flavus, Aspergillus fumigatus, Aspergillus niger, Aspergillus terreus, Escherichia Coli, Shigella Spp, Salmonella, Staphylococcus aureus, yeasts and molds and subsequently treated using ionized Hydrogen Peroxide (iHP) to the dried material. Potency results of the cannabis plant were not affected, and no additional residual solvents were found. The process was successful in complete remediation of all microbial contaminants. Another partner TOMI is working with has proven SteraMist that has reduced microbial count on cannabis flower from 400cfu/g to non-detectable without affecting the level of THC. SteraMist continues to penetrate the market with additional studies and bringing on premier clients. Registrations & Intellectual Property (IP): Our portfolio includes more than twenty (20) Utility Patent applications worldwide for both method and system claims on SteraMist ® BIT ™ , either published or undergoing prosecution. We continue to pursue further claims to additional capabilities in on-going United States and worldwide patent applications. We have obtained two related United States utility patents giving us protection of our technology until the year 2038. We have obtained utility patents for our technologies in diverse countries such as Israel, Australia, Taiwan, Canada, Mexico, and, currently pending, in Brazil, and continue to pursue protections all over the world. We have submitted utility patent applications in multiple countries, including Europe, China, Brazil, and Australia for further additional applications of SteraMist BIT, and a related application has already been determined novel and inventive in Taiwan. We have been awarded a design patent on our surface-mounted applicator device in the United States, China, Japan, Taiwan, and Korea. We have filed and have been granted or have pending acceptance on thirty-two (32) separate design patents for our: Decontamination Chamber(s), Decontamination Applicator, Decontamination Cart, Applicator, and Surface Mounted Applicator 90-Degree Device. These patents are published around the world, including but not limited to United States, China, Hong Kong, Europe, United Kingdom, Singapore, Taiwan, Vietnam, Canada, South Korea, and Japan. We are also pursuing IP protection for further applications of our SteraMist BIT in diverse fields at multiple jurisdictions, such as food decontamination. Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of today, we have over two hundred trademarks, (word and/or logo) registered or pending across the globe. TOMI registers marks in eight (8) classes of specification of goods and services: Class 1 for Chemicals for Treating Hazardous Waste, Class 5 for Disinfectants, All-Purpose for Hard Surfaces and for Treating Mold, Class 7 for Handheld Power Operated Spraying Machines, Class 11 for Sterilizers for Medical Use and Air Purification, Class 35 for Business Consultation and Management Services, Class 37 for General Disinfecting Services, Class 40 for Chemical Decontamination and Manufacturing Services, and Class 41 for Providing Education Training and information related to biological and bacterial decontamination services. 35 Table of Contents Financial Operations Overview Our financial position as of September 30, 2022 and December 31, 2022, respectively, was as follows: September 30, 2022 Unaudited December 31, 2021 Total shareholders’ equity $ 11,797,000 $ 13,595,000 Cash and cash equivalents $ 4,335,000 $ 5,317,000 Deferred Revenue $ 1,155,000 $ 6,000 Accounts receivable, net $ 2,338,000 $ 1,965,000 Inventories $ 4,713,000 $ 4,743,000 Prepaid expenses $ 349,000 $ 344,000 Vendor Deposits $ 482,000 $ 289,000 Other Receivables $ 164,000 $ 236,000 Current liabilities – Excluding Deferred Revenue $ 1,908,000 $ 1,810,000 Long-term liabilities $ 785,000 $ 861,000 Working Capital $ 9,319,000 $ 11,077,000 During the nine months ended September 30, 2022, our debt and liquidity positions were affected by the following: · Net cash used in operations of approximately $929,000. Results of Operations for the Three and Nine Months Ended September 30, 2022 Compared to the Three and Nine Months Ended September 30, 2021 For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Revenue, Net $ 1,760,000 $ 2,205,000 $ (445,000 ) $ 5,527,000 $ 5,744,000 $ (217,000 ) Gross Profit $ 1,071,000 1,314,000 (243,000 ) 3,413,000 3,491,000 (78,000 ) Total Operating Expenses (1) $ 1,725,000 1,801,000 (76,000 ) 5,589,000 6,682,000 (1,093,000 ) Income (Loss) from Operations (654,000 ) (487,000 ) (167,000 ) (2,176,000 ) (3,191,000 ) 1,014,000 Total Other Income (Expense) 1,000 - 2,000 1,000 415,000 (413,000 ) Provision for Income Taxes - - - - - - Net Income (Loss) $ (653,000 ) $ (487,000 ) (165,000 ) $ (2,175,000 ) $ (2,776,000 ) 601,000 Basic Net Income (Loss) per share $ (0.03 ) $ (0.03 ) $ (0.00 ) $ (0.11 ) $ (0.17 ) $ 0.06 Diluted Net Income (Loss) per share $ (0.03 ) $ (0.03 ) $ (0.00 ) $ (0.11 ) $ (0.17 ) $ 0.06 Sales and Revenue Total revenue for the three months ended September 30, 2022 and 2021, was $1,760,000 and $2,205,000, respectively, representing a decrease of $445,000, or 20% compared to the same prior year period. For the nine months ended September 30, 2022 and 2021, our total revenue was $5,527,000 and $5,744,000, respectively, representing a decrease of $217,000, or 4% compared to the same prior year period. The decline in revenue is due to the customer-imposed delivery restrictions for equipment and CES orders and the related impact to our revenue recognition and deferred revenue. As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic subsides, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities. 36 Table of Contents Net Revenue For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Sales, net $ 1,760,000 $ 2,205,000 $ (445,000 ) $ 5,527,000 $ 5,744,000 $ (217,000 ) Product and Service Revenue For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ SteraMist Product $ 1,435,000 $ 1,657,000 $ (222,000 ) $ 4,448,000 $ 4,329,000 $ 119,000 Service and Training 325,000 548,000 (223,000 ) 1,079,000 1,415,000 (336,000 ) Total $ 1,760,000 $ 2,205,000 $ (445,000 ) $ 5,527,000 $ 5,744,000 $ (217,000 ) SteraMist product-based revenues for the three months ended September 30, 2022 and 2021, were $1,435,000 and $1,657,000, representing a decrease of $222,000 or 13% when compared to the same prior year period. Product based revenues for the nine months ended September 30, 2022 and 2021, were $4,448,000 and $4,439,000, representing an increase of $119,000 or 3% when compared to the same prior year period. The increase in product-based revenue was attributable to higher mobile equipment sales. Our service-based revenue for the three months ended September 30, 2022 and 2021, was $325,000 and $548,000, respectively, representing a decrease of 41%. For the nine months ended September 30, 2022 and 2021, our service-based revenue was $1,079,000 and $1,415,000, representing a decrease of $336,000 or 24% when compared to the same prior period in 2021. The decline in service and training revenue was due to the timing of certain iHP service that occurred in the prior year period. Revenue by Geographic Region For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ United States $ 1,632,000 $ 2,028,000 $ (396,000 ) $ 4,336,000 $ 5,017,000 $ (681,000 ) International 128,000 177,000 (49,000 ) 1,191,000 727,000 464,000 Total $ 1,760,000 $ 2,205,000 $ (445,000 ) $ 5,527,000 $ 5,744,000 $ (217,000 ) Our domestic revenue for the three months ended September 30, 2022 and 2021 was $1,632,000 and $2,028,000, respectively, a decrease of $396,000, or 20% when compared to the same prior year period. For the nine months ended September 30, 2022 and 2021, our domestic revenue was $4,366,000 and $5,017,000, respectively, representing a decrease of $681,000 or 13%. Internationally, our revenue for the three months ended September 30, 2022 and 2021, was approximately $128,000 and $177,000, respectively, representing a decrease of $49,000 or 28% when compared to the same prior year period. For the nine months ended September 30, 2022 and 2021, our domestic international revenue was $1,191,000 and $727,000, respectively, representing an increase of $464,000 or 64%. 37 Table of Contents Cost of Sales For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Cost of Sales $ 689,000 $ 890,000 (201,000 ) $ 2,114,000 $ 2,252,000 (138,000 ) Cost of sales was $689,000 and $890,000 for the three months ended September 30, 2022 and 2021, respectively, a decrease of $201,000, or 23%, compared to the prior year. Our gross profit as a percentage of sales for the three months ended September 30, 2022 was 60.9% compared to 59.6% in the same prior period, respectively. The higher gross profit is attributable to the product mix in sales. Cost of sales was $2,114,000 and $2,252,000 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $138,000, or 6%, compared to the prior year. Our gross profit as a percentage of sales for the nine months ended September 30, 2022 was 61.8% compared to 60.8% in the same prior period, respectively. The higher gross profit is attributable to the product mix in sales. Professional Fees For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Professional Fees $ 106,000 $ 118,000 $ (12,000 ) $ 392,000 $ 398,000 $ (6,000 ) Professional fees are comprised mainly of legal, accounting, and financial consulting fees. Professional fees were $106,000 and $118,000 for the three months ended September 30, 2022 and 2021, respectively, a decrease of approximately $12,000, or 10%, in the current year period. Professional fees were $392,000 and $398,000 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of approximately $6,000, or 2%, in the current year period. Depreciation and Amortization For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Depreciation and Amortization $ 83,000 $ 70,000 $ 13,000 $ 248,000 $ 226,000 $ 22,000 Depreciation and amortization were approximately $83,000 and $70,000 for the three months ended September 30, 2022 and 2021, respectively, representing an increase of $13,000, or 19%. Depreciation and amortization were approximately $248,000 and $226,000 for the nine months ended September 30, 2022 and 2021, respectively, representing an increase of $22,000, or 10%. The increase in depreciation expense is due to a higher amount of fixed assets being depreciated in the current year periods when compared to the same prior year periods. 38 Table of Contents Selling Expenses For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Selling Expenses $ 365,000 $ 465,000 $ (100,000 ) $ 1,272,000 $ 1,275,000 $ (3,000 ) Selling expenses for the three months ended September 30, 2022 were approximately $365,000, as compared to $465,000 for the quarter ended September 30, 2021, representing a decline of approximately $100,000 or 22%. The decline in selling expenses is attributable to lower sales in the current year period and higher sales commissions and our increased tradeshow presence the current year period. Selling expenses for the nine months ended September 30, 2022 were approximately $1,272,000, as compared to $1,275,000 for the period ended September 30, 2021, representing a decrease of approximately $3,000. Research and Development For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Research and Development $ 118,000 $ 93,000 $ 25,000 $ 255,000 $ 495,000 $ (240,000 ) Research and development expenses for the three months ended September 30, 2022 were approximately $118,000, as compared to $93,000 for the quarter ended September 30, 2021, representing an increase of approximately $25,000, or 27%. The increase is attributable to the timing of certain projects and testing that occurred in the current year period. Research and development expenses for the nine months ended September 30, 2022 were approximately $225,000, as compared to $495,000 for the period ended September 30, 2021, representing a decrease of approximately $240,000, or 78%. The decrease in research and development expenses is attributable to product development charges in connection with our SteraPak we incurred in the prior year period which did not reoccur in the current year period and lower product development costs associated with current R&D projects being performed internally. Consulting Fees For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Consulting Fees $ 43,000 $ 64,000 $ (21,000 ) $ 146,000 $ 266,000 $ (120,000 ) Consulting fees were $43,000 and $64,000 for the three months ended September 30, 2022 and 2021, respectively, representing a decrease of $21,000, or 33%, in the current quarter period. Consulting fees were $146,000 and $266,000 for the nine months ended September 30, 2022 and 2021, respectively, representing a decrease of $120,000, or 45%, in the current quarter period. The decrease is due to the timing of certain projects that occurred in the prior year that did not occur in the same current year period. 39 Table of Contents General and Administrative Expense For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ General and Administrative $ 1,009,000 $ 991,000 $ 18,000 $ 3,277,000 $ 4,023,000 $ (746,000 ) General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense, product registration costs, equity compensation and bad debt expense. General and administrative expense was $1,009,000 and $991,000 for the three months ended September 30, 2022 and 2021, respectively, an increase of $18,000 in the current period. General and administrative expense was $3,277,000 and $4,023,000 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $746,000 in the current period. The decline in general and administrative expense is primarily attributable to lower payroll costs, insurance and bad debt expense in the current year period. Other Income and Expense For The Three Months Ended September 30, Change For The Nine Months Ended September 30, Change 2022 2021 $ 2022 2021 $ Gain Upon Debt Extinguishment - - - 415,000 (415,000 ) Interest Income - - 1,000 1,000 - Interest Expense - - - - (1,000 ) 1,000 Other Income (Expense) $ - $ - $ - $ 1,000 $ 415,000 $ (414,000 ) Gain upon debt extinguishment of $415,000 in connection with the forgiveness of a loan payable. Interest income was approximately $1,000 for the nine months ended September 30, 2022 and 2021. Interest expense was $0 and $1,000 for the nine months ended September 30, 2022 and 2021, respectively. Liquidity and Capital Resources As of September 30, 2022, we had cash and cash equivalents of $4,335,000 and working capital of $9,319,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of public company reporting requirements. We have historically funded our operations through funds generated through operations and debt and equity financings. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all. 40 Table of Contents In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering to certain institutional investors 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 have an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance. For the nine months ended September 30, 2022 and 2021, we incurred a loss from operations of ($2,175,000) and ($3,190,000), respectively. Cash used in operations for the nine months ended September 30, 2022 and 2021, was $929,000 and $3,823,000, respectively. A breakdown of our statement of cash flows for the nine months ended September 30, 2022 and 2021 is provided below: For the nine months ended September 30, 2022 2021 Net Cash Provided By (Used) in Operating Activities $ (929,000 ) $ (3,823,000 ) Net Cash Used in Investing Activities $ (78,000 ) $ (295,000 ) Net Cash Provided by Financing Activities: $ 25,000 $ 4,582,000 Operating Activities Cash used in operating activities for the nine months ended September 30, 2022 and 2021 was $929,000 and $3,823,000, respectively. The decline was attributable to a lower current year loss and customer deposits as well as increased purchases of inventory in the prior year to replenish our levels. Investing Activities Cash used in investing activities for the nine months ended September 30, 2022 and 2021 was $78,000 and 295,000, respectively. The decrease is attributable to fixed assets purchased in the prior year and capitalized patent and trademark costs. Financing Activities Cash provided by financing activities for nine months ended September 30 2022 and 2021 was $25,000 and $4,582,000, respectively. The decrease as a result of the proceeds we received in connection with the sale of our common stock and warrants in the prior year period. Liquidity Our revenues can fluctuate due to the following factors, among others: · ramp up and expansion of our internal sales force and manufacturers’ representatives; · length of our sales cycle; · length of installation of our CES; · global response to the outbreak of COVID-19 Pandemic and or new Pandemics or diseases of concern; · customer budget cycles and allocations; · expansion into new territories and markets; and · timing of orders from distributors. We could incur operating losses and an increase of costs related to the continuation of product and technology development, sales expense as we continue to grow our sales teams, inventory as we continue to ensure we have products needed and geographic presence, tooling capital expenditures as we ramp up and streamline our production and administrative activities including compliance with the Sarbanes-Oxley Act of 2002 Section 404. 41 Table of Contents Management has taken and will endeavor to continue to take a number of actions in order to improve our results of operations and the related cash flows generated from operations in order to strengthen our financial position, including the following items: · expanding our label with the EPA to further our product registration internationally; · continued expansion of our internal sales force and manufacturer representatives in an effort to drive global revenue in all verticals; · continue research and development and add new products to our “Stera” product line; · source alternative lower-cost suppliers; · expansion of international distributors; and · continued growth in all of our verticals. We expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources. We believe that our existing balance of cash and cash equivalents and amounts expected to be provided by operations will provide us with sufficient financial resources to meet our cash requirements for operations, working capital and capital expenditures over the next twelve months. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates. The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following policies to be critical to an understanding of our condensed consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows. Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations. We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. Title and risk of loss generally pass to our customers upon shipment. Our customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from customers. 42 Table of Contents Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Costs to Obtain a Contract with a Customer We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses. Contract Balances As of September 30, 2022, and December 31, 2021 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. Significant Judgments Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventory, fair values of financial instruments, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Fair Value Measurements The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following: 43 Table of Contents Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities. Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. All these items were determined to be Level 1 fair value measurements. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents includes cash on hand, held at financial institutions and other liquid investments with original maturities of three months or less. At times, these deposits may be in excess of insured limits. Accounts Receivable Our accounts receivable are typically from credit worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods. We expense costs to maintain certification to cost of goods sold as incurred. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable. Property and Equipment We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter. Leases We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease. 44 Table of Contents 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. Accrued Warranties Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the condensed consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. Income Taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with FASB ASC Topic 740, Income Taxes. Net Income (Loss) Per Share Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the treasury stock method and includes the effect from potential issuance of shares of common stock, such as shares issuable pursuant to the exercise of options and warrants and conversions of preferred stock or debentures. Equity Compensation Expense We account for equity compensation expense in accordance with FASB ASC 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period. On July 7, 2017, our shareholders approved the 2016 Equity Incentive Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 625,000 shares of common stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of common stock for numerous reasons, including, but not limited to, shares of common stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award; awards under the 2016 Plan are expressly conditioned upon such agreements. 45 Table of Contents On December 30, 2020, we received shareholder approval to amend and restate the 2016 Equity Incentive Plan to increase the maximum number of shares of common stock authorized from issuance by 1,375,000, from 625,000 shares to 2,000,000. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $250,000 at times during the year. Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three and nine months ended September 30, 2022 and 2021. 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 condensed consolidated financial statements. Recently adopted accounting pronouncements 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. We adopted ASU 2021-10 starting in 2022, which did not have a material impact on our condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not Applicable. 46 Table of Contents