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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-29 · 201 added, 260 removed, 259 unchanged (64% of the section changed)

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This discussion and analysis should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report.

TOMI Environmental Solutions, Inc.

(“TOMI”, “we” and “our”) is a global bacteria decontamination and infectious disease control company, providing environmental solutions for indoor surface decontamination through the manufacturing, sales, service and licensing of our SteraMist® brand of products, including SteraMist® BIT™, a low percentage (7.8%) hydrogen peroxide-based fog or mist that uses Binary Ionization Technology (BIT™).

Our solution and process are environmentally friendly as the only biproduct from our decontamination process is oxygen and humidity.

Our solution is organically listed in the United States and Canada it is sustainably a green product with no or very little carbon footprint.

Most of our competitors in the disinfection space leave significant byproducts and are corrosive.

SteraMist is not corrosive, and it does not damage equipment or facilities.

Our SteraMist® is a patented technology that produces ionized Hydrogen Peroxide (iHP™) using cold plasma science created under a grant by the United States Defense Advanced Research Projects Agency (DARPA).

Our EPA registered BIT™ Solution is composed of a low concentration of hydrogen peroxide converted to iHP™ after passing the trade secret blended solution including its sole active ingredient of 7.8% hydrogen peroxide through an atmospheric cold plasma arc.

The newly formed iHP™ fog and mist consists of submicron’s to 3-micron radical particles that are carried throughout the treatment area in a fog or mist moving with the same velocity and characteristics of a gas.

This allows the ionized hydrogen peroxide fog or mist to affect all surfaces and air space throughout the targeted treatment area, over, above and beyond the ability of a manual cleaning processes.

iHP™ damages pathogenic organisms through the oxidation of proteins, carbohydrates, and lipids.

SteraMist® no-touch disinfection and or decontamination treat areas mechanically, causing cellular disruptions and/or dysfunctions resulting in a 6-log (99.9999%) and greater kill or inactivation of all pathogens in the treatment area.

Under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), we are required to register with the EPA and certain state regulatory authorities as a seller of disinfectants.

In June 2015, SteraMist® BIT™ was registered with the EPA as a hospital-healthcare disinfectant and general broad-spectrum surface disinfectant for use as a misting/fogging agent.

SteraMist® BIT™ now holds EPA registrations (# 90150-2) for mold control, and air and surface remediation (# 90150-1).

In February 2016, we expanded our label with the EPA to include Clostridium difficile Spores and MRSA, as well as the influenza (Avian) virus h1n1, which we believe has better positioned us to penetrate all industries including the biodefense and healthcare industry.

In August 2017, our EPA label was further expanded to include efficacy against Salmonella and Norovirus.

As of January 27, 2017, our technology is one of 53 of the EPA’s “Registered Antimicrobial Products Effective against Clostridium difficile Spores”, as published on the EPA’s K List.

Further, in December 2017, SteraMist® was included in the EPA’s list G (Norovirus), L (Ebola) and M (Avian Flu).

In March 2020, our EPA label was further amended to include Emerging Viral Pathogens claims, thus meeting the criteria against Enveloped viruses and Large Non-enveloped viruses and included on List N (Emerging Viral Pathogens including SARS-CoV-2).

In 2021, the EPA granted SteraMist® BIT™ 0.35% hydrogen peroxide – EPA registration number 90150-3.

SteraMist® BIT™ brings to the world a mechanical and automated method of cleaning using a game-changing technology and EPA registered Hospital-HealthCare disinfectant providing an upgrade to existing disinfecting and cleaning protocols while limiting liability in a facility when it comes to resistant infectious pathogens.

We maintain this registration in all fifty (50) states, Washington DC, Canada, and approximately thirty-five (35) other countries.

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.

Life Sciences

The SteraMist ® Environment System, Custom Engineered Systems (CES), the SteraMist ® Select Surface Unit (Plus), SteraBox, 90 Degree Applicator and our iHP ™ Corporate Service Division, are designed to be tailored to provide a complete solution to address the regulatory inspections of disinfecting/decontaminating and Installation Qualification (IQ)-Operational Qualification (OQ)–Performance Qualification (PQ) validation processes within the life sciences industry.

Long term, ongoing projects and validations continue to be a focus and lead to proposals and interest for our CES permanent decontamination room.

As these are longer lead-time sales that can take months to design, build and implement, we expect installations to have impact to our results in 2022.

Further, post COVID pandemic has brought some attention to the SteraMist product line, as our CES in Pfizer Missouri was recently showcased in a New York Times article as they featured their COVID vaccine processes.

In addition, our iHP Corporate Service team treated one of four fill lines in a North Carolina pharmaceutical company that manufactures one of the COVID vaccines, with the remaining three lines set to be decontaminated in the future with SteraMist.

For the 2022 year and beyond TOMI expects growth in SteraMist Custom Engineered Systems (CES) bids and the manufacturing and implementation of these fully automated decontamination systems.

The first CES system was completed in 2016 for Dana Farber Cancer Institute, as Dana Farber was designing a new vivarium, they had the opportunity to integrate several new technologies to advance overall efficiency, quality, and design.

One such technology, was the use of our ionized Hydrogen Peroxide (iHP) decontamination.

SteraMist’s Custom Engineered System (CES) has become a leading solution to growing customer demands.

TOMI’s CES is an automated system that can be fully integrated into any company’s infrastructure, enabling decontamination, without burdening manual use and with the collaboration of current premier customers and partners, TOMI has further perfected the system.

The CES eliminates issues such as human error, guarantees accuracy that is unmatched by competitors, and decreases a client’s labor cost and downtime, and in a short time the CES may make up a majority of TOMI’s revenue.

Hospital-Healthcare

The SteraMist ® line of products, specifically the SteraMist ® Surface Unit and SteraMist ® Total Disinfection Cart, are our main solutions to aid our Hospital-HealthCare customers in providing high quality of safety to their patients and personnel by disinfecting operating rooms, pharmacies, ambulances, and emergency environments throughout a healthcare facility.

TOMI’s latest product, the SteraPak, further assists healthcare communities with an easy-to-use, cordless disinfection solution, creating a more mobile solution.

Our customers that have successfully adopted our technology in Hospital-Healthcare facilities, have recurring revenue and reorder rates of our BIT ™ Solution.

We plan to continue to expand our marketing, advertising and educational campaigns targeted at the Hospital-Healthcare marketing in an effort to grow our customer base and increase adoption of our SteraMist ® line of products.

Our team of technicians and representatives train, maintain, and service capital equipment throughout the world for our Hospital-HealthCare customers.

As our Training and Implementation department expands, we expect continued growth and purchases in our Hospital-HealthCare division.

TOMI provides protocol development and implementation of SteraMist ® as it is critical in the healthcare setting.

During 2020 the use of our SteraMist ® in such campuses increased due to our comprehensive training for their day and night shift maintenance and housekeeping departments.

Annual comparison case studies from healthcare facilities are now available, which shows lower transmission infection rates in COVID, Clostridium difficile Spores and overall, HAI cases.

UCLA recently completed a successful collection of critical data for the Shield Study.

The Shield Study is a multi-year study comparing SteraMist with manual clean.

The Study was conducted by multiple well-established hospitals.

Initial findings have been positive regarding ease of use, overall efficacy, and quick turnaround time of patient rooms.

TOMI looks forward to announcing the full results as soon as they are available to make public.

TOMI anticipates this study will assist in the expansion of current HealthCare customers to follow the model of Gila River Health Care.

Gila River is one of TOMI’s largest Healthcare customers owning a total of fourteen (14) Surface Units and Two (2) SteraPaks.

The Gila River Indian Community (GRIC) is an Indian reservation in Arizona that is made up of seven (7) districts and is home to the Akimel O’oodham (Pima) and the Pee-Posh (Maricopa) tribes.

Gila River Health Care, a premier Native American healthcare system, provides high quality patient care, delivering a wide variety of medical services such as general surgery, dental, and emergency medicine, as well as associated health services such as pharmacy and laboratory operations, skilled nursing and rehabilitation.

TOMI Service Network

The TOMI Service Network, or TSN, is an expansive network consisting of professionals throughout North America who are exclusively licensed and trained to use the SteraMist ® products.

With the purchase of SteraMist and joining TSN, TOMI trains and services a wide array of professional remediation companies in the use of SteraMist ® throughout the TSN division.

TSN allows for increased accessibility and brand awareness of iHP ® services to facilities in need of local routine and emergency disinfection and decontamination.

The TOMI Service Network (TSN) division is addressing the cleaning protocols that have changed permanently due to the COVID-19 pandemic, and our network is expected to play a significant role in facilitating and maintaining these protocols throughout the United States and Canada.

The urgency for emergency disinfection services may have declined, but the education and support of such services that TOMI personnel provide to our members creates an advantage by maintaining strong business relationships while they service thousands of SteraMist customers, and the world returns to the new normal.

Our SteraPak release is an important factor for this market that we will increase the new member onboarding.

Current members are showing interest in purchasing the SteraPak to expand their current SteraMist offerings.

Food Safety presents significant potential as an opportunity for substantial growth with continued product research and compliance testing.

With the food safety industry in North America coming under closer scrutiny with the implementation and enforcement of new and established guidelines.

This concentration has previously been approved by the USDA and FDA for direct food and crop application and will allow SteraMist ® to expand use sites beyond food processing machinery, restaurants, and food contact areas.

This will assist compliance with the newly established Food Safety Modernization Act guidelines set in place by the FDA, as well as the Safe Food for Canadians Act and Safe Food for Canadians Regulations in Canada.

TOMI continues to work with premium companies in testing and validating SteraMist ® technology in the Food Safety and seed industries.

In 2021, we have made progress in enhancing brand awareness by promoting and marketing this division.

We are receiving an increase in inquiries within the Food Safety division directly from these efforts.

With the global population explosion, we anticipate an increase in the demand for a mechanical way to disinfect our food supply.

Every day there are news articles around the world pertaining to the contamination of food supply.

The many published articles that the USDA in cooperation with TOMI have demonstrated that our technology offers a consistent alternative to the decade’s old chemical disinfection process.

SteraMist will deliver more consistent and quicker results in all areas of our food supply- From Farm to Market, Processing to packaging and Storage to delivery.

We plan on pursuing all these avenues.

With the continued testing and need for the market coupled with our new .35% label, should make pursuing these opportunities successful.

In addition, our solution and process is environmentally friendly in that the biproduct of SteraMist is only oxygen and humidity.

We have our solution listed on OMRI and labeled as organic.

Most disinfectants leave residue on furniture, objects, and foods.

SteraMist does not leave any chemical residue on any surface.

We have a very low carbon footprint, if any.

Our Commercial division includes but is not limited to use sites such as aviation, airports, police and fire, prisons, manufacturing companies, automobile, military, cruise ships, shipping ports, preschool education, primary and secondary schools, colleges including dormitories, all modes of public and private transportation, regulatory consulting agencies, retail, housing and recreation, and of course emergency preparedness for counties and cities to use SteraMist ® throughout their community.

Interest in SteraMist disinfection within the commercial division remains high.

The SteraPak is a popular product for this division because customers are looking for a more cost-effective solution compared to the current disinfectants on the market.

As quick and mobile disinfection solution is preferred in this industry, we believe that SteraPak will generate substantial customer interest and create sales opportunities.

Currently our customers are purchasing our SteraPak in all of our divisions to provide quick disinfection throughout various sites in their facilities.

We have listed the SteraPak on Amazon to better enhance consumer sales and accessibility in this division.

Working alongside a full-service Amazon consulting agency, ORCA Pacific, we can better position ourselves with optimized content and increase customer traffic with enhanced advertising.

Annual and Quarterly Highlights

Business Update

Our 2022 calendar year delivered continued growth in revenue and sales pipeline as well as improved year over financial operating results.

We ended our 2022 calendar year on a strong note as our fourth quarter sales represent our best standalone quarter we have reported since 2020.

Our recognized revenue and customer sales backlog for the year ended December 31, 2022, together, was approximately $10,362,000 which was comprised of recognized revenue of $8,338,000 and a customer sales backlog as of December 31, 2022, of approximately $2,024,000.

For the year ended December 31, 2022, we received over $10,000,000 in sales orders from including key global fortune 500 customers which represents 22% growth when compared to our calendar 2021 year.

The increase in sales orders is largely attributable to increased demand for our CES and mobile equipment orders primarily from our life science, commercial and food safety sectors.

A key driver to our longer-term growth is the solid demand for our CES by referrals to the product line by hosting tours of current installed systems, continuing brand awareness via our domestic independent manufacturing sales representatives and growing the network of international partners.

Revenue for the three months ended December 31, 2022 and 2021 was $2,812,000 and $2,010,000, respectively, representing an increase of $802,000, or 40% compared to the same prior year period.

Our revenue for the fourth quarter of 2022, grew 60% sequentially over what we reported in the third quarter of 2022.

The increase in sales was largely attributable to increased demand for our CES systems and our internal tech team ability execute and deliver the systems in the fourth quarter of 2022.

In 2022, we also saw growth in our sales results our mobile equipment orders due to our expanded product line.

With the current years increase in demand for our 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 $2,024,000 as of December 31, 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.

We have secured several new orders for our iHP CES for which revenue will be recognized upon delivery for the remainder of 2023 and believe our sales pipeline will continue to grow.

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 2023.

As of December 31, 2022, our customer sales backlog was as follows:

As of December 31, 2022

Expected Revenue Recognition

Value of Contracts or Sales Orders

Cash Deposits

For the Year Ending December 31, 2023

For the Year Ending December 31, 2024

Customer Backlog

As the market shifts 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.

The financial operating results for the year ended December 31, 2022, improved in comparison to the same prior year period primarily due to higher sales, improved gross profit margins which were up 1.5% and lower operating expenses which declined by 16%.

Our loss from operations for the year ended December 31, 2022, improved by 41% when compared to the same prior year periods.

Through December 31, 2022, we used approximately $1,234,000 in cash from operations, an approximate $2,590,000 improvement over the cash used in operations of $3,824,000 during the year ended December 31, 2021.

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.

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.

In evaluating sales related performance, management also 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.

Business Highlights and Recent Events

Registered Direct Offering:

In September 2021, we closed a registered direct offering of shares of our common stock priced at the market, resulting in net proceeds of $4,581,651, after deducting the placement agent’s fees and other offering expenses.

The proceeds from the offering were used for sales and marketing expenses associated with our products, advertising, purchase of inventory and other general corporate purposes.

During the first half of 2020, the COVID-19 pandemic contributed to significant increase of our customer demand and sales growth, but it also caused a decline in our revenue in most of 2021 as many of our established vertical clients were closed or required to reduce operation due to the impact of COVID-19 pandemic on their business.

The markets that were negatively affected included our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential global pharmaceutical research companies.

In addition, the healthcare industry shifted its focus and resources in response to the pandemic and therefore substantially reduced elective surgical and clinical related services, resulting in limited non-essential onsite personnel.

These trends made it difficult for us to demo our equipment and execute our sales and marketing strategies.

In addition, our customers have limited budgets for newer technologies.

As we move out of the pandemic, many companies throughout the world are including pandemic preparedness in their operation plans.

The United States has earmarked federal funds for disinfection.

During 2021, our vendors and customers experienced supply and logistic related challenges which negatively impacted procurement, manufacturing lead times and transit times, which contributed to the delayed launch our SteraPak and pushed out certain capital projects involving the installation and integration of our disinfection engineered systems into our customers’ facilities.

While the pandemic created short term volatility in our year over year revenue, it also contributed to a rapid expansion of our customer base and overall brand recognition in the industry.

Over the last two years, we have grown our user base substantially, which contributed to the growth in our solution revenue and recurring orders.

Our solution sales for 2021 were down compared to 2020 due to the spike in demand at the onset of the COVID-19 pandemic in 2020.

However, our solution revenue grew by 48% in 2021 as compared to 2019 due to the expansion of users we acquired over the last two years.

In addition, our customer recurring solution orders increased 63% in 2021 as compared to 2019 prior to the pandemic.

We believe this positive trend demonstrate a wider adoption of our technology in the marketplace which is consistent with our long-term business strategy.

During the years ended December 31, 2021, and 2020, our revenue declined by 69%.

Our overall revenue, grew by 22% for the year ended December 31, 2021, when compared to the year ended December 31, 2019, our last full calendar year prior to the pandemic.

The 2021 verse 2019 growth fell short of our expectations due to certain projects in our sales pipeline that were deferred into our 2022 calendar year as a result of supply chain issues with our customers and vendors.

During the second half of 2021, we began to see positive signs from our prospective and existing customers as businesses began to reopen their standard business operations and locations, which has bolstered our future sales pipeline and led to 20% growth in our revenue for the last six months of 2021 when compared to the first six months of 2021.

In December 2021, we announced the launch of our Amazon store where we featured the SteraPak and BIT solution.

As the most cost effective SteraMist system, the SteraPak is primed to effectively target both businesses and consumer end users, making it, we believe, ideal flagship SteraMist product for sale on Amazon.

Amazon is also an excellent branding opportunity for our new product.

We continue to gain market share in the Life Science and Pharmaceutical industries where our brand name and technology is well known and respected.

We continue to see demand for our iHP Customer Engineered Systems.

During the third quarter of 2021, we received an order by a major pharmaceutical company in Europe to build an iHP Customer Engineered System which was delivered and permanently installed into their facility in the fourth quarter of 2021.

In addition, in July 2021, we received a purchase order from a global biopharmaceutical company for our SteraMist Environment system and its validation service.

After creating a new companywide decontamination standard for this biopharmaceutical company TOMI has received an order for a new facility resulting in an opportunity to expand with this company to multiple locations across the world.

As we begin 2022, we are seeing continued positive trends and have received orders for our custom engineered systems of approximately $1,307,000 which will be recognized in our current (2022) calendar year.

We expect increased revenues in 2022 when compared to 2021 due to the launch of our new products, specifically our backpack solution ("SteraPak") across all verticals, continued expansion of our existing products with our existing customers and increased solution sales as the world exits the pandemic.

We believe that our Customer Engineered Systems (CES) will add significant revenue in 2022.

Total revenue without “customer sales backlog” for the year ended December 31, 2022 and 2021, was $8,338,000 and $7,754,000, respectively, representing an increase of $584,000, or 8% compared to the same prior year period.

The growth in our orders was due to increased demand for our mobile equipment and CES.

SteraMist product-based revenues for the year ended December 31, 2022 and 2021, were $6,864,000 and $6,179,000, representing an increase of $685,000 or 11% when compared to the same prior year period.

SteraMist service-based revenues for the years ended December 31, 2022 and 2021, were $1,474,000 and $1,575,000, representing a decrease of $101,000 or 6% when compared to the same prior year period.

The decline is due to the timing of certain service engagement that occurred in the current and prior year periods.

As of December 31, 2022, our balance sheet has deferred revenue of $700,000 which represents down payments on future equipment and CES orders that are expected to be recognized into revenue in future accounting periods.

Our customer sales backlog at December 31, 2022, was $2,024,000.

For the three months ended December 31, 2022 and 2021, our recognized revenue was $2,812,000 and $2,010,000, respectively, representing an increase of $802,000, or 40% compared to the same prior year period.

The increase was to higher CES, mobile equipment and SteraMist BIT solution revenue in the current year period.

We believe that we possess the best technologies in the world in the disinfection and decontamination space.

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Customers are requesting and discussing the positive results of our product and the environmentally friendly results compared to the caustic results of other disinfectants.

Dangerous pathogens still exist and will exist long after we recover from this pandemic.

While the United States and most of the world is currently recovering from the SARS CoV-2 coronavirus outbreak, there are many pathogens which are respiratory in nature that are still a looming threat;

these cases are occurring globally to this day.

We believe SteraMist can mitigate and reduce the impact of the next pandemic as it has already proved during the outbreaks of Ebola, MERS and recently with SARS CoV-2 pandemic.

We believe the need for a speedy comprehensive mechanical disinfectant like SteraMist cannot be stressed enough and should be included as the new norm of cleaning.

2021 Highlights:

On August 4, 2021, we introduced our SteraPak, which was launched in September 2021 and made available on Amazon in December 2021.

The Company is currently marketing the SteraPak product through all divisions.

On August 10, 2021, we secured a project to install an iHP Custom Engineered System (CES) for a major pharmaceutical company in Europe and are currently working with their locations in Brazil, Mexico, Germany, and Canada to purchase and implement SteraMist as their standard decontamination solution.

On September 13, 2021, we launched a new Amazon store for the recently launched SteraPak, in the USA.

On September 16, 2021, our technology has passed the EN 17272 evaluation.

The EN 17272 is the European standard for airborne room disinfection in the form of gas, steam and/or aerosol.

On September 27, 2021, we entered into definitive agreements with several institutional investors for the issuance and sale of 2,869,442 shares of its common stock in a registered direct offering priced at-the-market under Nasdaq rules

On October 5, 2021, we received a purchase order from a multinational top five pharmaceutical company.

On October 11, 2021, we obtained EPA registration for its 0.35% hydrogen peroxide BIT Solution, an all-in-one disinfectant for use across the entire food supply chain.

As conferences and tradeshows are reopening for companies to exhibit live, TOMI will be attending multiple shows across the country in 2022.

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.

On January 12, 2022, we assisted the decontamination efforts of On Demand Pharmaceuticals, an innovative technology company transforming how medicines are made, by providing its SteraMist Environmental Systems for use at On Demand Pharmaceutical’s modular cleanroom.

On February 10, 2022, we announced that we received approximately $1.3 million of orders for our CES and have set installation dates for these systems.

Two of the orders are from a Fortune 500 pharmaceuticals company and the other is from a leading research facility focused on immunology and infectious disease.

These additional CES orders are timed nicely after the final commissioning of the CES reported in October 2021 and installed months later after announcement for Fresenius Kabi’s Portuguese affiliate Labesfal S.A.

located in the heart of Portugal.

On March 8, 2022, we partnered with ARM EnerTech Associates, LLC, a U.S.-based engineering services & custom control panel manufacturer, to further develop its SteraMist brand of products.

On March 10, 2022 we announced that we fulfilled an urgent shipment of multiple SteraPak units to its local distributor in Hong Kong, TOMIMIST Hong Kong.

The units were deployed by a well-known real-estate conglomerate in Hong Kong for use in shopping malls, commercial and residential buildings, and numerous other business premises to effectively combat the massive outbreak of COVID-19 Omicron variant infections in the city.

As conferences and tradeshows reopened in 2022 to provide for companies to exhibit live, TOMI attended multiple shows across the country.

In April, 2022, we attended RIA 2022 International Restoration Convention & Industry Expo.

This show provided insight on the future of restoration businesses regarding mergers and acquisitions and meetings with core entities to discuss SteraMist disinfection potential with large franchises.

On April 25, 2022, TOMI was exhibited at FDIC International, which is the largest fire and rescue conference.

As first-time exhibitors, we gained knowledge on the EMS market and their need for disinfection.

With concerns of corrosion, vehicle turnover time, and residues left behind by older technologies, SteraMist technology saw great interest as it does not corrode or damage equipment, leave residue, and quickly disinfects.

This market eagerly awaits the release of the iHP SteraMist Transport System.

On May 19, 2022, Dr.

Halden Shane presented at the H.C.

Wainwright Investment Conference.

On May 20, 2022, we attended the INTERPHEX 2022 Technical Conference and exhibited three of our SteraMist mobile units.

The INTERPHEX technical conference is designed to host and connect state-of-the-art market leaders in the pharmaceutical, biotechnology, and life sciences industries.

On June 3, 2022, we announced that our SteraMist technology was included on the List Q for the use of its BIT solution to help fight the spread of rare or novel viruses such as Monkeypox virus, SARS-CoV-2 and its variants that causes COVID-19.

TOMI was notified of EPA’s inclusion on June 2, 2022.

On August 4, 2022, we announced that we had received multiple purchase orders for TOMI’s iHP CES.

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.

On September 12-14, 2022, Dr.

Halden Shane presented virtually at the H.C.

Wainwright 24th Annual Global Investment Conference.

On September 27, 2022, we announced that a U.S.

based multinational pharmaceutical company would be 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 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).

TOMI anticipates attending multiple shows across the country in 2023.

It is critical for TOMI to perform live demonstrations to showcase the difference between our SteraMist iHP technology and our competitors.

TOMI looks forward to making a large impact with live demonstrations of SteraMist disinfection technology throughout our multiple divisions.

2022 Highlights to Date:

TOMI recently received purchase orders, acceptance of CES proposals, and completed the supplier questionnaire (the first step to receiving a purchase order) for CES’s of approximately $1.3M.

These orders include a multi-national pharmaceutical company who locally has chosen SteraMist in two of their areas requiring superior decontamination.

The latter is a renowned institute that focuses on immunology and infection disease.

Research Studies:

The EPA has registered our 0.35% hydrogen peroxide product for the use in green houses, pre harvests and post harvests.

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 greenhouses, 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.

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regulatory agencies in approving new submissions, including TOMI's new 1% registration.

TOMI has partnered with the Department of Chemistry and Biochemistry of Texas Tech University to conduct a wide range of studies on spray pattern, deposition, and hydrogen peroxide content to compare our 1% label to other similar products on the market.

TOMI has also once again partnered with USDA Agricultural Research Service for continued research on 1% solution.

TOMI's long term relationship with USDA ARS continues to achieve results.

In March 2021, an article entitled "Hydrogen peroxide residue on tomato, apple, cantaloupe, and Romaine lettuce after treatments with cold plasma-activated hydrogen peroxide” was accepted for publication in the Journal of Food Microbiology and we are excepting another paper to be published by the end of the year.

We continue to work with our German aircraft partner and Boeing in a third-party test required for the aviation industry.

We will incur no costs for this work as both testing partners are clients.

We anticipate the testing will be completed in the first quarter of 2022.

As previously discussed, TOMI has engaged HYGCEN Germany GmbH to perform a quantitative test of germ carriers for airborne room disinfection and testing of the effectiveness of a method for disinfecting room air to meet the new EU norm (standard) EN 17272.

Certification that Binary Ionization Technology meets the new standard will continue to position iHP as the premier decontamination/disinfection technology available on the market today.

On September 16, 2021, we announced that our technology has passed the EN 17272 evaluation.

The EN 17272 is the European standard for airborne room disinfection in the form of gas, steam and/or aerosol.

October 2021, Applied Biosafety published a paper titled “Mechanisms of Sporicidal Activity Induced by Ionized Hydrogen Peroxide in the Spores of Bacillus astrophaeus.” This study reviewed the effects of iHP on the structure of the spores of Bacillus atrophaeus by observing its effects using transmission electron microscopy (TEM) and by evaluating the existence of DNA damage by fiuorescence-based quantitative polymerase chain reaction (qPCR).

The results of the qPCR analysis showed two initial stages of damage to DNA with very noticeable damage at 12 h contact time, which confirms the observations of the TEM micrographs for the B.

atrophaeus spores.

In short, the study demonstrated damage to the spore core DNA.

We have participated in a large multi-year federal funded study, known as the “SHIELD study” that compares hospital manual cleaning to a SteraMist ® mechanical cleaning.

Preliminary results collected by the current hospitals in the study is showing a decrease in the transference of pathogens resulting in HAIs and Clostridium difficile infections in the rooms that used SteraMist ® for their terminal clean, as compared to the rooms that have been manually cleaned.

Sufficient data has been collected to complete the study in 2021, and we expect that data to be provided to the examiners with a published paper to soon follow.

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.

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.

Product Development:

As many industrial companies are reducing R&D and capital expenditures spending due to the economic impact of the pandemic, TOMI continues its capital and operating expenditures.

We have orders for supplies and materials that are required in our equipment and are prepared to continue the manufacturing of all our products and should not be impacted by supply and material shortages.

Further, TOMI has multiple suppliers, outsourced engineers, and software programmers to turn to for the manufacturing and installation of its SteraMist products.

For the 2022 year and beyond TOMI expects measurable growth in winning SteraMist Custom Engineered Systems (CES) bids and the manufacturing and implementation of these fully automated decontamination systems.

One such technology, was the use of ionized Hydrogen Peroxide (iHP) decontamination.

SteraMist’s Custom Engineered System (CES) has become a leading solution to growing customer demands.

The CES eliminates issues such as human error, improves accuracy that is unmatched by competitors, and decreases a client’s labor cost and downtime.

We are in the process of developing two new product lines:

The Select Plus:

The Select Plus remains in the final design phase.

This is a hybrid product consisting of the Company’s current Surface Select and Environment systems.

The unit will allow for enhanced flexibility by using a single rotating applicator to decontaminate full-room to small-space volume with more robust process controls.

In addition, this product will be smaller and lighter than its current Select model.

We developed this product line in collaboration with Catalent.

As Catalent has been working closely and directly with the TOMI Tech team, three location facilities already have purchase orders in approval with their procurement office.

The Transport CES:

The Transport CES has been designed for the transportation market, specifically ambulances and boxed EMS vehicles.

The Transport CES is a simple timer based fogging system that can be installed semi-permanently or permanently and used for any transport and/or cargo vehicle.

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.

We believe the implementation of this product and our patented non-corrosive iHP technology should replace the number one competitor in this marketplace, which uses an extremely harsh chemical.

We expect this product to roll out during 2022 fiscal year.

Currently, one of our large hospital healthcare system customers has budgeted to implement the Transport CES into their fleet of ambulances.

This latest designed CES will use a 5-gallon container of BIT Solution.

This is in addition to our original 55-gallon drums used by current CES customers.

Our mobile units continue to use the 1-gallon BIT Solution containers sold in a case of 4, and for the SteraPak we use a 32-ounce bottle sold in a case of 8.

TOMI logistics has also implemented a 10-liter bottle for the initial purchase by a top 5 global bio-pharmaceutical company we announced in early October 2021.

All BIT Solution options remain secure and protected with our RFID reader and label during usage.

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 volt, 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.

Supply Chain:

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Cash and cash equivalents

Deferred Revenue

Accounts receivable, net

Inventories, net

Prepaid expenses

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Other Receivables

Current liabilities

Current liabilities – Excluding Deferred Revenue

Long-term liabilities

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Net cash used in investing activities $241,000.

Gain upon debt extinguishment of $415,000.

Net proceeds from the sale of stock and warrants of $4,582,000

Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

For The Years Ended

$ (17,274,000 )

(10,456,000 )

For The Years Ended December 31,

Total Operating Expenses (1)

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$ (2,880,000 )

$ (4,435,000 )

Basic Net Income (Loss) per share

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Includes $653,000 and $0 in non-cash equity compensation expense for the years ended December 31, 2022 and 2021, respectively.

During the years ended December 31, 2021 and 2020, we had net revenue of approximately $7,754,000 and $25,028,000, respectively, representing a decrease in revenue of approximately $17,274,000.

We experienced a significant decline in our revenue for the year ended December 31, 2021 as compared to the same prior year periods primarily due to the significant increase of demand caused by the onset of COVID-19 pandemic in the first half of 2020.

We were positioned well to respond to the pandemic related spike in demand due to our inventory levels and increased production capacity, which led to substantial revenue growth in the first and second quarter of 2020.

However, during the second half of 2020 and early 2021, many of our established vertical clients were closed or required to reduce operation due to the impact of COVID-19 pandemic on their businesses.

The markets that were negatively affected included our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies globally.

In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore substantially reduced elective surgical and clinical related services, resulting in limited non-essential onsite personnel.

These trends made it more difficult for us to demo our equipment and execute our sales and marketing strategies.

During the years ended December 31, 2022 and 2021, we had net revenue of approximately $8,338,000 and $7,754,000, respectively, representing an increase in revenue of approximately $584,000 or 8%.

As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter.

Further, as the COVID-19 pandemic subsides, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities, including continuing focus on cleaning and disinfection protocols of existing and new customers.

Further, as the COVID-19 pandemic has subsided, 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.

For The Years Ended December 31,

Product and Service Revenue

For The Years Ended

For The Years Ended December 31,

SteraMist Product

$ (16,792,000 )

Service and Training

$ (17,274,000 )

SteraMist product-based revenues for the years ended December 31, 2021 and 2020, were $6,179,000 and $22,971,000, representing a decrease of $16,792,000 when compared to the same prior year period.

SteraMist product-based revenues for the years ended December 31, 2022 and 2021, were $6,864,000 and $6,179,000, representing an increase of $685,000 when compared to the same prior year period.

Our service-based revenue for the years ended December 31, 2022 and 2021, was $1,474,000 and $1,575,000, respectively, representing a year over year decrease of $101,000.

Revenue by Geographic Region

For The Years Ended

For The Years Ended December 31,

United States

$ (11,964,000 )

International

$ (17,274,000 )

Our domestic revenue for the years ended December 31, 2022 and 2021, was $6,261,000 and $6,403,000, respectively, a decrease of $142,000 when compared to the same prior year period.

Internationally, our revenue for the years ended December 31, 2021 and 2020, was approximately $1,351,000 and $6,661,000, respectively, representing a decrease of $5,310,000.

Our recognized domestic revenue and domestic customer sales backlog for the year ended December 31, 2022, together, was approximately $8,285,000 which was comprised of recognized revenue of $6,261,000 and a customer sales backlog as of December 31, 2022, of approximately $2,024,000.

Internationally, our revenue for the years ended December 31, 2022 and 2021, was approximately $2,077,000 and $1,351,000, respectively, representing an of $726,000.

Cost of Sales

For The Years Ended

For The Years Ended December 31,

Cost of Sales

Cost of sales was $3,167,000 and $9,985,000 for the years ended December 31, 2021 and 2020, respectively, a decrease of $6,818,000, compared to the prior year.

The primary reason for the decline in cost of sales is attributable to lower sales and revenue in the current year.

Cost of sales was $3,278,000 and $3,167,000 for the years ended December 31, 2022 and 2021, respectively, an increase of $110,000, compared to the prior year.

The primary reason for the increase in cost of sales is attributable to higher sales and revenue in the current year.

Our gross profit as a percentage of sales for the years ended December 31, 2022 was 60.6% compared to 59.2% in the same prior period, respectively.

The lower gross profit is attributable to the product mix in sales.

In the prior year period and due to the pandemic, there was a higher concentration of solution-based revenue due to panic buying and hoarding of disinfection products by our clients as our solution sales carried a higher gross profit.

The higher gross profit is attributable to the product mix in sales.

Professional Fees

For The Years Ended

For The Years Ended December 31,

Professional Fees

Professional fees are comprised mainly of legal, accounting, and financial consulting fees.

Professional fees were $538,000 and $681,000 for the years ended December 31, 2021 and 2020, respectively, a decrease of approximately $143,000 in the current year period.

The decrease is attributable to additional professional fees in connection with the maintenance of our intellectual property that occurred in the same prior year period and legal costs incurred in connection with our up-listing to Nasdaq.

Professional fees were $536,000 and $538,000 for the years ended December 31, 2022 and 2021, respectively, representing an increase of approximately $2,000 in the current year period.

Depreciation and Amortization

For The Years Ended

For The Years Ended December 31,

Depreciation and Amortization

Depreciation and amortization were approximately $295,000 and $720,000 for the years ended December 31, 2021 and 2020, respectively, representing a decrease of $425,000.

The decline is due to intangible assets that became fully amortized in 2020 which has led to a lower amortization expense in the current year period.

Depreciation and amortization were approximately $329,000 and $295,000 for the years ended December 31, 2022 and 2021, respectively, representing an increase of $34,000, or 12%.

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 period.

Selling Expenses

For The Years Ended

For The Years Ended December 31,

Selling Expenses

Selling expenses for the year ended December 31, 2021 were approximately $1,674,000, as compared to $1,247,000 for the year ended December 31, 2020, representing an increase of approximately $427,000.

The increase in selling expense is attributable to a higher employee headcount and the related increase in payroll as well as increased advertising and marketing costs incurred in the current year period.

Selling expenses for the year ended December 31, 2022 were approximately $1,867,000, as compared to $1,674,000 for the year ended December 31, 2021, representing an increase of approximately $193,000, or 12%.

The increase in selling expense is attributable to a higher sales commissions and increased tradeshow costs in the year period.

We continue to invest and allocate resources into our sales, marketing and advertising initiatives and have increased efforts in the current year in order to further develop our brand recognition and grow our base of customers.

Research and Development

For The Years Ended

For The Years Ended December 31,

Research and Development

Research and development expenses for the year ended December 31, 2021 were approximately $573,000, as compared to $455,000 for the year ended December 31, 2020, representing an increase of approximately $118,000.

The increase in research and development expenses is attributable to new product development and increased testing.

Research and development expenses for the year ended December 31, 2022 were approximately $352,000, as compared to $573,000 for the year ended December 31, 2021, representing a decrease of approximately $221,000, or 39%.

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 Years Ended

For The Years Ended December 31,

Consulting Fees

Consulting fees were $326,000 and $327,000 for the years ended December 31, 2021 and 2020, respectively.

Consulting fees were $215,000 and $327,000 for the years ended December 31, 2022 and 2021, respectively, representing a decrease of $112,00, or 34%.

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.

General and Administrative Expense

For The Years Ended

For The Years Ended December 31,

General and Administrative

$ (1,461,000 )

General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense, product registration costs and bad debt expense.

General and administrative expense was $4,643,000 and $6,104,000 for the years ended December 31, 2022 and 2021, respectively, a decrease of 1,461,000 in the current year period.

The increase in general and administrative expense is primarily attributable to increase in our allowance for doubtful accounts receivable, higher insurance and listing fees associated with the up-listing to the Nasdaq Capital Market as well as a higher employee headcount resulting in an increase in wages.

The decrease in general and administrative expense is primarily attributable to lower payroll costs, insurance and bad debt expense.

Other Income and Expense

For The Years Ended

For The Years Ended December 31,

Gain Upon Debt Extinguishment

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Provision for Income Taxes

For The Years Ended

For The Years Ended December 31,

Provision for Income Tax Expense (Benefit)

Income tax benefit was $74,000 for the year ended December 31, 2020 and provision for income tax expense was $77,000 for the year ended December 31, 2020.

Income tax benefit was $74,000 for the year ended December 31, 2021.

Liquidity and Capital Resources

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The Warrants are exercisable at an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance.

For the year ended December 31, 2021, we incurred a loss from operations of ($4,924,000) and for the year ended December 31, 2020, we generated income from operations of $4,509,000.

Cash used in operations for the year ended December 31, 2021, was ($3,825,000).

Cash provided from operations was $4,578,000 for the year ended December 31, 2020.

For the year ended December 31, 2022 and 2021, we incurred losses from operations of ($2,882,000) and ($4,924,000), respectively.

Cash used in operations for the year ended December 31, 2022 and 2021, was ($1,234,000) and ($3,824,000), respectively.

A breakdown of our statement of cash flows for the year ended December 31, 2022 and 2021 is provided below:

For the Year Ended December 31,

Net Cash Provided By (Used) in Operating Activities

Net Cash Used in Operating Activities

$ (1,234,000 )

$ (3,824,000 )

Net Cash Used in Investing Activities

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Operating Activities

Cash used in operating activities for the year ended December 31, 2021 was $3,825,000, compared to cash provided by operations for the year ended December 31, 2020 of $4,578,000.

Cash used in operating activities for the year ended December 31, 2022 and 2021 was $1,234,000 and $3,824,000, 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 years ended December 31, 2022 and 2021 was $241,000 and $639,000, 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 the years ended December 31, 2022 and 2021 was $25,000 and $4,582,000 respectively.

The cash provided by financing activities increased as a result of the proceeds we received in connection with the sale of our common stock and warrants.

The cash provided by financing activities declined as a result of the proceeds we received in connection with the sale of our common stock and warrants in the prior year period.

Our revenues can fluctuate due to the following factors, among others:

ramp up and expansion of our internal sales force and manufacturers’ representatives;

ramp up and expansion of our internal sales force and manufacturer’s representatives;

length of our sales cycle;

global response to the outbreak of COVID-19 Pandemic;

global response to the outbreak of COVID-19 Pandemic and or other outbreaks;

expansion into new territories and markets;

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continued growth in all of our verticals.

During 2022 we experienced increased demand for our CES where we collect deposits upon the execution of the contract.

The deposits we receive fund the production for the CES and improve our overall liquidity through the duration of the project.

We believe our sales for our CES will continue to grow and improve our financial results from a liquidity perspective as well as improve our operating margins due to the higher recurring solution sales we see for our CES system.

As of December 31, 2022, we maintained a customer sales backlog of $2,024,000 of which we anticipate will be recognized into revenue and will provide a boost to our cash generated from core operations in our 2023 calendar year.

We believe our sales pipeline and the related deferred revenue will continue to grow in 2023 and improve our liquidity position during the next twelve months.

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

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

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Actual results could differ materially from our estimates.

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment.

We consider the following policies to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows.

The SEC defines critical accounting estimates 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 estimates to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows.

Revenue Recognition

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Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse.

The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with Accounting Standards Codification (ASC) guidance for income taxes.

Net Income (Loss) Per Share

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Recently issued accounting pronouncements not yet adopted

In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures.

This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020.

This ASU also enhances the disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty.

In addition, the ASU amends the guidance on vintage disclosures to require entities to disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20.

The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years.

Adoption of the ASU would be applied prospectively.

Early adoption is also permitted, including adoption in an interim period.

This ASU is currently not expected to have a material impact on our consolidated financial statements.

In October 2021, the FASB issued ASU No.

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This ASU is currently not expected to have a material impact on our consolidated financial statements.

Recently adopted accounting pronouncements

In November 2021, the FASB issued ASU No.

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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.

We adopted ASU 2021-10 starting in 2022, which did not have a material impact on our consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis