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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-16 · 249 added, 238 removed, 222 unchanged (69% of the section changed)

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The following discussion and analysis of our financial condition and results of operations relates to the years ended December 31, 2023 and 2022.

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.

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 Annual Report on Form 10-K.

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.

During our 2023 calendar year, we continued to build out our sales infrastructure through the expansion of our distribution network, diversified our product line to support our expanding customer base and the related utilization of our SteraMist technology and delivered multiple custom engineered systems to key customers.

Our year-over-year revenue declined due to the timing of customer orders.

In October and November of 2023, we agreed to sell and issue 12% convertible notes in a private placement in one or more closings up to an aggregate principal amount of $5,000,000.

As of November 7, 2023, we sold and issued an aggregate of $2,600,000 to certain investors pursuant to a Securities Purchase Agreement, dated November 7, 2023.

We are using the net proceeds from this offering for working capital and other general corporate purposes.

Management continues to focus on expanding our sales channels through the addition of distributors, outside sale representatives, internal sales staff, and external consultants.

During 2023, we focused on expanding our network of distributors and sale representative and business development initiatives.

We brought on and onboarded 9 distributors and 11 sales representatives, which has expanded our presence domestically and on an international basis.

We anticipate the increased bandwidth of our internal and external sales channels will have a positive impact on our revenue in 2024 and beyond.

In addition, we entered into a contract with Vizient, Inc.

increasing our presence in the U.S.

healthcare system.

Vizient is the largest GPO in the healthcare industry supplying around $100 billion in annual member purchasing volume.

Vizient serves approximately 97% of the nation’s Academic Medical Centers, more than 50% of the nation’s acute care health system, and serves more than 20% of the nation’s ambulatory market.

This contract enables us to supply SteraMist systems to a wide range of healthcare providers, including academic medical centers, pediatric facilities, and community health providers, through Vizient’s nationwide network.

Most recently in November 2023, we announced the addition of Sterile Grow, a United States based distributor and consultation company in the food and cannabis market.

Sterile Grow, led by Burrell Williamson III and Tri Nguyen, has demonstrated noteworthy achievements in the cannabis and food markets.

Williamson, rooted in the greenhouse industry, has expanded into vertical farming, bringing extensive expertise to the food and cannabis sectors.

Tri Nguyen specializes in controlled environment agriculture, particularly in integrating systems for large-scale indoor cannabis cultivation.

Combining their cultivation knowledge and past success with SteraMist, Sterile Grow has joined forces as a distributor with the purchase of mobile equipment in our current quarter.

In November 2023, we entered into a consulting agreement with BEAMS, LLC to strengthen and expand the TOMI SteraMist Network and increase business development in the commercial market.

BEAMS, LLC brings over 20 years’ experience establishing strategic vision and direction of large institutions and companies spanning multiple industries, including higher education, not-for-profit, healthcare, consultancy, hospitality, and pharmaceutical sectors.

We remain actively engaged in marketing and submitting bids for Custom Engineered Systems (“CES”) project as the market continues to shift to fully automatic disinfection and decontamination solutions.

We are also diligently working with existing outstanding potential purchasers while simultaneously building a robust pipeline for these long-term installations.

Further, we have expanded our bandwidth to meet the increasing demands for the product line, which includes the SteraMist Integration System for enclosures and have successfully navigated the challenges posed by the global supply chain issues.

During 2023, we completed and delivered four CES systems, as follows:

During the first quarter, we delivered a CES system to Orna Therapeutics, a leading biotechnology company located in Massachusetts.

As we complete each CES project, our iHP technology is becoming widely preferred as a decontamination solution for pharmaceutical and biotech companies.

Further, with each new CES installation the product line becomes more of a turnkey solution.

We obtained the Orna project through a prior colleague from Dana Farber Cancer Institute who became a spokesperson to the preference of SteraMist iHP for Orna.

During the second quarter, we delivered an eleven applicator CES system to Avid Bioservices, Inc.

(“Avid”) for implementation in Avid’s new purpose-built viral vector development and manufacturing facility in Costa Mesa, California.

During the third quarter of 2023, we delivered a three applicator CES system to Ragon Institute of MGH, MIT and Harvard for implementation in their research and clinical lab located in Cambridge, MA.

During the third quarter of 2023, we delivered to a one applicator system Indigo Pharmaceutical, Inc.

in Las Vegas, Nevada.

Our patented technology continues to be the answer to cell therapy manufacturing.

SteraMist iHP technology brings unparalleled decontamination capabilities, thanks to its small micron particles and speed, which provide distinct advantages in terms of efficacy and safety compared to other commercially available decontamination methods.

Our strategic integration plans will only enhance the overall performance and reliability of the Cell Shuttle industry, ensuring comprehensive and efficient decontamination for the end user’s processes.

To date, we have received 16 orders for CES systems.

With the successful completion of each project, our iHP technology is rapidly gaining popularity as the preferred decontamination solution for pharmaceutical and biotech companies.

Further, as we continue to install our technology in new CES projects, the product line evolves into a comprehensive turnkey solution.

Indeed, the timing is favorable as the industry is experiencing a shift towards modular cleanroom requirements.

The adaptability and efficiency offered by our iHP technology align perfectly with the changing needs of cleanroom setups.

This trend allows us to capitalize on the increasing demand for flexible and scalable cleanroom solutions, further enhancing the relevance and value of our products within the industry.

We believe our growing portfolio of CES systems will give us a competitive edge in the Life Sciences market segment improving our brand recognition.

This should create new business and sales opportunities for us.

In addition, after our installed CES projects are fully qualified and established for use, and our portfolio grows, we anticipate this will have a positive impact on our long-term recurring BIT solution sales thus providing the potential to enhance our operating margins, further strengthening our position in the industry, and supporting sustainable growth.

In 2023, we saw a continued increase in demand for our SteraMist iHP service.

For the year ended December 31, 2023 and 2022, our iHP service revenue was $1,660,000 and $1,474,000, respectively, representing a 13% increase.

In August of 2023, Pfizer Rocky Mount engaged our iHP service team to conduct emergency decontamination within their facility, which suffered substantial damage due to a tornado.

Pfizer Rocky Mount has been a long-term, loyal client of TOMI, having commenced their utilization of SteraMist iHP Corporate Service in 2014.

Since then, TOMI has been performing decontamination service twice a year during their facility’s routine scheduled shutdowns and called on as necessary throughout the years.

On March 7, 2024, announced an expansion in its SteraMist iHP Corporate Service contracts with the addition of new partners including the University of Texas and Rising Pharmaceuticals reaffirming its position as a leading provider of decontamination services to corporate clients in the life sciences industry.

We continued to diversify our base of products in 2023 with the introduction of the SteraMist Hybrid and SteraMist Transport, to support our ongoing commitment to providing superior disinfection decontamination solutions for our growing customer base.

Throughout 2023, we remained active in our marketing initiatives and attended and presented our SteraMist brand of products at various tradeshows, most notable were Interphex, Food Safety Summit, AALAS, ISSA North America, and MJBiz Conference.

In the fourth quarter of 2023, we attended and presented at the following shows:

Pharma Ed Aseptic, ISPE National, AALAS National Conference, NFMT Remix Conference, Bio Innovation, ISSA North America, and MJBiz Conference.

In June 2023, we launched our updated website, now accessible through our new domain name steramist.com.

The refreshed website offers a modern, user-friendly design and streamlined navigation, providing visitors with easy access to essential information about SteraMist products and services.

Business Highlights and Recent Events

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.

Total revenue for the year ended December 31, 2023, and 2022, was $7,355,000 and $8,338,000, respectively, representing a decrease of $983,000, or 12% compared to the same prior year period.

The decrease in revenue was attributable to the timing of customer orders.

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

This pandemic has provided us with the confidence to develop a clear strategy to develop and manufacture additional products to add to our portfolio.

The COVID-19 pandemic along with the needs of the pharmaceutical and vivarium space has provided us with the opportunity and experience 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.

This should lead to increased market share, profitability, and capability strength.

Our products are an environmentally friendly solution and process which address the concerns of sustainability.

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

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.

Our products are an environmentally friendly solution, and our processes 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 and environmentally unfriendly results of many other disinfectants.

SteraMist has established a successful track record in fighting pandemics and outbreaks and implementing SteraMist for emergency preparedness is vital.

The COVID-19 pandemic took the world by surprise, and history has shown that other pandemics and viruses are likely to follow.

Using a proven and trusted disinfectant for emergency outbreaks and daily for preventative maintenance, such as SteraMist, can alleviate the threat of infections from spreading and could stop a possible outbreak.

2023 Events and Highlights:

On January 17, 2023, we announced National Health Services (NHS) Wales purchased SteraMist ionized Hydrogen Peroxide (iHP) technology further expanding our presence in Great Britain.

On January 25, 2023, we announced that we would present our SteraMist brand of products at three upcoming International Society for Pharmaceutical Engineering (ISPE) Conferences in the first quarter of 2023:

The ISPE Facilities of the Future Conference, that was held in Bethesda, MD, January 31 and February 1, 2023;

the ISPE-CaSA Life Sciences Technology Conference in Raleigh, NC, held on February 28, 2023;

and the ISPE Aseptic Conference in Bethesda, MD, held on March 6 and 7, 2023.

On April 20, 2023, we announced our participation in several upcoming industry tradeshows, including CETA International, RIA International, the Lab Manager Leadership Summit, FDIC International, and the INTERPHEX Conference.

The company has showcased its SteraMist products, a proprietary and industry-leading disinfection technology, designed to combat a broad spectrum of viruses and bacteria spores.

On April 24, 2023, we announced the addition of four independent manufacturing representatives and distributors to our expanding national and global network.

Included in the additions are JANZ Corporation, New England Scientific Associates (NESA) by Baker, Crow Food Safety (Pty) Ltd, and ARES Scientific.

On April 26, 2023, we announced that approximately 20 billion medical devices are sterilized per year with Ethelene Oxide and a proposal restriction restricting its usage could create a significant market void that may be filled with alternative sterilization processes such as TOMI’s patented Binary Ionization Technology ® (BIT™) Technology.

On May 10, 2023, we announced our SteraMist technology was recognized as one of the Top 10 Infection Solution Providers of 2023 in the recent infection control solutions special edition.

On May 11, 2023, we announced the addition of Technimount System (“Technimount”) as an exclusive distributor selling capital equipment to the emergency medical services market throughout Canada.

On May 18, 2023, we announced the launch of our updated website, now accessible through the new domain name steramist.com.

The refreshed website offers a modern, user-friendly design and streamlined navigation, providing visitors with easy access to essential information about SteraMist products and services.

On May 31, 2023, we announced the completion of a study conducted in accordance with the U.S.

Department of Defense’s Biological Select Agents and Toxins Biorisk Program Office which demonstrated SteraMist iHP as an effective technology for decontamination of biological toxoids.

On June 5, 2023, we announced that the Company has entered a contract with Vizient, Inc., increasing TOMI’s presence in the U.S.

healthcare system.

On June 22, 2023, we announced a partnership with I.B.D., as a distributor in Italy.

On August 3, 2023, we announced a collaboration with Cellares to integrate its SteraMist ionized Hydrogen Peroxide (iHP) technology into a cutting-edge new cell therapy manufacturing solution, the Cell Shuttle, designed and produced by Cellares.

On August 14, 2023, we announced that Pfizer Rocky Mount has engaged TOMI’s iHP Corporate Service to conduct emergency decontamination within their facility, which suffered substantial damage due to a recent tornado.

On September 5, 2023, we announced the completion of a study funded by the USDA and NIFA which demonstrated SteraMist iHP as an effective treatment of deformed wing virus (DWV) contaminated hive substrates.

On September 13, 2023, we announced the expansion of our distribution channels with Avantor ® (NYSE:

AVTR), a Fortune 500 company and a leading supplier of mission-critical products and services.

On September 13, 2023, we announced that we partnered with Colcom, Inc.

to offer SteraMist iHP products as part of Colcom’s life sciences and healthcare portfolio of products.

On September 29, 2023, we announced the roll out of two new products, the SteraMist Hybrid and SteraMist Transport, to support its ongoing commitment to providing superior disinfection decontamination solutions for its growing customer base.

On November 27, 2023, we announced the addition of Sterile Grow, a United States based distributor and consultation company in the food and cannabis market.

2024 Highlights:

On February 29, 2024, we announced the signing of a new contract for a SteraMist iHP Custom Engineered System (CES) installation with a California-based life sciences company.

The contracted iHP Custom Engineered System (CES) is valued at approximately $600,000.

This system, featuring six applicators, will be integrated into a clinical suite, and is expected to be fully installed by the end of the third quarter in 2024.

On March 11, 2024, we announced a new groundbreaking study demonstrating the effectiveness of its solutions against foot-and-mouth disease virus (FMDV).

This significant advancement supports the Company’s submission for an additional EPA label.

Research Studies:

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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).

TOMI has successfully completed a second 24-month storage stability, this one to meet 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.

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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.

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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.

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SteraMist continues to penetrate the market with additional studies and bringing on premier clients.

In August 2023, we announced the completion of a study funded by the USDA and the National Institute of Food and Agriculture (“NIFA”) which demonstrated SteraMist iHP as an effective treatment of deformed wing virus (“DWV”) contaminated hive substrates.

In 2024, we will continue to use research and testing to inform the marketplace of the effectiveness of our products.

One goal of TOMI is to make SteraMist a recommended best practice to minimize emergency responder exposures to synthetic opioids, including fentanyl and fentanyl analogs.

We are also investigating whether SteraMist can play a role in controlling the environmental impact from perfluorooctane sulfonate (PFOS) and perfluorooctanoic acid (PFOA).

These substances and group of chemicals have been released to the environment through industrial manufacturing and through the use and disposal of PFAS containing products.

As a result, they are found across all trophic levels in the soil, air, and groundwater at sites across the United States and the rest of the world.

On April 26, 2023, we announced that approximately 20 billion medical devices are sterilized per year with Ethelene oxide and a proposal restriction restricting its usage could create a significant market void that may be filled with alternative sterilization processes such as TOMI’s patented Binary Ionization Technology ® (BIT™) Technology.

On March 14, 2024, the New York Times published an article “E.P.A.

Sets Limits on Carcinogenic Gas Used to Sterilize Medical Devices” which stated,

The Environmental Protection Agency is imposing new restrictions on the emissions of ethylene oxide, a colorless gas that is widely used to sterilize medical devices and is also a carcinogen.

The regulation, which is expected to be finalized shortly, would force sterilizing plants and other facilities that use ethylene oxide to install pollution controls to reduce emissions of the gas by about 90 percent.

It would mark the first time in 20 years that the government has tightened limits on the amount of the gas permitted to escape from a manufacturing facility.

Ethylene oxide is used in a number of products but is applied to about half the medical equipment made in the United States to reduce the risk of infection.

When inhaled, the gas can irritate the eyes, nose, throat and lungs, and has been linked to lymphoid and breast cancer as well as damage to the brain and nervous and reproductive systems.

It is still very early in the process, but this could open up large manufacturing faculties that would have a need for our custom unit built-ins in the manufacturing of medical equipment to replace ethylene oxide, as SteraMist’s only by-product environmentally is humidity and oxygen.

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.

SteraMist Engineering continues to make strides collaborating with key manufactures of cleanroom technology and equipment developing a turnkey seamless decontamination integration to chambers, cabinets, passthroughs, isolators, cage washers, heat sterilizers, hot cells and more.

TOMI begins this endeavor with a project management, turnkey modular solution, and process design consulting firm that we have partnered with in one of our previous CES projects.

The SteraMist Hybrid, an integral component of the SteraMist ENV, SteraMist Hybrid is designed with capabilities to communicate with a facility.

The system is strategically positioned in a centralized location of the facility through a docking station and features our newly designed permanently mounted stainless steel applicators.

Recently, TOMI successfully installed the first SteraMist Hybrid at Indigo Pharmaceutical, Inc.’s existing research facility, which selected the SteraMist Hybrid because it met the client’s strict delivery timeline while adhering to the facility’s budget constraints.

We remain in specification discussions with Indigo for a Custom Engineered System for a future site dedicated to injectables.

The SteraMist Transport has seen positive reception of its SteraMist Transport unit, an all-in-one dual voltage fogging product designed to treat a wide variety of vehicle sizes with an application time of only 20 minutes per 1,000 cubic foot.

The initial batch of this innovative product is currently in a soft launch phase and has been sold this quarter for live practical assessment with an existing international customer.

The Select Plus (“Select Plus”) is 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.

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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.

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

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 Select Surface Unit performs most of the functionality that the Select 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.

We believe there are many new and existing clients that are interested in the SteraPak due to the cost and mobility.

TOMI recently launched its fourth generation SteraMist ENV.

The system will now be 24 volts, 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 outputs where four are dedicated to our regular process of constant or pulse Injection, Dwell, and Aeration along with a light beacon status bar and four are programmable to meet the customer needs for any external equipment they may desire to work with the system.

This system is currently on the market, has been implemented by customers, and is receiving praise for its further developments.

Our SteraMist® BIT™ solution product line is currently made up of a 32-ounce bottle for the SteraPak, a ten liter, five gallon, 55-gallon drum for our custom built-ins and our traditional one gallon bottle.

This brings the BIT Solution product line to a total of five options provided to our customers, which will 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 during this fiscal year.

Supply Chain:

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Our financial position as of December 31, 2023 and 2022, respectively, was as follows:

December 31, 2023

December 31, 2022

Total shareholders’ equity

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Deferred Revenue

Accounts receivable, net

Accounts receivable – Current, net

Prepaid expenses

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Other Receivables

Accounts receivable – Long Term, net

Current liabilities – Excluding Deferred Revenue

Long-term liabilities

Long-term liabilities – Convertible Notes

Long-term liabilities – Other

Working Capital

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Net cash used in investing activities $217,000.

Net cash provided from financing activities $2,288,000.

Results of Operations for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

For The Years Ended December 31,

For The Year Ended December 31,

Total Operating Expenses (1)

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Diluted Net Income (Loss) per share

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, 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%.

During the years ended December 31, 2023 and 2022, we had net revenue of approximately $7,355,000 and $8,338,000, respectively, representing a decrease in revenue of approximately $983,000 or 12%.

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 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 December 31,

For The Year Ended December 31,

SteraMist Product

$ (1,169,000 )

Service and Training

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.

SteraMist product-based revenues for the years ended December 31, 2023 and 2022, were $5,695,000 and $6,864,000, representing a decrease of $1,169,000 when compared to the same prior year period.

Our service-based revenue for the years ended December 31, 2023 and 2022, was $1,660,000 and $1,474,000, respectively, representing a year over year increase of $186,000.

Revenue by Geographic Region

For The Years Ended December 31,

For The Year Ended

United States

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Our domestic revenue for the years ended December 31, 2023 and 2022, was $6,125,000 and $6,261,000, respectively, a decrease of $136,000 when compared to the same prior year period

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.

Internationally, our revenue for the years ended December 31, 2023 and 2022, was approximately $1,230,000 and $2,077,000, respectively, representing a decrease of $847,000.

Cost of Sales

For The Years Ended December 31,

For The Year Ended

Cost of Sales

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

Cost of sales was $3,065,000 and $3,278,000 for the years ended December 31, 2023 and 2022, respectively, a decrease of $213,000, compared to the prior year.

The decrease in cost of sales was primarily due to the lower sales.

Our gross profit as a percentage of sales for the year ended December 31, 2023 was 58.3% compared to 60.7% in the same prior period, respectively.

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

Professional Fees

For The Years Ended December 31,

For The Year Ended

Professional Fees

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Professional fees were $576,000 and $536,000 for the years ended December 31, 2023 and 2022, respectively, representing an increase of approximately $40,000 in the current year period.

The increase is attributable to higher accounting and legal fees in the current year period.

Depreciation and Amortization

For The Years Ended December 31,

For The Year Ended

Depreciation and Amortization

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Selling Expenses

For The Years Ended December 31,

For The Year Ended

Selling Expenses

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.

Selling expenses for the year ended December 31, 2023 were approximately $1,351,000, as compared to $1,867,000 for the year ended December 31, 2022, representing a decrease of approximately $516,000, or 28%.

The decline in selling expenses is due to lower advertising costs and sales commission incurred in the current year period due to less sales generated by third party representatives.

Research and Development

For The Years Ended December 31,

For The Year Ended

Research and Development

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.

Research and development expenses for the year ended December 31, 2023 were approximately $492,000, as compared to $352,000 for the year ended December 31, 2022, representing an increase of approximately $140,000, or 40%.

The increase in in research and development expenses is due testing and product development in connection with the SteraMist Hybrid, Transport and Select Plus units.

Consulting Fees

For The Years Ended December 31,

For The Year Ended

Consulting Fees

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.

Consulting fees were $283,000 and $215,000 for the years ended December 31, 2023 and 2022, respectively, representing an increase of $68,000, or 32%.

The increase is due to the timing of certain projects that occurred in the current year that did not occur in the same prior year period.

The increase in consulting fees is due to the additional business development related consulting projects which occurred in the current year period that did not occur in the prior year period.

General and Administrative Expense

For The Years Ended December 31,

For The Year Ended

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 $4,571,000 and $4,643,000 for the years ended December 31, 2023 and 2022, respectively, a decrease of $72,000 in the current year period.

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

The decrease in general and administrative expense is primarily attributable to lower equity-based compensation in the current year period.

Other Income and Expense

For The Years Ended December 31,

Gain Upon Debt Extinguishment

For The Year Ended

Interest Income

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Other Income (Expense)

Gain upon debt extinguishment of $415,000 in connection with the forgiveness of a loan payable received under the Payroll Protection Program of the CARES Act.

Amortization of deferred financing costs was approximately $10,000 and $0 for the year ended December 31, 2023 and 2022, respectively.

This represents the amortization of costs incurred in connection with the convertible notes.

Interest income was approximately $12,000 and $2,000 for the years ended December 31, 2023 and 2022, respectively.

Interest expense was $55,000 and $0 for the years ended December 31, 2023 and 2022, respectively.

The interest expense is attributable to the convertible notes.

Provision for Income Taxes

For The Years Ended December 31,

For The Years Ended

Provision for Income Tax Expense (Benefit)

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

Provision for income tax was $0 for the years ended December 31, 2023 and 2022.

Liquidity and Capital Resources

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We have no plans of incurring any debt or equity financing.

In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering to certain institutional investors and issued warrants to purchase 1,434,721 shares of common stock in a concurrent private placement.

We received net proceeds from the transaction of $4,581,651, after deducting the placement agent’s fees and other offering expenses.

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

For the year ended December 31, 2023 and 2022, we incurred losses from operations of ($3,349,000) and ($2,882,000), respectively.

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For the Year Ended December 31,

Net Cash Used in Operating Activities

Net Cash Provided By (Used) in Operating Activities

$ (3,599,000 )

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Cash used in operating activities for the year ended December 31, 2023 and 2022 was $3,599,000 and $1,234,000, 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.

The increase was attributable to a higher current year loss, lower deferred revenue and accounts payable.

Investing Activities

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Cash provided by financing activities for the years ended December 31, 2023 and 2022 was $2,288,000 and $25,000 respectively.

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.

The cash provided by financing activities increased as a result of the proceeds from the convertible notes issued in October and November of 2023.

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

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length of our sales cycle;

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

global and regional response to the outbreak of infectious diseases;

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.

During 2022 and 2023, 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 our sales for our CES will continue to grow in 2024 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.

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.

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.

We may consider financing transactions to fund our operations if opportunities arise.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of stockholders.

Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures.

Debt financing would also result in fixed payment obligations.

We believe strongly that the current and historical trading prices of our Common Stock is depressed and does not reflect the actual valuation of the Company, and that our declining trading price was the result of active short selling and market manipulation at the close using the cross at the end of many days by certain investors in the market that is outside the control of the Company.

While short selling may be permitted in some cases under applicable laws, we believe that certain investors, particularly those investing in small and microcap companies like TOMI, may be circumventing regulatory requirements and conducting aggressive short selling that is designed to drive down the trading price of our Common Stock, including naked short selling tactics.

These activities have not only depressed our stock price, but also reduced the trading liquidity of our stock and caused damage to our reputation, while making it more difficult for us to secure financing to fund our operations and comply with NASDAQ’s minimum bid price requirements.

We believe that the regulatory authorities, such as the SEC and FINRA, should take more aggressive enforcement actions against short selling traders who are undermining the values of microcap companies, and we will continue our various efforts and strategies to ensure that trading price of our stock reflects the true value of TOMI and generates positive returns for our shareholders.

On November 7, 2023, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (collectively, the “Investors”) pursuant to which we agreed to sell and issue to the Investors in a private placement transaction (the “Private Placement”) in one or more closings up to an aggregate principal amount of $5,000,000 (the “Notes”).

As of November 7, 2023, we issued and sold an aggregate of $2,600,000 of Notes to certain Investors pursuant to the SPA.

The gross proceeds from the transaction are approximately $2,600,000, before deducting the placement agent’s fees and other estimated offering expenses.

We intend to use the net proceeds from this offering for working capital and other general corporate purposes.

The initial closing of the Private Placement occurred on November 7, 2023.

The Notes are due on the fifth anniversary of the issuance date of the Notes and bear simple interest at a rate of 12% per annum, payable in equal monthly installments.

The Notes are convertible into shares of our Common Stock, at the option of the holder, at a conversion price of $1.25 per share, which shall not exceed $1.55 per share.

In addition, we can require Investors to convert the Notes at the then current conversion price at any time after 90 days from the issue date if the Common Stock has a closing bid price of $1.55 per share or higher on any twenty days within a thirty day period of consecutive trading days, or if a “fundamental change” occurs (as defined in the SPA).

The Notes are unsecured and senior to other indebtedness subject to certain exceptions.

Critical Accounting Estimates

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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.

Estimated allowances for sales returns are recorded as sales are recognized.

We use a specific identification method based on subsequent product return activity and historical average calculation to estimate the allowance for sales returns.

Costs to Obtain a Contract with a Customer

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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:

Quoted prices in active markets for identical assets or liabilities.

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.

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

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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 have a policy of reserving for credit losses 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.

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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.

We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842.

We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842.

This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities.

Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease.

As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise.

Furthermore, our lease payments are based on index rates with minimum annual increases.

These represent fixed payments and are captured in the future minimum lease payments calculation.

In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes.

Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred.

Generally, variable lease payments are based on usage and common area maintenance.

These payments will be included as variable lease expense when recognized.

Capitalized Software Development Costs

In accordance with ASC 985-20 regarding the development of software to be sold, leased, or marketed we expense such costs as they are incurred until technological feasibility has been established, at and after which time those costs are capitalized until the product is available for general release to customers.

The periodic expense for the amortization of capitalized software development costs will be included in cost of sales.

Accrued Warranties

Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products.

We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale.

Our manufacturers assume the warranty against product defects which we extend to our customers upon sale of the product.

We assume responsibility for product reliability and results.

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.

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

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We had no long-lived asset impairment charges for the years ended December 31, 2023 and 2022.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2023-07, Improvements to Reportable Segment Disclosures (Topic 280).

This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment’s profit or loss.

This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources.

The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements.

Early adoption is also permitted.

This ASU will likely result in us including the additional required disclosures when adopted.

We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024.

In December 2023, the FASB issued ASU No.

2023-09, Improvements to Income Tax Disclosures (Topic 740).

The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid.

The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024.

Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance.

This ASU will result in the required additional disclosures being included in our consolidated financial statements, once adopted.

Recently adopted accounting pronouncements

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

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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.

We adopted the ASU prospectively on January 1, 2023.

This ASU did not have a material impact on our consolidated financial statements.

In October 2021, the FASB issued ASU No.

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

Adoption of the ASU should be applied prospectively.

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

If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption.

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

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 consolidated financial statements.

We adopted this ASU prospectively on January 1, 2023.

This ASU did not have a material impact on our consolidated financial statements.

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity.

ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and improves the disclosures for convertible instruments and related earnings per share guidance.

ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance.

For public entities that qualify as a filer with the SEC, excluding entities eligible to be smaller reporting companies, ASU 2020-06 is effective for fiscal annual periods beginning after December 15, 2021, including interim periods within those fiscal years.

For nonpublic entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption was permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

ASU 2020-06 must be adopted as of the beginning of a company’s annual fiscal year.

ASU 2020-06 may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition.

The Company adopted ASU 2020-06 on January 1, 2021.

The adoption did not have an impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”), which provides new authoritative guidance with respect to the measurement of credit losses on financial instruments.

This update changes the impairment model for most financial assets and certain other instruments by introducing a current expected credit loss (“CECL”) model.

The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies.

The Company adopted ASU 2016-13 on January 1, 2023.

The adoption did not have an impact on our consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Financial STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K, beginning on page F-1, and are incorporated by reference herein.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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