TOMI Environmental Solutions, Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management conducted an evaluation of the effectiveness of our disclosure controls and procedures (as is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were designed, implemented and operating effectively. Our management has concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Changes in Internal Control Over Financial Reporting During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 45 Table of Contents Item 9B. OTHER INFORMATION During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 46 Table of Contents PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Our directors and executive officers and their ages and positions as of March 7, 2023 are presented below. Name Age Position Halden S. Shane 79 Chief Executive Officer and Chairman of the Board Elissa J. Shane 44 Chief Operating Officer and Director Nick Jennings 46 Chief Financial Officer Walter C. Johnsen 73 Director Kelly J. Anderson 56 Director Lim Boh Soon 68 Director Halden S. Shane : Dr. Shane has been our Chief Executive Officer and Chairman of the Board since October 15, 2007, when we commenced our current operations. Dr. Shane also served as President and CEO of Tiger Management International, a private management company that deals in business management of private and public companies. Dr. Shane resigned all positions and closed Tiger Management International in 2009. Dr. Shane was founder and CEO of Integrated Healthcare Alliance, Inc. and also founder and General Partner of Doctors Hospital West Covina, California. Prior thereto, Dr. Shane practiced Podiatric Surgery specializing in ankle arthroscopy. Dr. Shane received his Bachelor of Science degree from the University of Miami in 1969, his Bachelor of Medical Science degree from California College of Podiatric Medicine in 1971, and his Doctor of Podiatric Medicine Degree from the California College of Podiatric Medicine in 1973. He is Board Certified by the American Board of Podiatric Surgery, American Board of Orthopedics, and the American Board of Quality Assurance and Review. Dr. Shane’s extensive expertise and business experience in the medical and finance industry, as well as his knowledge of our day-to-day operations and strategic initiatives provide our Board of Directors with valuable insights and in-depth understanding of our Company. Elissa J. Shane : Ms. Shane has been our Chief Operating Officer since January 2018. On July 30, 2021, at the recommendation of the Nominating and Governance Committee, the Board appointed Ms. Elissa J. Shane to serve as a member of the Board. Previously, she served as our Chief Regulatory and Compliance Officer from September 2015 to December 2017 and as our Corporate Secretary in 2016. From January 2014 to September 2015, Ms. Shane received a B.A. in Psychology and Communications with a minor in Economics from the University of Southern California in 2001. Nick Jennings : Mr. Jennings has been our Chief Financial Officer since October 2014. From July 2014 until his employment by the Company, Mr. Jennings was self-employed and provided consulting, accounting and tax compliance services to private-owned companies. From November 2006 until June 2014, Mr. Jennings was a senior manager at Richardson Kontogouris Emerson LLP, where he worked with various public and private companies providing services in a variety of business areas including tax compliance, tax consulting, general accounting, and business assurance. He is a graduate of Loyola Marymount College with a degree in accounting and is a member of the American Institute of Certified Public Accountants. Walter C. Johnsen : Mr. Johnsen has been one of our directors since January 29, 2016. Since January 1, 2007, Mr. Johnsen has served as Chairman of the Board and Chief Executive Officer of Acme United Corporation, a leading worldwide supplier of innovative branded cutting, measuring and safety products in the school, home, office, hardware & industrial markets. From November 30, 1995 to December 31, 2006, he held the titles of President and Chief Executive Officer at Acme United. Mr. Johnsen previously served as Vice Chairman and a principal of Marshall Products, Inc., a medical supply distributor. Mr. Johnsen holds a Bachelor of Science in Chemical Engineering and a Master of Science in Chemical Engineering from Cornell University, and a Master of Business Administration from Columbia University. The Board concluded that Mr. Johnsen’s business and operations experience allows him to serve as one of our directors. 47 Table of Contents Kelly J. Anderson : Ms. Anderson has been one of our directors since January 29, 2016. Ms. Anderson is the Chief Executive Officer of CXO Executive Solutions, LLC, a provider of executive services. Between 2015 and July 2020, Ms. Anderson served a partner in C Suite Financial Partners, a financial consulting services company dedicated to serving private, public, private equity, entrepreneurial, family office and government-owned firms in all industries. Ms. Anderson is an inactive California CPA and a 1989 graduate of the College of Business and Economics at California State University, Fullerton. The Board concluded that Ms. Anderson’s experience in finance qualifies her to serve as one of our directors. Dr. Lim Boh Soon : Dr. Lim Boh Soon: Dr. Lim has served as a member of the Board since January 2018. Dr. Lim has more than 28 years of experience in the banking and finance industry. For more than the past five years, he has been a fellow of the Singapore Institute of Directors and is currently an independent non-executive director on the board of two publicly listed companies, one on the Singapore Stock Exchange and the other on Bursa Malaysia. Dr. Lim has served in various directorship roles throughout the past including with CSE Global Limited until April 2017, Across Asia Limited (Cayman Islands) until August 2017, and OUE Commercial REIT Management Private Limited until September 2019. In addition to his role with Tomi Environmental Solutions Inc., Dr. Lim holds current directorship positions with the following companies, Arise Asset Management Pte, Ltd., OUE Limited, VS Industry Berhad, TPT Corporation (Cayman Islands), Asri Asset Management Pte. Ltd., EpicQuant Pte. Ltd., QQ Fintech Pte. Ltd., and Kairos Asia Outreach. Further, Dr. Lim has worked in various senior management positions for several regional and multi-national organizations, including UBS Capital Asia Pacific Limited, The NatSteel Group, Rothschild Ventures Asia Limited and The Singapore Technologies Group. Dr. Lim was also a member of the Regional Investment Committee for UBS AG in Asia. Dr. Lim graduated with a First-Class Honors in Mechanical Engineering from The University of Strathclyde in the United Kingdom (formerly The Royal College of Science & Technology) in 1981 and obtained his Doctor of Philosophy in Mechanical Engineering from The University of Strathclyde in the United Kingdom in 1985. We believe that Dr. Lim’s experience as a director of public companies and in the finance industry qualifies him to serve on the Board. Family Relationships Ms. Elissa J. Shane, our Chief Operating Officer and Director, is the daughter of Dr. Halden Shane, our Chief Executive Officer and Chairman of the Board. Board Composition The Board currently consists of five directors divided into three classes, with each class holding office for a three-year term. Each director serves until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. Our Board is responsible for the business and affairs of our Company and considers various matters that require its approval. Our executive officers are appointed by our Board and serve at its discretion. Each member of the Board attended at least 75% of the total meetings held by the Board. Audit Committee Our Audit Committee was established in June 2009 and currently is comprised of Ms. Anderson, Mr. Johnsen and Dr. Lim. Ms. Anderson serves as chairperson of the Audit Committee. The Board has determined that Ms. Anderson qualifies as an audit committee financial expert within the meaning of SEC regulations and meets Nasdaq’s financial sophistication requirements. In making this determination, the Board has considered Ms. Anderson’s extensive financial experience and business background. The Audit Committee operates under a written charter, which is available at http://investor.tomimist.com/corporate-governance/audit-committee-charter. The purpose of the Audit Committee is to assist the Board in monitoring the integrity of the annual, quarterly and other financial statements of the Company, the independent auditor’s qualifications and independence, the performance of the Company’s independent auditors and the compliance by the Company with legal and regulatory requirements. The Audit Committee also reviews and approves all related-party transactions. Our Board has determined that Ms. Anderson is an “audit committee financial expert” as defined by the regulations promulgated by the SEC. 48 Table of Contents Code of Ethics The Board adopted a Code of Ethics in 2008 that applies to, among other persons, Board members, officers (including our Chief Executive Officer), contractors, consultants and advisors. Our Code of Ethics, which is available at http://investor.tomimist.com/TOMZ/code_of_ethics/2139, along with any future amendments thereto, sets forth written standards designed to deter wrongdoing and to promote: 1. honest and ethical conduct including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; 2. full, fair, accurate, timely and understandable disclosure in reports and documents that we file with or submit to the SEC and in other public communications made by us; 3. compliance with applicable governmental laws, rules and regulations; 4. the prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and 5. accountability for adherence to the Code of Ethics. Item 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth the total compensation paid to or earned by our named executive officers for the years ended December 31, 2023 and 2022, respectively: Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) (1) Option/ Warrant Awards ($) (1) All Other Compensation ($) Total ($) Halden S. Shane 2023 605,000 - - 75,635 9,000 689,635 Chairman and CEO (2) 2022 550,000 - - 178,281 (3) 9,000 737,281 Elissa J. Shane (4) 2023 326,700 - - 37,817 12,000 376,517 COO 2022 297,000 - - 59,427 (3) 13,500 369,927 Nick Jennings (6) 2023 211,750 - - 18,909 - 230,659 CFO 2022 192,500 - - 41,340 (3) - 233,840 (1) The amounts shown in this column represent the aggregate grant date fair value of stock, option and/or warrant award, as applicable, granted during the year computed in accordance with FASB ASC Topic 718. See Note 2 of the notes to our audited consolidated financial statements contained in this Annual Report on Form 10-K for a discussion of valuation assumptions made in determining the grant date fair value of the awards. (2) During the year ended December 31, 2023, we issued an option to purchase 100,000 shares of common stock to our Chief Executive Officer at an exercise price of $0.85 per share pursuant to an employment agreement. The option was valued at $76,635 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the option received by our Chief Executive Officer with the following assumptions: volatility, 139%; expected dividend yield, 0%; risk free interest rate, 3.59%; and an expected life of 10 years. The grant date fair value of each share of common stock underlying the option was $0.76. Please refer to Item 11 Employment Agreements for additional details of Dr. Shane’s annual compensation. (3) During the year ended December 31, 2022, we issued an option to purchase 172,500 shares of common stock to our Chief Executive Officer at an exercise price of $1.12 per share pursuant to an employment agreement. The option was valued at $178,281 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the option received by our Chief Executive Officer with the following assumptions: volatility, 156%; expected dividend yield, 0%; risk free interest rate, 1.65%; and an expected life of 5 years. The grant date fair value of each share of common stock underlying the option was $1.03. (4) During the year ended December 31, 2023, we issued an option to purchase 50,000 shares of common stock to our Chief Operating Officer at an exercise price of $0.85 per share pursuant to an employment agreement. The option was valued at $37,817 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the option received by our Chief Executive Officer with the following assumptions: volatility, 139%; expected dividend yield, 0%; risk free interest rate, 3.59%; and an expected life of 10 years. The grant date fair value of each share of common stock underlying the option was $0.76. The other compensation in the amount of $12,000 represents an auto allowance pursuant to Ms. Shane’s employment agreement. Please refer to Item 11 Employment Agreements for additional details of Ms. Shane’s annual compensation. (5) During the year ended December 31, 2022, we issued an option to purchase 57,500 shares of common stock to our Chief Operating Officer at an exercise price of $1.12 per share pursuant to an employment agreement. The option was valued at $59,427 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the option received by our Chief Executive Officer with the following assumptions: volatility, 156%; expected dividend yield, 0%; risk free interest rate, 1.65%; and an expected life of 5 years. The grant date fair value of each share of common stock underlying the option was $1.03. (6) During the year ended December 31, 2023, we issued an option to purchase 25,000 shares of common stock to our Chief Financial Officer at an exercise price of $0.85 per share pursuant to an employment agreement. The option was valued at $18,909 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the option received by our Chief Executive Officer with the following assumptions: volatility, 139%; expected dividend yield, 0%; risk free interest rate, 3.59%; and an expected life of 10 years. The grant date fair value of each share of common stock underlying the option was $0.76. Please refer to Item 11 Employment Agreement for additional details of Mr. Jennings’ annual compensation. (7) During the year ended December 31, 2022 we issued an option to purchase 40,000 shares of common stock to our Chief Financial Officer at an exercise price of $1.12 per share pursuant to an employment agreement. The option was valued at $41,340 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the option received by our Chief Executive Officer with the following assumptions: volatility, 156%; expected dividend yield, 0%; risk free interest rate, 1.65%; and an expected life of 5 years. The grant date fair value of each share of common stock underlying the option was $1.03. 49 Table of Contents Outstanding Equity Awards at 2023 Fiscal Year-End The following table sets forth certain information with respect to outstanding options and warrants to purchase common stock previously awarded to our named executive officers as of December 31, 2023. Name Number of Securities Underlying Unexercised Warrants / Options Exercisable (1) (#) Number of Securities Underlying Unexercised Warrants / Options Unexercisable (#) Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Warrants (#) Exercise Price (1) ($) Expiration Date Halden S. Shane 156,250 (2) — — $ 1.20 1/31/2025 12,500 (3) — — $ 4.00 4/24/2030 375,000 (4) — — $ 6.95 10/01/2030 172,500 (5) — — $ 1.12 1/1/2032 437,500 (6) — — $ 0.96 12/22/2032 31,250 (7) — — $ 0.64 11/19/2033 125,000 (8) — — $ 0.80 1/26/2034 100,000 (9) — — $ 0.86 1/26/2033 Elissa J. Shane 31,250 (10) — — $ 0.88 1/03/2024 12,500 (11) — — $ 0.96 1/03/2025 18,750 (12) — — $ 0.80 1/15/2025 6,250 (13) — — $ 4.00 4/24/2030 31,250 (14) — — $ 7.06 10/1/2025 57,500 (15) — — $ 1.12 1/18/2032 50,000 (16) — — $ 0.86 1/26/2033 Nick Jennings 6,250 (17) — — $ 0.80 1/26/2023 6,250 (18) — — $ 4.00 4/24/2030 40,000 (19) — — $ 1.12 1/18/2032 25,000 (20) — — $ 0.86 1/26/2033 (1) Reflects the 1-for-8 reverse stock split of our Common Stock and Series A Preferred Stock effected on September 10, 2020. (2) Warrants vested on January 31, 2020 and have a term of five years. (3) Warrants April 24, 2020 and have a term of ten years. (4) Warrants vested on October 01, 2020 and have a term of ten years. (5) Options vested on January 18, 2022 and have a term of ten years. (6) Warrants vested on December 22, 2017 and were modified to expire on December 22, 2032 (7) Warrants vested on November 19, 2018 and were modified to expire on November 19, 2032. (8) Warrants vested on January 26, 2019 and where modified to expire on January 26, 2034. (9) Options vested on January 26, 2023 and have a term of ten years. (10) Options pursuant to the 2016 Plan vested on January 3, 2019 and have a term of five years. (11) Options pursuant to the 2016 Plan vested on January 3, 2020 and have a term of five years. (12) Options pursuant to the 2016 Plan vested on January 15, 2020 and have a term of five years. (13) Warrants vested on April 24, 2020 and have a term of ten years. (14) Options pursuant to the 2016 Plan vested on October 01, 2020 and have a term of five years. (15) Options vested on January 18, 2022 and have a term of ten years. (16) Options vested on January 26, 2023 and have a term of ten years. (17) Options pursuant to the 2016 Plan vested on January 26, 2018 and have a term of five years. (18) Warrants vested on April 24, 2020 and have a term of ten years. (19) Options vested on January 18, 2022 and have a term of ten years. (20) Options vested on January 26, 2023 and have a term of ten years. Employment Agreements, Termination of Employment and Change-in-Control Arrangements Except as described below, we currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control. 50 Table of Contents Employment Agreements We have entered into employment agreements with each of the named executive officers and generally include the named executive officer’s initial base salary and an indication of equity compensation opportunities. Halden S. Shane On September 22, 2020, we entered into a three year employment agreement with Dr. Shane, effective October 1, 2020. The agreement provides for a base annual salary of $500,000. The agreement also provides for a signing bonus of 375,000 warrants. Dr. Shane is also entitled to a cash performance bonus and an annual issuance of an option to purchase 31,250 shares of common stock from the 2016 Plan at the discretion of the Board. The agreement also provides that we will reimburse Dr. Shane for the expenses associated with the use of an automobile up to $750 a month. The initial term of his employment agreement is three years, which may be automatically extended for successive one-year terms, unless either party provides the other with 120 days’ prior written notice of its intent to terminate the agreement. In the event Dr. Shane is terminated as CEO as a result of a change in control, Dr. Shane will be entitled to a lump sum payment of two years’ salary at the time of such termination. Elissa J. Shane On October 1, 2020, we entered into an employment agreement with Elissa J. Shane, effective October 1, 2020. Pursuant to her employment agreement, Ms. Shane will receive an annual base salary of at least $270,000, subject to annual review and discretionary increase by the Compensation Committee of the Board. Ms. Shane is eligible to receive an annual cash bonus and other annual incentive compensation. The agreement originally provided for a grant of 93,750 warrants. Additionally, in connection with the execution of her employment agreement, on October 1, 2020, we issued Ms. Shane a warrant to purchase 93,750 shares of Common Stock at an exercise price of $6.17 per share. These provisions were subsequently amended to provide for the issuance to Ms. Shane of 31,250 options from the 2016 Equity Plan at the closing price of $7.06 on the date of grant in lieu of the warrant grant and the 93,750 warrants were cancelled. Ms. Shane acknowledged that the 31,250 options were in full consideration of the amount she was entitled to under the agreement. Her employment agreement also provides that we will reimburse Ms. Shane for reasonable and necessary business and entertainment expenses that she incurs in performing her duties. During the term of her employment, Ms. Shane will also be entitled to up to four weeks of paid vacation time annually, which will accrue up to six weeks, and to participate in our benefit plans and programs, including but not limited to all group health, life, disability and retirement plans. Ms. Shane is also entitled to the sum of $1,000 per month as a vehicle allowance. The initial term of her employment agreement is three years, which may be automatically extended for successive one-year terms, unless either party provides the other with 120 days’ prior written notice of its intent to terminate the agreement. In the event Ms. Shane is terminated as COO as a result of a change in control, Ms. Shane will be entitled to a lump sum payment of one and a half years’ salary at the time of such termination. Nick Jennings On September 2, 2015, we entered into a new employment agreement with Mr. Jennings, which superseded his prior agreement, pursuant to which he continues to serve as our Chief Financial Officer. Mr. Jennings’ annual salary is $132,000, which is reviewed annually. On January 26, 2016, we issued Mr. Jennings a five-year warrant to purchase up to 12,500 shares of common stock at an exercise price of $4.40 per share. The agreement also provided for the issuance of an additional five-year warrant to purchase 12,500 shares of common stock in 2016, however, this provision was modified to grant a salary increase in lieu of the options. In October 2020, Mr. Jennings’ annual salary was increased to $175,000 per year. Mr. Jennings is also entitled to additional equity compensation based upon superior performance of his responsibilities, as determined by the Board in its sole discretion. The agreement also provides that we will reimburse Mr. Jennings for certain business and entertainment expenses. In the event of a change in control of the Company that results in his termination, Mr. Jennings will be entitled to a lump sum payment of one year’s salary and all equity awards will be accelerated and fully vested. In the event his employment is terminated other than for cause, Mr. Jennings will receive an amount equal to his annual salary as of such termination date after the second employment anniversary. 51 Table of Contents Director Compensation Each of our non-employee directors receives cash fees and stock as compensation for their service on the Board and the committees of the Board on which they are a member. The tables below set forth cash and stock compensation earned by each non-employee director during the fiscal year ended December 31, 2023. Name Fees earned or paid in cash ($) Stock awards ($) Option awards ($) Other Compensation ($) Total ($) Walter Johnsen (1) 48,000 17,000 — — 65,000 Kelly Anderson (2) 54,600 17,000 — — 71,600 Lim Boh Soon (3) 48,000 17,000 — — 65,000 (1) Mr. Johnsen was elected to the Board on January 29, 2016. The term of his agreement as director commenced on February 1, 2016 for up to two years and until a successor is elected, or resignation or removal. Mr. Johnsen was re-elected to the board for a 3-year term at our 2019 annual meeting. Our agreement with Mr. Johnsen provides for an annual fee in the amount of $48,000 paid on a quarterly basis and an annual grant of shares of common stock. In January 2023, we issued Mr. Johnsen 20,000 shares of common stock that were valued at $17,000. (2) Ms. Anderson was elected to the Board on January 29, 2016 and serves as the chairperson of our Audit Committee. The term of her agreement as director commenced on February 1, 2016 for up to two years and until a successor is elected, or resignation or removal. Ms. Anderson was re-elected to the board for a 3-year term at our 2019 annual meeting. Our agreement with Ms. Anderson provides for an annual fee in the amount of $54,600 paid on a quarterly basis and an annual grant of shares of common stock. In January 2023, we issued Ms. Anderson 20,000 shares of common stock that were valued at $17,000. (3) Mr. Lim was elected to the Board on January 29, 2018. The term of his agreement as director commenced on February 1, 2018 for up to three years unless re-elected or until a successor is elected, or resignation or removal. Mr. Lim was re-elected to the board for a 3-year term at our 2021 annual meeting. Our agreement with Mr. Lim provides for an annual fee in the amount of $48,000 paid on a quarterly basis and an annual grant of shares of common stock. In January 2022, we issued Mr. Lim 20,000 shares of common stock that were valued at $17,000. 52 Table of Contents Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information We currently maintain one compensation plan: the 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan was approved by the Board on January 29, 2016 and received shareholder approval on July 7, 2017. The 2016 Plan authorized the issuance of 625,000 shares of common stock. On August 25, 2015, the Board terminated the 2008 Plan, which we had maintained previously and which our shareholders had approved. Accordingly, we will issue future awards under the 2016 Plan. On December 30, 2020, we received shareholder approval to amend and restate the 2016 Plan to increase the maximum number of shares of common stock authorized from issuance by 1,375,000, from 625,000 shares to 2,000,000. The following table provides information as of December 31, 2023 with respect to compensation plans under which our equity securities are authorized for issuance. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) Weighted-average exercise price of outstanding options, warrants and rights (1) Number of securities remaining available for future issuance under equity compensation plans (1) Equity compensation plans approved by security holders 617,542 (2) $ 1.09 1,037,708 (4) Equity compensation plans not approved by security holders 1,165,208 (3) $ 2.97 — Total 1,782,750 $ 2.41 — (1) Reflects the 1-for-8 reverse stock split of our Common Stock and Series A Preferred Stock effected on September 10, 2020. (2) Prior to August 25, 2015, we granted awards under the 2008 Plan. (3) Represents shares of common stock issuable upon the exercise of warrants issued to executive officers, employees and consultants in exchange for services rendered. (4) On July 7, 2017, the 2016 Plan received shareholder approval, which permits the grant up to 625,000 shares of common stock. On December 30, 2020, we received shareholder approval to amend and restate the 2016 Plan to increase the maximum number of shares of common stock authorized from issuance by 1,375,000, from 625,000 shares to 2,000,000. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information with respect to the beneficial ownership of our common stock and Series A preferred stock (together, “Voting Stock”) as of March 7, 2024 for: · each person (or group of affiliated persons) known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock or Series A preferred stock; · each of our directors and nominees for election to the Board; · each of the executive officers named in the summary compensation table; and · all of our directors and executive officers as a group. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the following table have sole voting and investment power with respect to all shares of Voting Stock that they beneficially own, subject to applicable community property laws. 53 Table of Contents Applicable percentage ownership is based on 19,955,205 shares of common stock and 63,750 shares of Series A preferred stock outstanding at March 7, 2024. In computing the number of shares of Voting Stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of Voting Stock subject to options, warrants or other convertible securities held by that person or entity that are currently exercisable or releasable or that will become exercisable or releasable within 60 days of March 7, 2024. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the address of each person or entity in the following table is c/o TOMI Environmental Solutions, Inc., 8430 Spires Way., Suite N, Frederick, MD 21701. Shares Beneficially Owned Common Stock Series A Preferred Stock % of Total Voting Name of Beneficial Owner Shares % of Class Shares % of Class Power (1) 5% Shareholders: Lau Sok Huy (2) 2,170,139 10.9 % — — 10.8 % Named Executive Officers and Directors: Halden S. Shane (1)(3) 4,152,664 19.1 % 63,750 100.0 % 19.3 % Elissa J. Shane (4) 475,164 2.2 % — — 2.2 % Nick Jennings (5) 96,869 * — — * Walter Johnsen (6) 91,875 * — — * Kelly Anderson (7) 91,875 * — — * Lim Boh Soon (8) 143,774 * — — * Executive Officers and Directors as a Group (9) 5,052,220 23.2 % — — 23.4 % * Denotes ownership of less than 1%. (1) Percentage of total voting power represents voting power with respect to all shares of our Common Stock and Series A Preferred Stock, as a single class. The holders of Common Stock and Series A Preferred Stock are each entitled to one vote per share. (2) Based on Form 3 filed with the SEC by Lau Sok Huy on January 24, 2018. (3) Consists of: (i) 2,430,164 shares of Common Stock held of record by Dr. Shane; (ii) 187,500 shares of Common Stock held of record by the Shane Family Trust; (iii) 125,000 shares of Common Stock held of record by Belinha Shane; and (iv) 1,410,000 shares of Common Stock issuable upon the exercise of warrants and options to purchase Common Stock held by Dr. Shane that are exercisable or will become exercisable within 60 days of March 7, 2024. Dr. Shane is a co-trustee of the Shane Family Trust and may be deemed to share voting and investment power over the securities held by the trust. Belinha Shane is Dr. Shane’s wife. Dr. Shane disclaims ownership of such shares held by his wife, except to the extent of his pecuniary interest. (4) Consists of: (i) 267,664 shares of Common Stock held of record by Ms. Shane; and (ii) 207,500 shares of Common Stock issuable upon the exercise of warrants and options to purchase Common Stock held by Ms. Shane that are exercisable or will become exercisable within 60 days of March 7, 2024. (5) Consists of: (i) 26,519 shares of Common Stock held of record by Mr. Jennings; and (ii) 71,250 shares of Common Stock issuable upon the exercise of warrants and options to purchase Common Stock held by Mr. Jennings that are exercisable or will become exercisable within 60 days of March 7, 2024. (6) Consists of: (i) 88,750 shares of Common Stock held of record by Mr. Johnsen; and (ii) 3,125 shares of Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of March 7, 2024. (7) Consists of: (i) 88,750 shares of Common Stock held of record by Ms. Anderson; and (ii) 3,125 shares of Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of March 7, 2024. (8) Consists of 143,774 shares of Common Stock held of record by Dr. Lim. (9) Consists of: (i) 3,357,220 shares of Common Stock; (ii) 1,150,000 shares of Common Stock issuable upon the exercise of warrants to purchase Common Stock; and (iii) 545,000 shares of Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of March 7, 2024. 54 Table of Contents Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Transactions with Related Persons None. Independence of the Board Based upon information submitted by Mr. Johnsen, Ms. Anderson, and Dr. Lim, the Board has determined that each of them is “independent” under Nasdaq corporate governance rules. Dr. Shane and Ms. Elissa Shane are not independent directors as they are employees of the Company. No director will be considered “independent” unless the Board affirmatively determines that the director has no direct or indirect material relationship with the Company. Our Board has three separate standing committees: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. We have made each of our committee charters available on our website at http://investor.tomimist.com/. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Accountant Fees The following table presents the aggregate fees billed for audit and other services provided by our independent registered public accounting firm, Rosenberg Rich Baker Berman, P.A., during the 2023 and 2022 fiscal years: For the Fiscal Years Ended December 31, 2023 2022 Audit Fees (1) $ 160,000 $ 150,000 Audit-Related Fees (2) — — Tax Fees (3) — — All Other Fees (4) — — Total $ 160,000 $ 150,000 (1) Audit Fees: Audit fees represent the professional services rendered for the audit of our annual financial statements and the review of our financial statements included in quarterly reports, along with services normally provided by the accounting firm in connection with statutory and regulatory filings or engagements. (2) Audit-Related Fees: Audit-related fees represent professional services rendered for assurance and related services by Rosenberg Rich Baker Berman, P.A. that were reasonably related to the performance of the audit or review of our financial statements that are not reported under audit fees. (3) Tax Fees: Tax fees represent professional services rendered by the accounting firm for tax compliance, tax advice, and tax planning. (4) All Other Fees: All other fees represent fees billed for products and services provided by Rosenberg Rich Baker Berman, P.A other than the services reported for the other categories. Pre-Approval Policies and Procedures of the Audit Committee Consistent with the rules and regulations promulgated by the Securities and Exchange Commission, the Audit Committee approves the engagement of our independent registered public accounting firm and is also required to pre-approve all audit and non-audit expenses. All of the services described above were approved by the Audit Committee in accordance with its procedure. We do not otherwise rely on pre-approval policies and procedures. 55 Table of Contents PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: (1) Financial Statements. See Index to Financial Statements and Schedule on page F-1. (2) Schedules to Financial Statements. All financial statement schedules have been omitted because they are either inapplicable or the information required is provided in our consolidated financial statements and the related notes thereto, included in Part II, Item 8 of this Annual Report on Form 10-K. (3) The exhibits listed on the accompanying Exhibit Index are filed (or incorporated by reference herein) as part of this Annual Report on Form 10-K. 56 Table of Contents Item 16. FORM 10-K SUMMARY None. EXHIBIT INDEX Exhibit Number Description of Exhibit Form File No. Date Exhibit Filed Herewith 3.1 Articles of Restatement of the Registrant, effective October 6, 2009 S-1 333-162356 10/6/09 3.1 3.2 Articles of Amendment of Articles of Incorporation of the Registrant, effective October 24, 2011 8-K 000-09908 11/07/11 3 3.3 Articles of Amendment of Articles of Incorporation of the Registrant, effective September 10, 2020 8-K 000-09908 9/14/20 3.1 3.4 Amended Bylaws of the Registrant, adopted effective November 2, 2007 10-Q 000-09908 5/16/16 3.2 3.5 Amendment to Amended Bylaws of the Registrant, adopted effective January 29, 2016 8-K 000-09908 2/1/16 3.2 4.1 Specimen certificate evidencing shares of common stock of the Registrant S-3 333-249850 11/4/20 4.1 4.2 Description of Registrants Securities 10-K 001-39574 03/29/2022 4.2 4.3 Form of Warrant to Purchase Common Stock 10-Q 000-09908 05/17/21 4.1 4.4 Form of Non-Qualified Stock Option Agreement 10-Q 000-09908 05/17/21 4.2 4.5 Form of Common Stock Purchase Warrant 8-K 000-09908 09/26/21 4.1 4.6 Form of Placement Agent Warrant 8-K 000-09908 09/26/21 4.2 4.7 Form of TOMI Environmental Solutions, Inc. 12% Convertible Note 8-K 001-39574 11/07/2023 10.2 10.1+ Amended and Restated 2016 Equity Incentive Plan, as adopted by the Registrant’s stockholders on December 30, 2020 DEF 14A 001-39574 12/2/20 Appendix A 10.2+ Offer Letter, dated January 15, 2016, by and between the Registrant and Dr. Halden Shane 10-Q 000-09908 5/16/16 10.1 10.3+ Offer Letter, dated September 2, 2015, by and between the Registrant and Nick Jennings 10-Q 000-09908 5/16/16 10.3 10.4+ Form of Appointment to the Board of Directors as Independent Director of the Registrant 10-Q 000-09908 5/16/16 10.5 10.5 Restated Manufacturing and Development Agreement, dated November 10, 2016, by and between the Registrant and RG Group 10-Q 000-09908 9/30/16 10.1 10.6+ Employment Agreement, entered into as of January 5, 2018, by and between the Registrant and Elissa J. Shane, effective as of January 1, 2018 8-K 000-09908 1/8/18 10.1 10.7+ Amendment to Executive Employment Agreement 10.8 Form of Securities Purchase Agreement dated as of September 26, 2021, between the Registrant and the purchasers named therein 8-K 000-09908 09/26/21 10.1 10.9 Form of Securities Purchase Agreement, dated as of November 7, 2023, between TOMI Environmental Solutions, Inc. and the purchasers named therein 8-K 001-39574 11/07/2023 10.1 10.10 Form of Registration Rights Agreement, dated as of November 7, 2023, between TOMI Environmental Solutions, Inc. and the purchasers named therein 8-K 001-39574 11/07/2023 10.3 14.1 Code of Ethics 10-K 000-09908 3/31/09 14 21.1 Subsidiaries of the Registrant X 24.1 Power of Attorney (included in signature page) X 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1# Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema X 101.CAL XBRL Taxonomy Extension Calculation Linkbase X 101.DEF XBRL Taxonomy Extension Definition Linkbase X 101.LAB XBRL Taxonomy Extension Label Linkbase X 101.PRE XBRL Taxonomy Extension Presentation Linkbase X 104 Cover Page Interactive Data File X + Indicates a management contract or compensatory plan. # The information in Exhibit 32.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this report), unless the Registrant specifically incorporates the foregoing information into those documents by reference. 57 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: April 1, 2024 TOMI ENVIRONMENTAL SOLUTIONS, INC. /s/ HALDEN S. SHANE Halden S Shane Chairman of the Board and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY The undersigned directors and officers of TOMI Environmental Solutions, Inc. constitute and appoint Halden S. Shane and Nick Jennings, or either of them, as their true and lawful attorney and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney and agent shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ HALDEN S. SHANE Chairman of the Board and Chief Executive Officer (Principal Executive Officer) April 1, 2024 Halden S. Shane /s/ NICK JENNINGS Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) April 1, 2024 Nick Jennings /s/ ELISSA J. SHANE Director April 1, 2024 Elissa J. Shane /s/ WALTER C. JOHNSEN Director April 1, 2024 Walter C. Johnsen /s/ KELLY J. ANDERSON Director April 1, 2024 Kelly J. Anderson /s/ LIM BOH SOON Director April 1, 2024 Lim Boh Soon 58 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firms [PCAOB No. 89 ]. F-2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F-4 Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 F-5 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2023 and 2022 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 F-7 Notes to Consolidated Financial Statements F-9 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of TOMI Environmental Solutions, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of TOMI Environmental Solutions, Inc. (the Company) as of years ended December 31, 2023 and 2022, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023 and 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for credit losses As described further in Note 2 to the consolidated financial statements, the Company maintains an allowance for credit losses against its accounts receivable balances based on the future estimated credit losses. As of December 31, 2023, the allowance for credit losses was $1.5 million, or 36% of total accounts receivable. This estimate is determined based on internally developed qualitative and quantitative factors derived from the aging of receivables, the Company’s past collection history with customers, forward looking information and economic trends and conditions. We identified the estimates used to determine the allowance for doubtful accounts as a critical audit matter. We have identified the evaluation of the Company’s estimation of allowance for doubtful accounts as a critical audit matter. There is an established policy for determining overall allowance for doubtful accounts with specific judgement in place for certain account balances that require additional evaluation and assessment which are used in estimating losses related to customer receivables. There is also a high degree of subjectivity in management's assessment of the completeness and accuracy of the allowance for credit losses, specifically the portion of the receivable expected to be collected, which requires a heightened level of auditor judgement in auditing the estimate. F-2 Table of Contents Our audit procedures related to the allowance for doubtful accounts included: · Testing the mathematical accuracy of management’s allowance for doubtful accounts calculation as of December 31, 2023 by recalculating and independently applying the policy to each risk pool, as well as recalculating the aging of receivables based on underlying source documentation. · Recomputing current and historical collection rates for customer receivable balances and comparing the historical loss rates against the current period estimated loss rates within the respective risk pools, and performing a retrospective analysis of the subsequent collections on customer receivables with certain risk characteristics. · Evaluating the reasonableness of management’s qualitative adjustments against the allowance for credit losses by obtaining corroborating evidence which supports the adjustments and assumptions made by management in determining the allowance. Inventory – Valuation associated with excess and obsolete (E&O) inventory As further described in Note 2 to the consolidated financial statements, inventory is stated at the lower of cost or net realizable value. At the balance sheet date, the Company evaluated inventories for excess quantities and obsolescence and included an inventory reserve against its inventory balances. As of December 31, 2023, the inventory reserve was approximately $0.1 million, or 3% of total inventory. To estimate the amount of inventory that may be in excess or obsolete, the Company reviews inventory quantities on hand as well as historical and projected distribution levels. The Company’s model assumes that inventory will be distributed on a first-in-first-out basis. Due to the nature of the inventory and the levels of inventory purchased in prior years, estimating the amount of inventory that is in excess or potentially obsolete involves significant judgments and estimates. Given the significant judgments associated with evaluating the valuation of E&O inventory, auditing the reasonableness of management’s estimates and assumptions involved especially subjective judgment and an increased extent of effort, therefore we identified the estimates used to determine the valuation of the E&O inventory as a critical audit matter. Our audit procedures related to the Company’s valuation of E&O inventory included the following: · Evaluating the design and implementation of controls over the E&O inventory valuation. · Evaluating management’s future projections by comparing the historical sales. · Obtaining the Company’s E&O calculation and testing the mathematical accuracy. · Assessing the reasonableness of the assumptions used in the E&O calculation by developing an independent expectation and comparing our independent expectation to the results of the Company’s calculation. · Inquiring of the Company’s employees outside of the accounting department and evaluating other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory E&O calculation. /s/ Rosenberg Rich Baker Berman, P.A. We have served as the Company’s auditor since 2021. Somerset, New Jersey April 1, 2024 F-3 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 ASSETS Current Assets: Cash and Cash Equivalents $ 2,339,059 $ 3,866,733 Accounts Receivable - net 2,429,929 2,772,340 Other Receivables 164,150 164,150 Inventories (Note 3) 4,627,103 4,495,999 Vendor Deposits (Note 4) 29,335 447,052 Prepaid Expenses 371,298 388,359 Total Current Assets 9,960,874 12,134,633 Property and Equipment – net (Note 5) 1,048,642 1,335,331 Other Assets: Intangible Assets – net (Note 6) 1,123,246 1,025,736 Operating Lease - Right of Use Asset (Note - 7) 467,935 528,996 Long Term Accounts Receivable - net 206,240 - Other Assets 550,677 475,103 Total Other Assets 2,348,098 2,029,835 Total Assets $ 13,357,614 $ 15,499,799 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 1,267,029 $ 1,761,750 Accrued Expenses and Other Current Liabilities (Note 14) 675,491 728,703 Deferred Revenue - 699,732 Current Portion of Long-Term Operating Lease (Note 7) 115,658 100,282 Total Current Liabilities 2,058,178 3,290,467 Long-Term Liabilities: Long-Term Operating Lease, Net of Current Portion (Note 7) 642,527 761,132 Convertible Notes Payable, net of discount of $ 301,985 and $ 0 at December 31, 2023 and 2022, respectively (Note 10) 2,298,015 - Total Long-Term Liabilities 2,940,542 761,132 Total Liabilities 4,998,720 4,051,599 Commitments and Contingencies (Note 12) Shareholders’ Equity: Cumulative Convertible Series A Preferred Stock; par value $ 0.01 per share, 1,000,000 shares authorized; 63,750 shares issued and outstanding at December 31, 2023 and 2022, respectively 638 638 Cumulative Convertible Series B Preferred Stock; $ 1,000 stated value; 7.5% Cumulative dividend; 4,000 shares authorized; none issued and outstanding at December 31, 2023 and 2022, respectively - - Common stock; par value $ 0.01 per share, 250,000,000 shares authorized; 19,923,955 and 19,763,955 shares issued and outstanding at December 31, 2023 and 2022, respectively 199,240 197,640 Additional Paid-In Capital 57,985,245 57,673,559 Accumulated Deficit ( 49,826,229 ) ( 46,423,637 ) Total Shareholders’ Equity 8,358,894 11,448,200 Total Liabilities and Shareholders’ Equity $ 13,357,614 $ 15,499,799 The accompanying notes are an integral part of the consolidated financial statements. F-4 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended December 31, 2023 2022 Sales, net $ 7,354,564 $ 8,338,099 Cost of Sales 3,065,028 3,277,644 Gross Profit 4,289,536 5,060,455 Operating Expenses: Professional Fees 575,728 536,311 Depreciation and Amortization 366,677 329,164 Selling Expenses 1,351,465 1,867,013 Research and Development 491,798 352,238 Consulting Fees 282,548 215,180 General and Administrative 4,570,597 4,642,548 Total Operating Expenses 7,638,813 7,942,454 Income (loss) from Operations ( 3,349,277 ) ( 2,881,999 ) Other Income (Expense): Interest Income 11,990 1,939 Interest Expense ( 63,305 ) - Total Other Income (Expense) ( 53,315 ) 1,939 Income (loss) before income taxes ( 3,402,592 ) ( 2,880,060 ) Provision for Income Taxes (Note 16) - - Net Income (loss) $ ( 3,402,592 ) $ ( 2,880,060 ) Net income (loss) Per Common Share Basic $ ( 0.17 ) $ ( 0.15 ) Diluted $ ( 0.17 ) $ ( 0.15 ) Basic Weighted Average Common Shares Outstanding 19,834,476 19,743,544 Diluted Weighted Average Common Shares Outstanding 19,834,476 19,743,544 The accompanying notes are an integral part of the consolidated financial statements. F-5 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Series A Preferred Common Stock Additional Paid Accumulated Total Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at January 1, 2022 63,750 638 19,680,955 196,809 $ 56,941,209 $ ( 43,543,577 ) $ 13,595,080 Equity Compensation 653,843 653,843 Common Stock Issued for Services Provided 51,750 518 53,820 54,338 Warrants and Options Exercised 31,250 313 24,687 25,000 Net (Loss) for the year ended December 31, 2022 ( 2,880,060 ) ( 2,880,060 ) Balance at December 31, 2022 63,750 $ 638 19,763,955 $ 197,640 $ 57,673,559 $ ( 46,423,637 ) $ 11,448,200 Equity Compensation 163,286 163,286 Common Stock Issued for Services Provided 160,000 1,600 148,400 150,000 Net (Loss) for the year ended December 31, 2023 ( 3,402,592 ) ( 3,402,592 ) Balance at December 31, 2023 63,750 $ 638 19,923,955 $ 199,240 $ 57,985,245 $ ( 49,826,229 ) $ 8,358,894 The accompanying notes are an integral part of the consolidated financial statements. F-6 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2023 2022 Cash Flow Used in Operating Activities: Net Loss $ ( 3,402,592 ) $ ( 2,880,060 ) Adjustments to Reconcile Net Loss to Net Used In Operating Activities: Depreciation and Amortization 366,677 329,164 Amortization of Right of Use Asset 157,315 157,315 Amortization of Software Costs - 10,475 Amortization of Deferred Financing Costs 10,413 Equity Compensation Expense 163,286 653,843 Value of Equity Issued for Services 150,000 54,338 Reserve for Bad Debt ( 183,653 ) - Inventory Reserve - 95,000 Changes in Operating Assets and Liabilities: Decrease (Increase) in: Accounts Receivable 526,064 ( 807,564 ) Inventory ( 131,104 ) 152,281 Prepaid Expenses 17,061 ( 44,786 ) Vendor Deposits 417,718 ( 158,466 ) Other Receivables - 71,754 Long Term Accounts Receivable ( 206,240 ) Other Assets ( 75,574 ) ( 177,474 ) Increase (Decrease) in: Accounts Payable ( 494,721 ) 707,711 Accrued Expenses ( 53,212 ) 64,095 Customer Deposits ( 699,732 ) 693,732 Lease Liability ( 160,291 ) ( 155,622 ) Net Cash Used in Operating Activities ( 3,598,585 ) ( 1,234,264 ) Cash Flow From Investing Activities: Capitalized Patent and Trademark Costs ( 118,630 ) ( 40,570 ) Purchase of Property and Equipment ( 98,060 ) ( 200,876 ) Net Cash Used in Investing Activities ( 216,690 ) ( 241,446 ) F-7 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED For the Years Ended December 31, 2023 2022 Cash Flow From Financing Activities: Proceeds from Issuance of Convertible Notes 2,287,601 - Proceeds from Issuance of Stock and Warrants - 25,000 Net Cash From Financing Activities: 2,287,601 25,000 Decrease In Cash and Cash Equivalents ( 1,527,674 ) ( 1,450,710 ) Cash and Cash Equivalents - Beginning 3,866,733 5,317,443 Cash and Cash Equivalents – Ending $ 2,339,059 $ 3,866,733 Supplemental Cash Flow Information: Cash Paid For Interest $ - $ 28,892 Cash Paid (Refunded) for Income Taxes $ - $ ( 72,086 ) Non-Cash Investing and Financing Activities: Patent and trademark costs reclassified from Other Assets $ - $ 43,377 The accompanying notes are an integral part of the consolidated financial statements. F-8 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS TOMI Environmental Solutions, Inc., a Florida corporation (“TOMI”, the “Company”, “we”, “our” and “us”) is a global provider of disinfection and decontamination essentials through our premier Binary Ionization Technology® (BIT™) platform, under which we manufacture, license, service and sell our SteraMist® brand of products, including SteraMist® BIT™, a hydrogen peroxide-based mist and fog. Our solution and process are environmentally friendly as the only by-product from our decontamination process is oxygen and water in the form of humidity. Our solution is organically listed in the United States and Canada as a sustainably green product with no or very little carbon footprint. Our business is organized into five divisions: Life Sciences, Healthcare, TOMI Service Network, Food Safety and Commercial. Invented under a defense grant in association with the Defense Advanced Research Projects Agency (“DARPA”) of the U.S. Department of Defense, BIT™ is registered with the U.S. Environmental Protection Agency (the “EPA”) and uses a low percentage hydrogen peroxide as its only active ingredient to produce a fog composed mostly of a hydroxyl radical (.OH ion), known as ionized Hydrogen Peroxide (iHP™). Represented by the SteraMist® brand of products, iHP™ produces a germ-killing aerosol that works like a visual non-caustic gas. Our products are designed to service a broad spectrum of commercial structures, including, but not limited to, hospitals and medical facilities, bio-safety labs, pharmaceutical facilities, meat and produce processing facilities, universities and research facilities, vivarium labs, other service industries including cruise ships, office buildings, hotel and motel rooms, schools, restaurants, military barracks, police and fire departments, prisons, and athletic facilities. Our products are also used in single-family homes and multi-unit residences. Additionally, our products have been listed on the EPA’s List N as products that help combat COVID-19 and are actively being used for this purpose. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of TOMI and its wholly owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. All intercompany accounts and transactions have been eliminated in consolidation. Reclassification of Accounts Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These reclassifications had no material effect on previously reported results of operations or financial position. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventory, fair values of financial instruments, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Fair Value Measurements The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following: Level 1: Quoted prices in active markets for identical assets or liabilities. Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities. F-9 Table of Contents The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, held at financial institutions and other liquid investments with original maturities of three months or less. At times, these deposits may be in excess of insured limits. At December 31, 2023 and December 31, 2022, there were no cash equivalents. Accounts Receivable Our accounts receivable are typically from credit-worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of their status and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for 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. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Bad debt expense for the years ended December 31, 2023 and 2022, was approximately $ 272,517 and $ 142,188 , respectively. At December 31, 2023 and December 31, 2022, the allowance for doubtful accounts reserve was $ 1,494,347 and $ 1,678,000 . Long-term trade accounts receivable, are principally amounts arising from the sale of goods and services with a contractual maturity date or realization period of greater than one year and are recognized as “Long-Term Accounts Receivable” in our Consolidated Balance Sheet. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods and raw materials. We expense costs to maintain certification to cost of goods sold as incurred. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable. Our reserve for obsolete inventory was $ 95,000 as of December 31, 2023 and December 31, 2022. Property and Equipment We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter. Leases We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease. F-10 Table of Contents As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense in the period in which they are incurred. Capitalized Software Development Costs In accordance with ASC 985-20 regarding the development of software to be sold, leased, or marketed, we expense such costs as they are incurred until technological feasibility has been established, at and after which time those costs are capitalized until the product is available for general release to customers. The periodic expense for the amortization of capitalized software development costs will be included in cost of sales. Amortization expense for the years ended December 31, 2023 and 2022, was $ 0 and $ 10,475 , respectively. Accounts Payable As of December 31, 2023, two vendors accounted for approximately 59 % of accounts payable. As of December 31, 2022, two vendors accounted for approximately 55 % of accounts payable. For the year ended December 31, 2023, two vendors accounted for 70 % of cost of sales. For the year ended December 31, 2022, two vendors accounted for 67 % of cost of sales. Accrued Warranties Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. As of December 31, 2023, and December 31, 2022, our warranty reserve was $ 30,000 and $ 68,000 , respectively. (See Note 15). Income Taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with FASB ASC Topic 740, Income Taxes guidance for income taxes. Net deferred tax benefits have been fully reserved at December 31, 2023 and December 31, 2022. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. 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. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of common stock and the denominator may have to adjust to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued during the period to reflect the potential dilution that could occur from shares of common stock issuable through a contingent shares issuance arrangement, stock options, warrants, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, and warrants, and the if-converted method is used for convertible preferred stock as prescribed in FASB ASC Topic 260. Because of the net loss for the year ended December 31, 2023 and 2022, the impact of including these in our computation of diluted EPS was anti-dilutive. Potentially dilutive securities as of December 31, 2023 consisted of 2,080,000 shares of common stock from convertible debentures, 2,772,096 shares of common stock issuable upon exercise of outstanding warrants, 617,542 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). F-11 Table of Contents Potentially dilutive securities as of December 31, 2022 consisted of 2,792,335 shares of common stock issuable upon exercise of outstanding warrants, 413,000 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately 5.5 million and 3.3 million shares of common stock were outstanding at December 31, 2023 and 2022, respectively, but were excluded from the computation of diluted net loss per share at December 31, 2023 and 2022 due to the anti-dilutive effect on net loss per share. For the Year Ended December 31, 2023 2022 Net Loss $ ( 3,402,592 ) $ ( 2,880,060 ) Net loss attributable to common shareholders $ ( 3,402,592 ) $ ( 2,880,060 ) Weighted average number of shares of common stock outstanding: Basic 19,834,476 19,743,544 Diluted 19,834,476 19,743,544 Net loss attributable to common shareholders per share: Basic $ ( 0.17 ) $ ( 0.15 ) Diluted $ ( 0.17 ) $ ( 0.15 ) The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented: For the Years Ended December 31, 2023 2022 Numerator: Net Loss $ ( 3,402,592 ) $ ( 2,880,060 ) Denominator: Basic weighted-average shares 19,834,476 19,743,544 Effect of dilutive securities Warrants - - Convertible Debt - - Options - - Preferred Stock - - Diluted Weighted Average Shares 19,834,476 19,743,544 Net Loss Per Common Share: Basic $ ( 0.17 ) $ ( 0.15 ) Diluted $ ( 0.17 ) $ ( 0.15 ) F-12 Table of Contents Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, Revenue from Contracts with Customers (Topic 606). We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations. We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. Title and risk of loss generally pass to our customers upon shipment. Our customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from Customers. Disaggregation of Revenue The following table presents our revenues disaggregated by revenue source (rounded to nearest thousandth). Product and Service Revenue For The Years Ended December 31, Change 2023 2022 $ SteraMist Product $ 5,695,000 $ 6,864,000 $ ( 1,169,000 ) Service and Training 1,660,000 1,474,000 186,000 Total $ 7,355,000 $ 8,338,000 $ ( 983,000 ) Revenue by Geographic Region For The Years Ended December 31, Change 2023 2022 $ United States $ 6,125,000 $ 6,261,000 $ ( 136,000 ) International 1,230,000 2,077,000 ( 847,000 ) Total $ 7,355,000 $ 8,338,000 $ ( 983,000 ) Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Costs to Obtain a Contract with a Customer We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses. Contract Balances As of December 31, 2023, and December 31, 2022 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. F-13 Table of Contents Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. Significant Judgments Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services. Equity Compensation Expense We account for equity compensation expense in accordance with FASB ASC 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value. The valuation methodology used to determine the fair value of options and warrants issued as compensation during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The expected term of the Company’s warrants has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” warrants. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its common stock, par value $0.01 (the “Common Stock”) and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment. On July 7, 2017, our shareholders approved the Company’s Amended and Restated 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 2,000,000 shares of Common Stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of Common Stock for numerous reasons, including, but not limited to, shares of Common Stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award, and awards under the 2016 Plan are expressly conditioned upon such agreements. For the year ended December 31, 2023 and 2022, we issued 60,000 and 51,750 shares of common stock, respectively, out of the 2016 Plan. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $ 250,000 at times during the year. Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the years ended December 31, 2023 and 2022. F-14 Table of Contents Advertising and Promotional Expenses We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses included in selling expenses for the years ended December 31, 2023 and 2022 were approximately $ 498,000 and $ 653,000 , respectively. Research and Development Expenses We expense research and development expenses in the period in which they are incurred. For the years ended December 31, 2023 and 2022, research and development expenses were approximately $ 492,000 and $ 352,000 , respectively. Business Segments We currently have one reportable business segment due to the fact that we derive our revenue primarily from one product. A breakdown of revenue is presented in “Revenue Recognition” in Note 2 above. 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. 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. 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. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. We adopted this ASU prospectively on January 1, 2023. This ASU did not have a material impact on our consolidated financial statements. F-15 Table of Contents 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. NOTE 3. INVENTORIES Inventories consist of the following at (rounded to the nearest thousandth): December 31, 2023 December 31, 2022 Finished goods $ 3,980,000 $ 3,929,000 Raw Materials 742,000 662,000 Inventory Reserve ( 95,000 ) ( 95,000 ) Inventory, net $ 4,627,000 $ 4,496,000 NOTE 4. VENDOR DEPOSITS On December 31, 2023 and December 31, 2022, we maintained vendor deposits of $ 29,335 and $ 447,052 , respectively, for open purchase orders for inventory. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at: December 31, 2023 December 31, 2022 Furniture and fixtures $ 364,819 $ 364,819 Equipment 2,269,185 2,236,510 Vehicles 66,170 60,703 Computer and software 306,556 246,638 Leasehold improvements 393,381 393,381 Tenant Improvement Allowance 405,000 405,000 Total Property and Equipment 3,805,111 3,707,051 Less: Accumulated depreciation 2,756,469 2,371,720 Property and Equipment, net $ 1,048,642 $ 1,335,331 F-16 Table of Contents For the years ended December 31, 2023 and 2022, depreciation was $ 345,556 and $ 314,669 , respectively. For the years ended December 31, 2023 and 2022, amortization of tenant improvement allowance was $ 39,194 and was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations. NOTE 6. INTANGIBLE ASSETS Intangible assets consist of patents and trademarks related to our Binary Ionization Technology. We amortize the patents over the estimated remaining lives of the related patents. The trademarks have an indefinite life. Amortization expense was $ 21,121 and $ 14,495 for the years ended December 31, 2022 and 2021, respectively. Definite life intangible assets consist of the following: December 31, 2023 December 31, 2022 Intellectual Property and Patents $ 3,196,396 $ 3,108,063 Less: Accumulated Amortization 2,904,013 2,882,892 Patents, net $ 292,383 $ 225,171 Indefinite life intangible assets consist of the following: Trademarks 830,863 800,565 Total Intangible Assets, net $ 1,123,246 $ 1,025,736 Approximate future amortization is as follows (rounded to nearest thousandth): Year Ended : Amount December 31, 2024 20,000 December 31, 2025 20,000 December 31, 2026 20,000 December 31, 2027 20,000 December 31, 2028 20,000 Thereafter 192,000 Total $ 292,000 F-17 Table of Contents NOTE 7. LEASES In April 2018, we entered into a 10 -year lease agreement for a new 9,000 -square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement commenced in December 2018 when the property was ready for occupancy. The agreement provided for annual rent of $ 143,460 , an escalation clause that increases the rent 3 % year over year, a landlord tenant improvement allowance of $ 405,000 and additional landlord work as discussed in the lease agreement. We took occupancy of the property on December 17, 2018 and the lease was amended in March 2019 to provide for a 4-month rent holiday and a commencement date of April 1, 2019. A 7 % discount rate was determined using our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The balances for our operating lease where we are the lessee are presented as follows within our consolidated balance sheet: Operating leases: December 31, 2023 December 31, 2022 Assets: Operating lease right-of-use asset $ 467,935 $ 528,996 Liabilities: Current Portion of Long-Term Operating Lease $ 115,658 $ 100,282 Long-Term Operating Lease, Net of Current Portion 642,527 761,132 Total $ 758,185 $ 861,414 The components of lease expense are as follows within our consolidated statement of operations: For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 Operating lease expense $ 157,315 $ 157,315 Other information related to leases where we are the lessee is as follows: December 31, 2023 December 31, 2022 Weighted-average remaining lease term: Operating leases 5.00 years 6.00 years Discount rate: Operating leases 7.00 % 7.00 % Supplemental cash flow information related to leases where we are the lessee is as follows: For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities: $ 160,290 $ 155,621 As of December 31, 2023, the maturities of our operating lease liability are as follows: Year Ended: Operating Lease December 31, 2024 $ 165,098 December 31, 2025 170,051 December 31, 2026 175,153 December 31, 2027 180,408 December 31, 2028 185,819 Thereafter 33,751 Total minimum lease payments 910,281 Less: Interest 152,096 Present value of lease obligations 758,185 Less: Current portion 115,658 Long-term portion of lease obligations $ 642,527 F-18 Table of Contents NOTE 8. CAPITALIZED SOFTWARE DEVELOPMENT COSTS In accordance with ASC 985-20 we capitalized certain software development costs associated with updating our continuing line of product offerings. Capitalized software development costs consist of the following at: December 31, 2023 December 31, 2022 Capitalized Software Development Costs $ 125,704 $ 125,704 Less: Accumulated Amortization ( 125,704 ) ( 125,704 ) Capitalized Software Development Costs - net $ - $ - Amortization expense for the years ended December 31, 2023 and 2022 was $ 0 and $ 10,475 , respectively. NOTE 9. CLOUD COMPUTING SERVICE CONTRACT In May 2020 we entered into a cloud computing service contract with a vendor. The contract provides for annual payments in the amount of $ 30,409 and has a term of 5 years. The annual contract payments are capitalized as a prepaid expense and amortized over a twelve-month period. We have incurred implementation costs of $ 66,857 in connection with the cloud computing service contract which have been capitalized in prepaid expenses and other assets as of December 31, 2023. In accordance with ASU No. 2018-15, such implementation costs are being amortized over the remaining contract terms beginning January 1, 2021, which was when the cloud-based service contract was placed in service. Amortization expense for the years ended December 31, 2023 and 2022 were $ 15,063 and $ 15,027 , respectively. NOTE 10. CONVERTIBLE DEBT On October and November 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 of Convertible Notes (the “Notes”). As of December 31, 2023, we issued and sold an aggregate of $ 2,600,000 of Notes to certain Investors pursuant to the SPA. In October and November 2023, we sold and issued pursuant to the SPA convertible promissory notes (the “Notes”) to purchase an aggregate of 2,080,000 shares of common stock at an exercise price of $ 1.25 per share in exchange for aggregate gross proceeds of $ 2,600,000 . The Notes mature and are due on the fifth anniversary of the issuance date in October and November of 2028. The Notes 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 (20) days within a thirty (30) day period of consecutive trading days, or if a “fundamental change” occurs (as defined in the Securities Purchase Agreement) . The Notes are unsecured and senior to other indebtedness subject to certain exceptions. Interest expense related to the Notes for the years ended December 31, 2023 and 2022 was $ 54,892 and $ 0 , respectively. Amortization of deferred financing costs were $ 10,413 and $ 0 for the years ended December 31, 2023 and 2022, respectively, which has been included with interest expense on the statement of operations. Convertible notes consist of the following at: December 31, December 31, 2023 2022 Convertible notes $ 2,600,000 $ - Less: Debt issuance costs ( 312,398 ) - Accumulated amortization 10,413 - Convertible notes, net $ 2,298,015 $ - F-19 Table of Contents NOTE 11. SHAREHOLDERS’ EQUITY Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up by us before any payment is made to the holders of our common stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock. Convertible Series A Preferred Stock Our authorized Convertible Series A Preferred Stock, $ 0.01 par value, consists of 1,000,000 shares. At December 31, 2023 and 2022, there were 63,750 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock. Convertible Series B Preferred Stock Our authorized Convertible Series B Preferred Stock, $1,000 stated value, 7.5% cumulative dividend, consists of 4,000 shares. At December 31, 2023 and 2022, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock. Common Stock In January 2022, we issued 51,750 shares of common stock valued at approximately $ 54,000 to members of our Board pursuant to our equity plan (see Note 12). In January 2023, we issued 60,000 shares of Common Stock valued at approximately $ 51,000 to members of our Board pursuant to our equity plan (see Note 12). Stock Options In January 2022 we issued an option to purchase 172,500 shares of common stock to our Chief Executive Officer at an exercise price of $ 1.12 per share pursuant to an employment agreement. The option was valued at $ 178,281 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 156 %; expected dividend yield, 0 %; risk free interest rate, 1.65 %; and an expected life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.03 . In January 2022 we issued an option to purchase 57,500 shares of common stock to our Chief Operating Officer at an exercise price of $ 1.12 per share pursuant to an employment agreement. The option was valued at $ 59,427 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 156 %; expected dividend yield, 0 %; risk free interest rate, 1.65 %; and an expected life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.03 . In January 2022 we issued an option to purchase 40,000 shares of common stock to our Chief Financial Officer at an exercise price of $ 1.12 per share pursuant to an employment agreement. The option was valued at $ 41,340 and has a contractual term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 156 %; expected dividend yield, 0 %; risk free interest rate, 1.65 %; and an expected life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $ 1.03 . In January 2023, we issued options to purchase 175,000 shares of Common Stock to Officers at an exercise price of $ 0.85 per share pursuant to an employment agreement. The options were valued at $ 132,361 and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options received by Officers with the following assumptions: volatility, 139 %; expected dividend yield, 0 %; risk free interest rate, 3.59 %; and an expected life of 5 years. The grant date fair value of each share of Common Stock underlying the options was $ 0.76 . In January 2023, we issued options to purchase 42,042 shares of Common Stock to employees at an exercise prices of $ 0.71 - $ 0.85 per share pursuant to an employment agreement. The options were valued at $ 30,925 , in aggregate and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options received by our employees with the following assumptions: volatility, 139 %; expected dividend yield, 0 %; risk free interest rate, 3.59 %; and an expected life of 5 years. The grant date fair value of each share of Common Stock underlying the options was $ 0.76 . The total stock based compensation for the years ended December 31, 2023 and 2022, was $ 163,286 and $ 653,843 , respectively which has been in included within General and Administration expense in our statement of operations. F-20 Table of Contents The following table summarizes stock options outstanding as of December 31, 2023 and 2022: December 31, 2023 December 31, 2022 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Outstanding, beginning of period 413,000 $ 1.65 143,000 $ 2.66 Granted 217,042 0.82 270,000 1.12 Exercised - - - - Expired ( 12,500 ) - - - Outstanding, end of period 617,542 $ 1.38 413,000 $ 1.65 Options outstanding and exercisable by price range as of December 31, 2023 were as follows: Average Exercisable Options Weighted Remaining Weighted Outstanding Options Contractual Average Range Number Life in Years Number Exercise Price $ 0.71 7,042 4.06 7,042 $ 0.71 $ 0.80 27,500 2.20 27,500 $ 0.80 $ 0.85 210,000 9.08 210,000 $ 0.85 $ 0.88 31,250 1.01 31,250 $ 0.88 $ 0.96 12,500 1.02 12,500 $ 0.96 $ 1.12 270,000 9.06 270,000 $ 1.12 $ 1.93 10,500 4.06 10,500 $ 1.93 $ 2.16 5,000 2 .00 5,000 $ 2.16 $ 4.40 12,500 3.05 12,500 $ 4.40 $ 7.06 31,250 2.75 31,250 $ 7.06 617,542 7.05 617,542 $ 1.38 Stock Warrants The following table summarizes the outstanding common stock warrants as of December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (Unaudited) Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Outstanding, beginning of period 2,792,335 $ 2.25 3,381,021 $ 2.22 Granted - - - - Exercised - - ( 31,250 ) ( 0.21 ) Expired ( 20,239 ) ( 1.11 ) ( 557,436 ) ( 2.23 ) Outstanding, end of period 2,772,096 $ 2.25 2,792,335 $ 2.25 F-21 Table of Contents Warrants outstanding and exercisable by price range as of December 31, 2023 were as follows: Outstanding Warrants Exercisable Warrants Exercise Price Number Average Weighted Remaining Contractual Life in Years Number Weighted Average Exercise Price $ 0.64 31,250 9.89 31,250 $ 0.64 $ 0.80 125,000 10.08 125,000 $ 0.80 $ 0.96 442,708 8.98 442,708 $ 0.96 $ 1.12 6,250 0.30 6,250 $ 1.12 $ 1.20 156,250 1.09 156,250 $ 1.20 $ 1.68 1,434,721 2.75 1,434,721 $ 1.68 $ 2.18 172,167 2.75 172,167 $ 2.18 $ 4.00 28,750 6.32 28,750 $ 4.00 $ 6.95 375,000 7.75 375,000 $ 6.95 2,772,096 4.62 2,772,096 $ 2.25 There were no unvested warrants outstanding as of December 31, 2023. NOTE 12. COMMITMENTS AND CONTINGENCIES Legal Contingencies We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operations or cash flows. In addition, from time to time, we may have to file claims against parties that infringe on our intellectual property. Product Liability As of December 31, 2023 and 2022, there were no claims against us for product liability. NOTE 13. CONTRACTS AND AGREEMENTS Director Compensation In January 2023, we increased the annual fee to the non-employee members of our Board to $ 48,000 , to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee was increased to $ 54,600 , also to be paid in cash on a quarterly basis. Non-employee Director compensation also includes the annual issuance of our Common Stock. For the year ended December 31, 2022, we issued an aggregate of 51,750 shares of Common Stock that were valued at approximately $ 54,000 to members of our Board. For the year ended December 31, 2023, we issued an aggregate of 60,000 shares of Common Stock that were valued at approximately $ 51,000 to members of our Board. Manufacturing Agreement In June 2020 we entered into a manufacturing agreement with Planet Innovation Products, Pty Ltd (“PI”). The agreement does not provide for any minimum purchase commitments and is for a term of three years. The agreement also provides for a warranty against product defects. F-22 Table of Contents Cloud Computing Service Contract In May 2020 we entered into an agreement with a vendor for a cloud computing service contract. The contract provides for annual payments in the amount of $ 30,409 and has a term of 5 years. Approximate minimum future payments under the contract are as follows: Year Ended : Amount December 31, 2024 30,000 December 31, 2025 - December 31, 2026 - Total $ 30,000 NOTE 14. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following at: December 31, 2023 December 31, 2022 Commissions $ 200,837 $ 442,805 Payroll and related costs 201,009 136,000 Director fees 37,650 34,650 Sales Tax Payable 5,707 ( 1,351 ) Accrued warranty (Note 15) 30,000 68,000 Allowance for Sales Returns 128,390 - Other accrued expenses 71,898 48,599 Total $ 675,491 $ 728,703 NOTE 15. ACCRUED WARRANTY Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. The warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate warranty costs based on historical warranty claim experience. The following table presents warranty reserve activities at: December 31, 2023 December 31, 2022 Beginning accrued warranty costs $ 68,000 $ 68,000 Provision for warranty expense 26,911 24,158 Settlement of warranty claims ( 64,911 ) ( 24,158 ) Ending accrued warranty costs $ 30,000 $ 68,000 F-23 Table of Contents NOTE 16. INCOME TAXES The Company’s income tax expense (benefit) consisted of: For the Year Ended December 31, December 31, 2023 2022 Current: Federal $ - $ - State - - Foreign - - - Deferred: Federal - - State - - Foreign - - - - Total $ - $ - The Company’s net income (loss) before income tax consisted of: For the Year Ended December 31, December 31, 2023 2022 United States $ ( 3,402,592 ) $ ( 2,880,060 ) Foreign - - Total $ ( 3,402,592 ) $ ( 2,880,060 ) Our income tax expense differed from the amounts computed by applying the United States statutory corporate income tax rate for the following reasons: On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax Act”) was enacted into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017 , the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. The Tax Act did not give rise to any material impact on the consolidated balance sheets and consolidated statements of operations due to our historical loss position and the full valuation allowance on our net U.S. deferred tax assets. The reconciliation of taxes at the federal and state statutory rate to our provision for income taxes for the years ended December 31, 2023 and 2022 was as follows: For the Year Ended December 31, December 31, 2023 2022 Income (Loss) before income tax $ ( 3,402,592 ) $ ( 2,880,060 ) US statutory corporate income tax rate 28 % 28 % Income tax expense computed at US statutory corporate income tax rate ( 952,726 ) ( 806,417 ) Reconciling items: Change in valuation allowance on deferred tax assets 2,121,178 553,005 Provision to prior year tax return ( 1,188,884 ) 36,032 Incentive stock options and warrants 45,720 183,076 Gain Upon Debt Extinguishment Meals and Entertainment 3,347 - Other ( 29,235 ) 34,304 Income tax expense (benefit) $ - $ - F-24 Table of Contents Components of our deferred income tax assets (liabilities) are as follows: December 31, December 31, 2023 2022 Deferred tax assets: Reserve for Bad Debt $ 418,000 $ 470,000 Inventory Reserve 27,000 27,000 Accrued Vacation 53,000 38,000 Warranty Reserve 8,000 19,000 Intangible Assets 181,000 257,000 Capitalized R&D 148,000 67,000 Stock-Based Compensation 1,246,000 - Operating lease right-of-use liabilities 212,000 241,000 Net operating losses 5,568,000 4,639,000 Valuation Allowance ( 7,539,000 ) ( 5,332,000 ) Deferred Tax Assets 322,000 426,000 Deferred tax liabilities: Operating lease right-of-use assets ( 189,000 ) ( 217,000 ) Property and Equipment ( 133,000 ) ( 209,000 ) ( 322,000 ) ( 426,000 ) Net Deferred Tax Assets and Liabilities $ - $ - Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized; in accordance with ASC-740 guidance for income taxes. As of December 31, 2023, we recorded a valuation allowance of $ 7,539,000 for the portion of the deferred tax assets that we do not expect to be realized. The valuation allowance on our net deferred taxes increased by $ 999,000 during the year ended December 31, 2023, primarily due to U.S. deferred tax assets incurred in the current year that cannot be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. For income tax purposes in the United States, we had available federal net operating loss carryforwards (“NOL”) as of December 31, 2023 and 2022 of approximately $ 20,796,000 and $ 17,479,000 respectively to reduce future federal taxable income. For income tax purposes in the United States, we had available state NOL carryforwards as of December 31, 2023 and 2022 of approximately $ 17,153,000 and $ 13,835,000 respectively to reduce future state taxable income. If any of the NOL’s generated prior to 2018 are not utilized, they will expire at various dates through 2037. NOL’s generated after 2017 carry forward indefinitely. There may be certain limitations as to the future annual use of the NOLs due to certain changes in our ownership. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of December 31, 2023, and 2022, the management of the Company determined there were no reportable uncertain tax positions. NOTE 17. CUSTOMER CONCENTRATION The Company had certain customers whose accounts receivable balances individually represented 10 % or more of the Company’s accounts receivable. As of December 31, 2023, two customers accounted for 27 % of our gross accounts receivable. As of December 31, 2022, one customer accounted for 14 % of our gross accounts receivable. For the year ended December 31, 2023, we had 2 customers who represented 20 % of revenue. For the year ended December 31, 2022, we had no customer who represented 10 % or more of revenue. F-25