TOMI Environmental Solutions, Inc. 10-Q

Item 1. Financial Statements. TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS Current Assets: March 31, 2024 (Unaudited) December 31, 2023 Cash and Cash Equivalents $ 1,093,219 $ 2,339,059 Accounts Receivable - net 2,115,691 2,429,929 Other Receivables 164,150 164,150 Inventories (Note 3) 4,645,885 4,627,103 Vendor Deposits (Note 4) 124,427 29,335 Prepaid Expenses 384,003 371,298 Total Current Assets 8,527,375 9,960,874 Property and Equipment – net (Note 5) 1,060,640 1,048,642 Other Assets: Intangible Assets – net (Note 6) 1,118,369 1,123,246 Operating Lease - Right of Use Asset (Note - 7) 451,514 467,935 Long Term Accounts Receivable - net 206,240 206,240 Other Assets 593,930 550,677 Total Other Assets 2,370,053 2,348,098 Total Assets $ 11,958,068 $ 13,357,614 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 1,351,118 $ 1,267,029 Accrued Expenses and Other Current Liabilities (Note 13) 472,525 675,491 Deferred Revenue 13,659 - Current Portion of Long-Term Operating Lease 118,911 115,658 Total Current Liabilities 1,956,213 2,058,178 Long-Term Liabilities: Long-Term Operating Lease, Net of Current Portion (Note 7) 612,017 642,527 Convertible Notes Payable, net of discount of $ 286,366 and $ 301,985 at March 31, 2024 and December 31, 2023, respectively (Note 9) 2,313,634 2,298,015 Total Long-Term Liabilities 2,925,651 2,940,542 Total Liabilities $ 4,881,864 $ 4,998,720 Commitments and Contingencies (Note 11) - - 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 March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, respectively - - Common stock; par value $ 0.01 per share, 250,000,000 shares authorized; 19,955,205 and 19,923,955 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively 199,553 199,240 Additional Paid-In Capital 58,012,432 57,985,245 Accumulated Deficit ( 51,136,419 ) ( 49,826,229 ) Total Shareholders’ Equity 7,076,204 8,358,894 Total Liabilities and Shareholders’ Equity $ 11,958,068 $ 13,357,614 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For The Three Months Ended March 31, 2024 2023 Sales, net $ 1,114,087 $ 1,582,172 Cost of Sales 443,419 640,935 Gross Profit 670,668 941,237 Operating Expenses: Professional Fees 197,999 137,185 Depreciation and Amortization 77,921 88,776 Selling Expenses 289,069 376,653 Research and Development 67,971 70,520 Consulting Fees 113,635 75,455 General and Administrative 1,150,549 1,380,794 Total Operating Expenses 1,897,144 2,129,383 Income (loss) from Operations ( 1,226,476 ) ( 1,188,146 ) Other Income (Expense): Interest Income 9,906 659 Interest Expense ( 93,620 ) - Total Other Income (Expense) ( 83,714 ) 659 Income (loss) before income taxes ( 1,310,190 ) ( 1,187,487 ) Provision for Income Taxes (Note 16) - - Net Income (loss) $ ( 1,310,190 ) $ ( 1,187,487 ) Net income (loss) Per Common Share Basic $ ( 0.07 ) $ ( 0.06 ) Diluted $ ( 0.07 ) $ ( 0.06 ) Basic Weighted Average Common Shares Outstanding 19,954,511 19,806,622 Diluted Weighted Average Common Shares Outstanding 19,954,511 19,806,622 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) For the three months ended March 31, 2024 Series A Preferred Common Stock Additional Paid Accumulated Total Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at January 1, 2024 63,750 638 19,923,955 199,240 $ 57,985,245 $ ( 49,826,229 ) $ 8,358,894 Warrants and Options Exercised 31,250 313 27,187 27,500 Net (Loss) for the three months ended March 31, 2024 ( 1,310,190 ) ( 1,310,190 ) Balance at March 31, 2024 63,750 $ 638 19,955,205 $ 199,553 $ 58,012,432 $ ( 51,136,419 ) $ 7,076,204 For the three months ended March 31, 2023 Series A Preferred Common Stock Additional Paid Accumulated Shareholders’ Shares Amount Shares Amount in Capital Deficit Equity Balance at January 1, 2023 63,750 638 19,763,956 197,640 $ 57,673,559 $ ( 46,423,637 ) $ 11,448,200 Equity Compensation 158,833 158,833 Common Stock Issued for Services Provided 60,000 600 50,400 51,000 Net (Loss) for the three months ended March 31, 2023 ( 1,187,487 ) ( 1,187,487 ) Balance at March 31, 2023 63,750 $ 638 19,823,956 $ 198,240 $ 57,882,792 $ ( 47,611,124 ) $ 10,470,546 The accompanying notes are an integral part of the condensed consolidated financial statements. 6 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 2024 2023 Cash Flow From Operating Activities: Net Income (Loss) $ ( 1,310,190 ) $ ( 1,187,487 ) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used) In Operating Activities: Depreciation and Amortization 77,921 88,776 Amortization of Right of Use Asset 39,329 39,329 Amortization of Deferred Financing Costs 15,620 - Equity Compensation Expense - 158,833 Value of Equity Issued for Services - 51,000 Reserve for Bad Debt ( 96,620 ) - Changes in Operating Assets and Liabilities: Decrease (Increase) in: Accounts Receivable 410,858 281,653 Inventory ( 18,782 ) 142,541 Prepaid Expenses ( 12,705 ) ( 24,616 ) Vendor Deposits ( 95,093 ) ( 67,151 ) Other Assets ( 43,253 ) ( 45,581 ) Increase (Decrease) in: Accounts Payable 84,090 ( 518,441 ) Accrued Expenses ( 202,966 ) ( 161,769 ) Customer Deposits 13,659 ( 81,243 ) Lease Liability ( 40,367 ) ( 39,191 ) Net Cash Provided (Used) in Operating Activities ( 1,178,499 ) ( 1,363,347 ) Cash Flow From Investing Activities: Purchase of Property and Equipment ( 94,840 ) ( 34,086 ) Net Cash (Used) in Investing Activities ( 94,840 ) ( 34,086 ) The accompanying notes are an integral part of the condensed consolidated financial statements. 7 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED (UNAUDITED) For the Three Months Ended March 31, 2024 2023 Cash Flow From Financing Activities: Proceeds from Issuance of Stock and Warrants 27,500 - Net Cash From Financing Activities: 27,500 - Increase (Decrease) In Cash and Cash Equivalents ( 1,245,840 ) ( 1,397,433 ) Cash and Cash Equivalents - Beginning 2,339,059 3,866,733 Cash and Cash Equivalents – Ending $ 1,093,219 $ 2,469,300 Supplemental Cash Flow Information: Cash Paid for Interest $ 49,000 $ - The accompanying notes are an integral part of the condensed consolidated financial statements. 8 Table of Contents TOMI ENVIRONMENTAL SOLUTIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS TOMI Environmental Solutions, Inc., a Florida corporation (“TOMI”, the “Company”, “we”, “our” and “us”) is a global provider of disinfection and decontamination essentials through our premier Binary Ionization Technology® (BIT™) platform, under which we manufacture, license, service and sell our SteraMist® brand of products, including SteraMist® BIT™, a hydrogen peroxide-based mist and fog. Our solution and process are environmentally friendly as the only biproduct from our decontamination process is oxygen and 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 Basis of Presentation The interim unaudited condensed consolidated financial statements included herein, presented in accordance with generally accepted accounting principles utilized in the United States of America (“GAAP”), and stated in U.S. dollars, have been prepared by us, without an audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2023 and notes thereto which are included in the annual report on Form 10-K previously filed with the SEC on April 1, 2024 (the “Annual Report”). We follow the same accounting policies in the preparation of interim reports. The results of operations for the interim periods covered by this Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period. For the three months ended March 31, 2024 our loss was $1,310,000 and the cash used in operations was $1,178,000. Absent any other action, the Company may require additional liquidity to continue its operations over the next 12 months. However, management has considered its liquidity plans to continue the Company as a going concern and believes substantial doubt is alleviated by managing costs and expenses, raising capital by closing equity and debt offerings and generating additional revenue and funding through increased sales, government grants and other sources. 9 Table of Contents Principles of Consolidation The accompanying condensed 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 condensed 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. 10 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 March 31, 2024 and December 31, 2023, 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 three months ended March 31, 2024 and 2023, respectively was approximately $ 88,000 and $ 54,000 . At March 31, 2024 and December 31, 2023, the allowance for credit losses was approximately $ 1,398,000 and $ 1,494,000 . 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 March 31, 2024 and December 31, 2023. 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. 11 Table of Contents Leases We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease. As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense in the period in which they are incurred. Accounts Payable As of March 31, 2024, one vendor accounted for approximately 50 % of accounts payable. As of December 31, 2023, two vendors accounted for approximately 59 % of accounts payable. For the three months ended March 31, 2024 and 2023, two vendors accounted for 49 % and 59 % of cost of sales, respectively. 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 March 31, 2024, and December 31, 2023, our warranty reserve was $ 30,000 . (See Note 14). Income Taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with FASB ASC Topic 740, Income Taxes guidance for income taxes. Net deferred tax benefits have been fully reserved at March 31, 2024 and December 31, 2023. 12 Table of Contents Net Income (Loss) Per Share Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the treasury stock method and includes the effect from potential issuance of shares of common stock, such as shares issuable pursuant to the exercise of options and warrants and conversions of preferred stock or debentures. 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 and convertible debt as prescribed in FASB ASC Topic 260. Because of the net loss for the three months ended March 31, 2024 and 2023, the impact of including these in our computation of diluted EPS was anti-dilutive. Potentially dilutive securities as of March 31, 2024 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, 580,042 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Potentially dilutive securities as of March 31, 2023 consisted of 2,773,585 shares of common stock issuable upon exercise of outstanding warrants, 610,500 shares of common stock issuable upon vesting and exercise and 63,750 shares of common stock issuable upon conversion of outstanding shares of Convertible Series A Preferred Stock. Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately 5.5 million and 3.4 million shares of common stock were outstanding at March 31, 2024 and 2023, respectively, but were excluded from the computation of diluted net loss per share at March 31, 2024 and 2023 due to the anti-dilutive effect on net loss per share. Revenue Recognition We recognize revenue in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. 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. 13 Table of Contents 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 approximate revenues disaggregated by revenue source. Product and Service Revenue For the three months ended March 31, (Unaudited) 2024 2023 SteraMist Product $ 743,000 $ 1,276,000 Service and Training 371,000 306,000 Total $ 1,114,000 $ 1,582,000 Revenue by Geographic Region For the three months ended March 31, (Unaudited) 2024 2023 United States $ 662,000 $ 1,128,000 International 452,000 454,000 Total $ 1,114,000 $ 1,582,000 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. 14 Table of Contents 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 March 31, 2024, and December 31, 2023, we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. Significant Judgments Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services. Equity Compensation Expense We account for equity compensation expense in accordance with FASB ASC 718, “Compensation-Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value. 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 three months ended March 31, 2023, we issued 60,000 shares of Common Stock, out of the 2016 Plan. 15 Table of Contents Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $ 250,000 at times during the year. Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three months ended March 31, 2024 and 2023. Advertising and Promotional Expenses We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses for the three months ended March 31, 2024 and 2023 were approximately $ 92,000 and $ 197,000 , respectively. Research and Development Expenses We expense research and development expenses in the period in which they are incurred. For the three months ended March 31, 2024 and 2023, research and development expenses were approximately $ 68,000 and $ 71,000 , 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. 16 Table of Contents 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. NOTE 3. INVENTORIES Inventories consist of the following at (rounded to the nearest thousandth): March 31, 2024 (Unaudited) December 31, 2023 Finished Goods $ 3,922,000 $ 3,980,000 Raw Materials 819,000 742,000 Inventory Reserve ( 95,000 ) ( 95,000 ) Total $ 4,646,000 $ 4,627,000 17 Table of Contents NOTE 4. VENDOR DEPOSITS At March 31, 2024 and December 31, 2023, we maintained vendor deposits of $ 124,427 and $ 29,335 respectively, for open purchase orders for inventory. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at: March 31, 2024 (Unaudited) December 31, 2023 Furniture and fixtures $ 458,651 $ 364,819 Equipment 2,269,185 2,269,185 Vehicles 66,170 66,170 Computer and software 307,563 306,656 Leasehold improvements 393,381 393,381 Tenant Improvement Allowance 405,000 405,000 Total cost of property and equipment 3,899,950 3,805,211 Less: Accumulated depreciation 2,839,310 2,756,469 Property and Equipment, net $ 1,060,640 $ 1,048,642 For the three months ended March 31, 2024 and 2023, depreciation was $ 73,043 and $ 85,003 , respectively. For the three months ended March 31, 2024 and 2023, amortization of tenant improvement allowance was $ 9,798 and was recorded as lease expense and included within general and administrative expense on the condensed 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 $ 4,878 and $ 3,773 for the three months ended March 31, 2024 and 2023, respectively. 18 Table of Contents Definite life intangible assets consist of the following: March 31, 2024 (Unaudited) December 31, 2023 Intellectual Property and Patents $ 3,196,396 $ 3,196,396 Less: Accumulated Amortization 2,908,890 2,904,013 Patents, net $ 287,506 $ 292,383 19 Table of Contents Indefinite life intangible assets consist of the following: Trademarks 830,863 830,863 Total Intangible Assets, net $ 1,118,369 $ 1,123,246 Approximate future amortization is as follows (rounded to nearest thousandth): Year Ended : Amount April 1 – December 31, 2024 $ 15,000 December 31, 2025 20,000 December 31, 2026 20,000 December 31, 2027 20,000 December 31, 2028 20,000 Thereafter 193,000 Total $ 288,000 NOTE 7. LEASES In April 2018, we entered into a 10 -year lease agreement for a new 9,000 -square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement 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 condensed consolidated balance sheet: Operating leases: March 31, 2024 (Unaudited) December 31, 2023 Assets: Operating lease right-of-use asset $ 451,514 $ 467,935 Liabilities: Current Portion of Long-Term Operating Lease $ 118,911 $ 115,658 Long-Term Operating Lease, Net of Current Portion 612,017 642,527 Total Right of Use Liability $ 730,928 $ 785,185 20 Table of Contents The components of lease expense are as follows and are included within general and administrative expense on our condensed consolidated statement of operations: For the Three Months Ended March 31, 2024 (Unaudited) For the Three Months Ended March 31, 2023 (Unaudited) Operating lease expense $ 39,329 $ 39,329 Other information related to leases where we are the lessee is as follows: March 31, 2024 (Unaudited) December 31, 2023 Weighted-average remaining lease term: Operating leases 4.75 years 5 .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 Three Months Ended March 31, 2024 (Unaudited) For the Three Months Ended March 31, 2023 (Unaudited) Cash paid for amounts included in the measurement of lease liabilities: $ 40,366 $ 39,191 As of March 31, 2024, the maturities of our operating lease liability are as follows: Year Ended: Operating Lease April 1 – December 31, 2024 $ 124,732 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 869,914 Less: Interest 138,986 Imputed value of lease obligations 730,928 Less: Current portion 118,911 Long-term portion of lease obligations $ 612,017 21 Table of Contents NOTE 8. 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 March 31, 2024. 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 three months ended March 31, 2024 and 2023 were $ 3,766 and $ 3,766 , respectively. NOTE 9. CONVERTIBLE DEBT In 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 three months ended March 31, 2024 and 2023 was $ 78,000 and $ 0 , respectively. Amortization of deferred financing costs were $ 15,620 and $ 0 for the three months ended March 31, 2024 and 2023, respectively, which has been included with interest expense on the statement of operations. 22 Table of Contents Convertible notes consist of the following at: March 31, December 31, 2024 2023 (Unaudited) Convertible notes $ 2,600,000 $ 2,600,000 Less: Debt issuance costs ( 312,398 ) ( 312,398 ) Accumulated amortization 26,032 10,413 Convertible notes, net $ 2,313,634 $ 2,298,015 NOTE 10. SHAREHOLDERS’ EQUITY Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up by us before any payment is made to the holders of our Common Stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our Common Stock. Convertible Series A Preferred Stock Our authorized Convertible Series A Preferred Stock, $ 0.01 par value, consists of 1,000,000 shares. At March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, 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 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). 23 Table of Contents Stock Options 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 has 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 an option to purchase 35,000 shares of Common Stock to an employee at an exercise price of $ 0.85 per share pursuant to an employment agreement. The option was valued at $ 26,472 and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options 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 5 years. The grant date fair value of each share of Common Stock underlying the options was $ 0.76 . The following table summarizes stock options outstanding as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 (Unaudited) Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Outstanding, beginning of period 617,542 $ 1.38 413,000 $ 1.65 Granted - 0.85 217,042 0.82 Exercised ( 31,250 ) 0.88 - - Expired ( 6,250 ) 0.80 ( 12,500 ) - Outstanding, end of period 580,042 $ 1.42 617,542 $ 1.38 Options outstanding and exercisable by price range as of March 31, 2024 were as follows: Outstanding Options Average Exercisable Options Weighted Remaining Weighted Contractual Average Range Number Life in Years Number Exercise Price $ 0.71 7,042 3.81 7,042 $ 0.71 $ 0.80 21,250 1.95 21,250 $ 0.80 $ 0.85 210,000 8.83 210,000 $ 0.85 $ 0.96 12,500 0.77 12,500 $ 0.96 $ 1.12 270,000 8.81 270,000 $ 1.12 $ 1.93 10,500 3.81 10,500 $ 1.93 $ 2.16 5,000 1.75 5,000 $ 2.16 $ 4.40 12,500 2.80 12,500 $ 4.40 $ 7.06 31,250 2.5 0 31,250 $ 7.06 580,042 6.80 580,042 $ 1.43 24 Table of Contents Stock Warrants The following table summarizes the outstanding common stock warrants as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 (Unaudited) Weighted Average Exercise Price Number of Warrants Weighted Average Exercise Price Outstanding, beginning of period 2,772,096 $ 2.25 2,792,335 $ 2.25 Granted - - - - Exercised - - - - Expired - - ( 20,239 ) ( 1.11 ) Outstanding, end of period 2,772,096 $ 2.25 2,772,096 $ 2.25 Warrants outstanding and exercisable by price range as of March 31, 2024 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 9.64 31,250 $ 0.64 $ 0.80 125,000 9.83 125,000 $ 0.80 $ 0.96 442,708 8.73 442,708 $ 0.96 $ 1.12 6,250 0.05 6,250 $ 1.12 $ 1.20 156,250 0.84 156,250 $ 1.20 $ 1.68 1,434,721 2.50 1,434,721 $ 1.68 $ 2.18 172,167 2.50 172,167 $ 2.18 $ 4.00 28,750 6.07 28,750 $ 4.00 $ 6.95 375,000 7.50 375,000 $ 6.95 2,772,096 4.37 2,772,096 $ 2.25 There were no unvested warrants outstanding as of March 31, 2024. NOTE 11. COMMITMENTS AND CONTINGENCIES Legal Contingencies We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operations or cash flows. In addition, from time to time, we may have to file claims against parties that infringe on our intellectual property. 25 Table of Contents Product Liability As of March 31, 2024 and December 31, 2023, there were no claims against us for product liability. NOTE 12. 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 three months ended March 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. 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 April 1 - December 31, 2024 $ 30,000 December 31, 2025 - Total $ 30,000 26 Table of Contents NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following at: March 31, 2024 (Unaudited) December 31, 2023 Commissions $ 105,315 $ 200,837 Payroll and related costs 203,242 201,009 Director fees 37,650 37,650 Sales Tax Payable 6,062 5,707 Accrued warranty (Note 14) 30,000 30,000 Other accrued expenses 90,256 71,898 Total $ 472,525 $ 675,491 NOTE 14. ACCRUED WARRANTY Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. The warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate warranty costs based on historical warranty claim experience. The following table presents warranty reserve activities at: March 31, 2024 (Unaudited) December 31, 2023 Beginning accrued warranty costs $ 30,000 $ 68,000 Provision for warranty expense 3,962 26,911 Settlement of warranty claims ( 3,962 ) ( 64,911 ) Ending accrued warranty costs $ 30,000 $ 30,000 NOTE 15. INCOME TAXES For the three months ended March 31, 2024 and 2023, our provision for income tax was $ 0 . 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 FASB ASC Topic 740, Income Taxes. As of March 31, 2024 and December 31, 2023, we recorded a valuation allowance of $ 7,851,000 and $ 7,539,000 , respectively for the portion of the deferred tax assets that we do not expect to be realized. Management believes that based on the available information, it is more likely than not that the remaining U.S. deferred tax assets will not be realized, such that a full of 100% valuation allowance is required against U.S. deferred tax assets. 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. NOTE 16. CUSTOMER CONCENTRATION Two customers accounted for 37 % of net revenue for the three months ended March 31, 2024. Two customers accounted for 26 % of net revenue for the three months ended March 31, 2023. As of March 31, 2024 three customers accounted for 41 % of our gross accounts receivable. As of December 31, 2023, two customers accounted for 27 % of our gross accounts receivable. 27 Table of Contents