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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-09908

TOMI ENVIRONMENTAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

Florida |  | 59-1947988
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

8430 Spires Way, Frederick, Maryland 21701
(Address of principal executive offices) (Zip Code)
(800) 525-1698
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common stock, par value $0.01 per share |  | TOMZ |  | Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☐
Non-accelerated filer | ☒ | Smaller reporting company | ☒
|  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 10, 2021, the registrant had 19,680,955 shares of common stock outstanding.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
|  | Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 3
PART I | FINANCIAL INFORMATION |
Item 1 | Financial Statements. | 4
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 30
Item 3 | Quantitative and Qualitative Disclosures About Market Risk. | 48
Item 4 | Controls and Procedures. | 49
PART II | OTHER INFORMATION |
Item 1 | Legal Proceedings. | 50
Item 1A | Risk Factors. | 50
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds. | 50
Item 3 | Defaults Upon Senior Securities. | 50
Item 4 | Mine Safety Disclosures. | 50
Item 5 | Other Information. | 50
Item 6 | Exhibits. | 50
SIGNATURES | 51
EXHIBIT INDEX | 52

2
Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Form 10-Q, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we intend that such forward looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed forward-looking statements. You can generally identify forward-looking statements as statements containing the words “will,” “would,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “assume,” “can,” “could,” “plan,” “predict,” “should” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” in our most recent Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

3
Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS |  |  |  |  |  |
Current Assets: |  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Cash and Cash Equivalents |  | $ | 5,662,745 |  |  | $ | 5,198,842 |
Accounts Receivable - net |  |  | 3,528,034 |  |  |  | 3,716,701 |
Other Receivables |  |  | 114,848 |  |  |  | 198,951 |
Inventories (Note 3) |  |  | 4,788,204 |  |  |  | 3,781,515 |
Vendor Deposits (Note 4) |  |  | 426,818 |  |  |  | 388,712 |
Prepaid Expenses |  |  | 319,704 |  |  |  | 421,305 |
Total Current Assets |  |  | 14,840,352 |  |  |  | 13,706,027 |
Property and Equipment – net (Note 5) |  |  | 1,299,060 |  |  |  | 1,298,103 |
Other Assets: |  |  |  |  |  |  |  |
Intangible Assets – net (Note 6) |  |  | 829,345 |  |  |  | 722,916 |
Operating Lease - Right of Use Asset (Note - 7) |  |  | 595,874 |  |  |  | 631,527 |
Capitalized Software Development Costs - net (Note 8) |  |  | 20,951 |  |  |  | 52,377 |
Other Assets |  |  | 486,623 |  |  |  | 358,935 |
Total Other Assets |  |  | 1,932,793 |  |  |  | 1,765,755 |
Total Assets |  | $ | 18,072,205 |  |  | $ | 16,769,885 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current Liabilities: |  |  |  |  |  |  |  |
Accounts Payable |  | $ | 1,126,221 |  |  | $ | 1,501,469 |
Accrued Expenses and Other Current Liabilities (Note 13) |  |  | 655,341 |  |  |  | 501,849 |
Customer Deposits |  |  | 80,059 |  |  |  | 118,880 |
Current Portion of Long-Term Operating Lease |  |  | 89,059 |  |  |  | 81,223 |
Total Current Liabilities |  |  | 1,950,680 |  |  |  | 2,203,421 |
Long-Term Liabilities: |  |  |  |  |  |  |  |
Loan Payable (Note 15) |  |  | - |  |  |  | 410,700 |
Long-Term Operating Lease, Net of Current Portion (Note 7) |  |  | 885,252 |  |  |  | 953,190 |
Total Long-Term Liabilities |  |  | 885,252 |  |  |  | 1,363,890 |
Total Liabilities |  |  | 2,835,932 |  |  |  | 3,567,311 |
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 September 30, 2021 and December 31, 2020 |  |  | 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 September 30, 2021 and December 31, 2020 |  |  | - |  |  |  | - |
Common stock; par value $0.01 per share, 250,000,000 shares authorized; 19,680,955 and 16,761,513 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively. |  |  | 196,810 |  |  |  | 167,615 |
Additional Paid-In Capital |  |  | 56,922,855 |  |  |  | 52,142,399 |
Accumulated Deficit |  |  | (41,884,030 | ) |  |  | (39,108,078 | )
Total Shareholders’ Equity |  |  | 15,236,273 |  |  |  | 13,202,574 |
Total Liabilities and Shareholders’ Equity |  | $ | 18,072,205 |  |  | $ | 16,769,885 |

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
(UNAUDITED)
|  | For The Three Months Ended |  |  | For The Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2021 |  |  | 2020 (1) |  |  | 2021 |  |  | 2020 |
Sales, net |  | $ | 2,204,569 |  |  | $ | 4,291,588 |  |  | $ | 5,743,549 |  |  | $ | 21,373,503 |
Cost of Sales |  |  | 890,273 |  |  |  | 1,455,568 |  |  |  | 2,252,133 |  |  |  | 8,484,580 |
Gross Profit |  |  | 1,314,296 |  |  |  | 2,836,021 |  |  |  | 3,491,415 |  |  |  | 12,888,924 |
Operating Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Professional Fees |  |  | 117,654 |  |  |  | 227,560 |  |  |  | 397,928 |  |  |  | 418,516 |
Depreciation and Amortization |  |  | 69,805 |  |  |  | 177,279 |  |  |  | 225,666 |  |  |  | 521,486 |
Selling Expenses |  |  | 465,304 |  |  |  | 212,624 |  |  |  | 1,275,137 |  |  |  | 980,096 |
Research and Development |  |  | 93,274 |  |  |  | 44,862 |  |  |  | 494,645 |  |  |  | 245,443 |
Equity Compensation Expense (Note 10) |  |  | - |  |  |  | 10,621 |  |  |  | - |  |  |  | 307,686 |
Consulting Fees |  |  | 63,805 |  |  |  | 75,204 |  |  |  | 265,588 |  |  |  | 226,454 |
General and Administrative |  |  | 991,090 |  |  |  | 991,543 |  |  |  | 4,022,650 |  |  |  | 2,776,846 |
Total Operating Expenses |  |  | 1,800,933 |  |  |  | 1,739,693 |  |  |  | 6,681,614 |  |  |  | 5,476,527 |
Income (loss) from Operations |  |  | (486,637 | ) |  |  | 1,096,328 |  |  |  | (3,190,199 | ) |  |  | 7,412,397 |
Other Income (Expense): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain Upon Debt Extinguishment |  |  | - |  |  |  | - |  |  |  | 414,583 |  |  |  | - |
Interest Income |  |  | 79 |  |  |  | 762 |  |  |  | 698 |  |  |  | 2,347 |
Interest Expense |  |  | - |  |  |  | (790 | ) |  |  | (1,034 | ) |  |  | (42,266 | )
Total Other Income (Expense) |  |  | 79 |  |  |  | (28 | ) |  |  | 414,247 |  |  |  | (39,919 | )
Income (loss) before income taxes |  |  | (486,558 | ) |  |  | 1,096,300 |  |  |  | (2,775,952 | ) |  |  | 7,372,478 |
Provision for Income Taxes (Note 16) |  |  | - |  |  |  | 77,000 |  |  |  | - |  |  |  | 77,000 |
Net Income (loss) |  | $ | (486,558 | ) |  | $ | 1,019,300 |  |  | $ | (2,775,952 | ) |  | $ | 7,295,478 |
Net income (loss) Per Common Share |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (0.03 | ) |  | $ | 0.06 |  |  | $ | (0.17 | ) |  | $ | 0.44 |
Diluted |  | $ | (0.03 | ) |  | $ | 0.05 |  |  | $ | (0.17 | ) |  | $ | 0.40 |
Basic Weighted Average Common Shares Outstanding |  |  | 16,843,045 |  |  |  | 16,741,622 |  |  |  | 16,805,145 |  |  |  | 16,429,360 |
Diluted Weighted Average Common Shares Outstanding |  |  | 16,843,045 |  |  |  | 18,593,255 |  |  |  | 16,805,145 |  |  |  | 18,280,993 |

(1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information.

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 nine months ended September 30, 2021

|  | Series A Preferred |  |  | Common Stock |  |  | Additional Paid in |  |  | Accumulated |  |  | Total Shareholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balance at January 1, 2021 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 16,761,514 |  |  | $ | 167,614 |  |  | $ | 52,142,400 |  |  | $ | (39,108,078 | ) |  | $ | 13,202,574 |
Common Stock Issued for Services Provided |  |  |  |  |  |  |  |  |  |  | 50,000 |  |  |  | 500 |  |  |  | 227,500 |  |  |  |  |  |  |  | 228,000 |
Common Stock Issued in Private Placement |  |  |  |  |  |  |  |  |  |  | 2,869,442 |  |  |  | 28,694 |  |  |  | 4,552,957 |  |  |  |  |  |  |  | 4,581,651 |
Net (Loss) for the nine months ended September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,775,952 | ) |  |  | (2,775,952 | )
Balance at September 30, 2021 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 19,680,956 |  |  | $ | 196,808 |  |  | $ | 56,922,857 |  |  | $ | (41,884,030 | ) |  | $ | 15,236,273 |

For the nine months ended September 30, 2020

|  | Series A Preferred |  |  | Common Stock |  |  | Additional Paid in |  |  | Accumulated |  |  | Total Shareholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balance at January 1, 2020 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 15,587,552 |  |  | $ | 155,876 |  |  | $ | 44,232,273 |  |  | $ | (43,499,244 | ) |  | $ | 889,543 |
Equity Compensation |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 334,875 |  |  |  |  |  |  |  | 334,875 |
Common Stock Issued for Services Provided |  |  |  |  |  |  |  |  |  |  | 50,000 |  |  |  | 500 |  |  |  | 47,500 |  |  |  |  |  |  |  | 48,000 |
Conversion of Notes Payable into Common Stock |  |  |  |  |  |  |  |  |  |  | 1,041,667 |  |  |  | 10,417 |  |  |  | 4,489,583 |  |  |  |  |  |  |  | 4,500,000 |
Warrants and Options Exercised |  |  |  |  |  |  |  |  |  |  | 66,796 |  |  |  | 668 |  |  |  | 182,832 |  |  |  |  |  |  |  | 183,500 |
Reverse stock split adjustment |  |  |  |  |  |  |  |  |  |  | 2,499 |  |  |  | 25 |  |  |  | (25 | ) |  |  |  |  |  |  | - |
Net Income for the nine months ended September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 7,295,478 |  |  |  | 7,295,478 |
Balance at September 30, 2020 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 16,748,513 |  |  | $ | 167,485 |  |  | $ | 49,287,039 |  |  | $ | (36,203,766 | ) |  | $ | 13,251,396 |

(1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 10—Equity for further information.

The accompanying notes are an integral part of the condensed consolidated financial statements.

6
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TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

For the three months ended September 30, 2021

|  | Series A Preferred |  |  | Common Stock |  |  | Additional Paid in |  |  | Accumulated |  |  | Total Shareholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balance at June 30, 2021 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 16,811,514 |  |  | $ | 168,114 |  |  | $ | 52,369,900 |  |  | $ | (41,397,472 | ) |  | $ | 11,141,180 |
Common Stock Issued in Private Placement |  |  |  |  |  |  |  |  |  |  | 2,869,442 |  |  |  | 28,694 |  |  |  | 4,552,957 |  |  |  |  |  |  |  | 4,581,651 |
Net (Loss) for the three months ended September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (486,558 | ) |  |  | (486,558 | )
Balance at September 30, 2021 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 19,680,956 |  |  | $ | 196,808 |  |  | $ | 56,922,857 |  |  | $ | (41,884,030 | ) |  | $ | 15,236,273 |

For the three months ended September 30, 2020

|  | Series A Preferred |  |  | Common Stock |  |  | Additional Paid in |  |  | Accumulated |  |  | Total Shareholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Equity |
Balance at June 30, 2020 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 16,719,075 |  |  | $ | 167,191 |  |  | $ | 49,214,210 |  |  | $ | (37,223,065 | ) |  | $ | 12,158,974 |
Equity Compensation |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 10,621 |  |  |  |  |  |  |  | 10,621 |
Warrants and Options Exercised |  |  |  |  |  |  |  |  |  |  | 26,940 |  |  |  | 269 |  |  |  | 62,230 |  |  |  |  |  |  |  | 62,499 |
Reverse stock split adjustment |  |  |  |  |  |  |  |  |  |  | 2,499 |  |  |  | 25 |  |  |  | (25 | ) |  |  |  |  |  |  | - |
Net Income for the three months ended September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,019,300 |  |  |  | 1,019,300 |
Balance at September 30, 2020 |  |  | 63,750 |  |  | $ | 638 |  |  |  | 16,748,514 |  |  | $ | 167,485 |  |  | $ | 49,287,039 |  |  | $ | (36,203,765 | ) |  | $ | 13,251,396 |

(1) Share amounts have been retroactively restated to reflect the Company’s reverse stock split, which was effected September 10, 2020. Refer to Note 10—Equity for further information.

The accompanying notes are an integral part of the condensed consolidated financial statements.

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TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

|  | For the Nine Months Ended September 30, |
|  | 2021 |  |  | 2020 |
Cash Flow From Operating Activities: |  |  |  |  |  |
Net Income (Loss) |  | $ | (2,775,952 | ) |  | $ | 7,295,478 |
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: |  |  |  |  |  |  |  |
Depreciation and Amortization |  |  | 225,666 |  |  |  | 521,486 |
Amortization of Right of Use Asset |  |  | 117,986 |  |  |  | 117,986 |
Amortization of Software Costs |  |  | 31,425 |  |  |  | 31,425 |
Equity Compensation Expense |  |  | - |  |  |  | 307,686 |
Value of Equity Issued for Services |  |  | 228,000 |  |  |  | 48,000 |
Reserve for Bad Debt |  |  | 360,000 |  |  |  | 205,000 |
Inventory Reserve |  |  | - |  |  |  | (100,000 | )
Gain Upon Debt Extinguishment |  |  | (414,583 | ) |  |  | - |
Changes in Operating Assets and Liabilities: |  |  |  |  |  |  |  |
Decrease (Increase) in: |  |  |  |  |  |  |  |
Accounts Receivable |  |  | (171,332 | ) |  |  | (2,214,625 | )
Inventory |  |  | (1,006,689 | ) |  |  | (1,923,030 | )
Prepaid Expenses |  |  | 101,601 |  |  |  | (189,095 | )
Vendor Deposits |  |  | (38,106 | ) |  |  | (192,160 | )
Other Receivables |  |  | 84,104 |  |  |  | (157,487 | )
Other Assets |  |  | (195,579 | ) |  |  | (354,991 | )
Increase (Decrease) in: |  |  |  |  |  |  |  |
Accounts Payable |  |  | (375,248 | ) |  |  | 1,436,766 |
Accrued Expenses |  |  | 157,377 |  |  |  | 288,508 |
Accrued Interest |  |  | - |  |  |  | (66,667 | )
Customer Deposits |  |  | (38,822 | ) |  |  | - |
Lease Liability |  |  | (113,039 | ) |  |  | (109,747 | )
Net Cash Provided by (Used in) Operating Activities |  |  | (3,823,191 | ) |  |  | 4,944,535 |
Cash Flow From Investing Activities: |  |  |  |  |  |  |  |
Capitalized Patent and Trademark Costs |  |  | (45,807 | ) |  |  | - |
Purchase of Property and Equipment |  |  | (248,751 | ) |  |  | (50,574 | )
Net Cash Used in Investing Activities |  |  | (294,557 | ) |  |  | (50,574 | )

The accompanying notes are an integral part of the condensed consolidated financial statements.

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TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(UNAUDITED)

|  | For the Nine Months Ended September 30, |
|  | 2021 |  |  | 2020 |
Cash Flow From Financing Activities: |  |  |  |  |  |
Proceeds from Issuance of Stock and Warrants |  |  | 4,581,651 |  |  |  | - |
Proceeds from Exercise of Warrants and Options |  |  | - |  |  |  | 183,500 |
Proceeds from Loan Payable |  |  | - |  |  |  | 410,700 |
Repayment of Principal Balance on Convertible Note |  |  | - |  |  |  | (500,000 | )
Net Cash Provided by Financing Activities: |  |  | 4,581,651 |  |  |  | 94,200 |
Increase In Cash and Cash Equivalents |  |  | 463,904 |  |  |  | 4,988,160 |
Cash and Cash Equivalents - Beginning |  |  | 5,198,842 |  |  |  | 897,223 |
Cash and Cash Equivalents – Ending |  | $ | 5,662,746 |  |  | $ | 5,885,383 |
Supplemental Cash Flow Information: |  |  |  |  |  |  |  |
Cash Paid For Interest |  | $ | - |  |  | $ | 107,356 |
Cash Paid for Income Taxes |  | $ | 75,000 |  |  | $ | 800 |
Non-Cash Investing and Financing Activities: |  |  |  |  |  |  |  |
Accrued Equity Compensation |  | $ | - |  |  | $ | 27,189 |
Conversion of Note Payable into Common Stock |  | $ | - |  |  | $ | 4,500,000 |
Equipment, net Transferred to Inventory |  | $ | - |  |  | $ | 36,256 |
Patent and trademark costs reclassified from Other Assets |  | $ | 67,890 |  |  | $ | - |

The accompanying notes are an integral part of the condensed consolidated financial statements.

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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 humidity. Our solution is organically listed in the United States and Canada it is sustainably a green product with no or very little carbon footprint. Our business is organized into five divisions: Healthcare, Life Sciences, 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 (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, 2020 and notes thereto which are included in the Annual Report on Form 10-K previously filed with the SEC on March 30, 2021. 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.

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 effect on previously reported results of operations or financial position.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventory, fair values of financial instruments, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of our assets and liabilities.

Fair Value Measurements

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

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.

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 September 30, 2021 and December 31, 2020 there were no cash equivalents (or cash equivalents consisted of money market, etc)

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 doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Bad debt expense for the three and nine months ended September 30, 2021 was approximately $93,000 and $511,000, respectively. Bad debt expense for the three and nine months ended September 30, 2020 was approximately $153,000 and $226,000, respectively.

At September 30, 2021 and December 31, 2020, the allowance for doubtful accounts was $750,000 and $390,000, respectively.

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 $0 as of September 30, 2021 and December 31, 2020, respectively.

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

In February 2016, the FASB issued ASU No. 2016-02 (ASC 842), Leases, to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We adopted ASC 842 as of January 1, 2019 using the modified retrospective basis with a cumulative effect adjustment as of that date. In addition, we elected the package of practical expedients permitted under the transition guidance within the standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. Accordingly, previously reported financial statements, including footnote disclosures, have not been recast to reflect the application of the standard to all comparative periods presented.

Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current portion on our condensed consolidated balance sheet as of September 30, 2021 and December 31, 2020.

We have elected not to present short-term leases on the condensed consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

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 three and nine months ended September 30, 2021 and 2020, was $10,475 and $31,425, respectively.

Accounts Payable

As of September 30, 2021, one vendor accounted for approximately 25% of accounts payable. As of December 31, 2020, two vendors accounted for approximately 32% of accounts payable.

For the three and nine months ended September 30, 2021, two vendors accounted for 55% and 60% of cost of sales, respectively. For the three and nine months ended September 30, 2020, two vendors accounted for 66% and 77% 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 condensed 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 September 30, 2021, and December 31, 2020, our warranty reserve was $68,000. (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 Accounting Standards Codification (ASC) guidance for income taxes. Net deferred tax benefits have been fully reserved at September 30, 2021 and December 31, 2020. 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.

Potentially dilutive securities as of September 30, 2021 consisted of 3,424,771 shares of common stock issuable upon exercise of outstanding warrants, 132,500 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 September 30, 2020 consisted of 1,686,633 shares of common stock issuable upon exercise of outstanding warrants, 101,250 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”).

Diluted net income or (loss) per share is computed similarly to basic net income or (loss) per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if such additional shares were dilutive. Options, warrants, and preferred stock of approximately 3.6 million and 2.2 million shares of common stock were outstanding at September 30, 2021 and December 31, 2020, respectively, but were excluded from the computation of diluted net loss per share at September 30, 2021 due to the anti-dilutive effect on net loss per share.

|  | For the Three Months Ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
Net Income (Loss) |  | $ | (486,558 | ) |  | $ | 1,019,300 |
Net income (loss) attributable to common shareholders |  | $ | (486,558 | ) |  | $ | 1,019,300 |
Weighted average number of shares of common stock outstanding: |  |  |  |  |  |  |  |
Basic |  |  | 16,843,045 |  |  |  | 16,741,622 |
Diluted |  |  | 16,843,045 |  |  |  | 18,593,255 |
Net income (loss) attributable to common shareholders per share: |  |  |  |  |  |  |  |
Basic |  | $ | (0.03 | ) |  | $ | 0.06 |
Diluted |  | $ | (0.03 | ) |  | $ | 0.05 |

The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented:

|  | For the Three Months Ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
Numerator: |  |  |  |  |  |
Net Income (Loss) |  | $ | (486,558 | ) |  | $ | 1,019,300 |
Denominator: |  |  |  |  |  |  |  |
Basic weighted-average shares |  |  | 16,843,045 |  |  |  | 16,741,622 |
Effect of dilutive securities |  |  |  |  |  |  |  |
Warrants |  |  | - |  |  |  | 1,686,633 |
Options |  |  | - |  |  |  | 101,250 |
Preferred Stock |  |  | - |  |  |  | 63,750 |
Diluted Weighted Average Shares |  |  | 16,843,045 |  |  |  | 18,593,255 |
Net Income (Loss) Per Common Share: |  |  |  |  |  |  |  |
Basic |  | $ | (0.03 | ) |  | $ | 0.06 |
Diluted |  | $ | (0.03 | ) |  | $ | 0.05 |
Note: Warrants, options and preferred stock for the three months ended September 30, 2021 are not included in the computation of diluted weighted average shares as such inclusion would be anti-dilutive.

|  | For the Nine Months Ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
Net Income (Loss) |  | $ | (2,775,952 | ) |  | $ | 7,295,478 |
Adjustments for convertible debt - as converted |  |  |  |  |  |  |  |
Interest on convertible debt |  |  | - |  |  |  | 40,689 |
Net income (loss) attributable to common shareholders |  | $ | (2,775,952 | ) |  | $ | 7,366,167 |
Weighted average number of shares of common stock outstanding: |  |  |  |  |  |  |  |
Basic |  |  | 16,805,145 |  |  |  | 16,429,360 |
Diluted |  |  | 16,805,145 |  |  |  | 18,280,993 |
Net income (loss) attributable to common shareholders per share: |  |  |  |  |  |  |  |
Basic |  | $ | (0.17 | ) |  | $ | 0.45 |
Diluted |  | $ | (0.17 | ) |  | $ | 0.40 |

The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented:

|  | For the Nine Months Ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
Numerator: |  |  |  |  |  |
Net Income (Loss) |  | $ | (2,775,952 | ) |  | $ | 7,295,478 |
Denominator: |  |  |  |  |  |  |  |
Basic weighted-average shares |  |  | 16,805,145 |  |  |  | 16,429,360 |
Effect of dilutive securities |  |  |  |  |  |  |  |
Warrants |  |  | - |  |  |  | 1,686,633 |
Options |  |  | - |  |  |  | 101,250 |
Preferred Stock |  |  | - |  |  |  | 63,750 |
Diluted Weighted Average Shares |  |  | 16,805,145 |  |  |  | 18,280,993 |
Net Income (Loss) Per Common Share: |  |  |  |  |  |  |  |
Basic |  | $ | (0.17 | ) |  | $ | 0.44 |
Diluted |  | $ | (0.17 | ) |  | $ | 0.40 |
Note: Warrants, options and preferred stock for the nine months ended September 30, 2021 are not included in the computation of diluted weighted average shares as such inclusion would be anti-dilutive.

Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) ASC 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.

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 September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
SteraMist Product |  | $ | 1,657,000 |  |  | $ | 3,677,000 |
Service and Training |  |  | 548,000 |  |  |  | 615,000 |
Total |  | $ | 2,205,000 |  |  | $ | 4,292,000 |

Revenue by Geographic Region

|  | For the three months ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
United States |  | $ | 2,028,000 |  |  | $ | 3,446,000 |
International |  |  | 177,000 |  |  |  | 846,000 |
Total |  | $ | 2,205,000 |  |  | $ | 4,292,000 |

Product and Service Revenue

|  | For the nine months ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
SteraMist Product |  | $ | 4,329,000 |  |  | $ | 19,557,000 |
Service and Training |  |  | 1,415,000 |  |  |  | 1,817,000 |
Total |  | $ | 5,744,000 |  |  | $ | 21,374,000 |

Revenue by Geographic Region

|  | For the nine months ended September 30, (Unaudited) |
|  | 2021 |  |  | 2020 |
United States |  | $ | 5,017,000 |  |  | $ | 15,437,000 |
International |  |  | 727,000 |  |  |  | 5,937,000 |
Total |  | $ | 5,744,000 |  |  | $ | 21,374,000 |

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 September 30, 2021, and December 31, 2020 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 dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its 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 2016 Equity Incentive Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 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 nine months ended September 30, 2021 and 2020, we issued 50,000 shares of fully vested common stock, respectively, pursuant to the 2016 Plan to our directors.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $250,000 at times during the year.

Long-Lived Assets Including Acquired Intangible Assets

We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three and nine months ended September 30, 2021 and 2020.

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 three and nine months ended September 30, 2021 were approximately $145,000 and $552,000, respectively. Advertising and promotional expenses included in selling expenses for the three and nine months ended September 30, 2020 were approximately $56,000 and $156,000, respectively.

Research and Development Expenses

We expense research and development expenses in the period in which they are incurred. For the three and nine months ended September 30, 2021, research and development expenses were approximately $93,000 and $495,000, respectively. For the three and nine months ended September 30, 2020, research and development expenses were approximately $45,000 and $245,000, 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

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. We elected to adopt this guidance early, in 2020 on a prospective basis. The guidance did not have a material impact on our condensed Consolidated Financial Statements.

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NOTE 3. INVENTORIES

Inventories consist of the following at:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Finished goods |  | $ | 4,396,402 |  |  | $ | 3,404,025 |
Raw Materials |  |  | 391,802 |  |  |  | 377,490 |
|  | $ | 4,788,204 |  |  | $ | 3,781,515 |

NOTE 4. VENDOR DEPOSITS

At September 30, 2021 and December 31, 2020, we maintained vendor deposits of $426,818 and $388,712, respectively, for open purchase orders for inventory.

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Furniture and fixtures |  | $ | 357,236 |  |  | $ | 357,236 |
Equipment |  |  | 1,614,751 |  |  |  | 1,580,743 |
Vehicles |  |  | 60,703 |  |  |  | 60,703 |
Computer and software |  |  | 214,860 |  |  |  | 203,704 |
Leasehold improvements |  |  | 386,120 |  |  |  | 386,120 |
Tenant Improvement Allowance |  |  | 405,000 |  |  |  | 405,000 |
Capitalized Costs in Progress – Tooling and Molds |  |  | 203,589 |  |  |  | - |
|  |  | 3,242,257 |  |  |  | 2,993,507 |
Less: Accumulated depreciation |  |  | 1,943,198 |  |  |  | 1,695,404 |
|  | $ | 1,299,060 |  |  | $ | 1,298,103 |

For the three and nine months ended September 30, 2021, depreciation was $67,383 and $218,398, respectively. For the three and nine months ended September 30, 2020, depreciation was $83,932 and $241,445, respectively. For the three and nine months ended September 30, 2021 and 2020, amortization of tenant improvement allowance was $9,798 and $19,597, respectively and was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations.

As of September 30, 2021, we had capitalized costs in progress not yet placed into service in connection with tooling and molds pursuant to ASC 340-10.

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 $2,422 and $7,268 for the three and nine months ended September 30, 2021, respectively. Amortization expense was $93,347 and $280,041 for the three and nine months ended September 30, 2020.

Definite life intangible assets consist of the following:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Intellectual Property and Patents |  | $ | 3,054,259 |  |  | $ | 3,000,012 |
Less: Accumulated Amortization |  |  | 2,864,259 |  |  |  | 2,856,991 |
Patents, net |  | $ | 190,000 |  |  | $ | 143,021 |

Indefinite life intangible assets consist of the following:

Trademarks |  |  | 639,345 |  |  |  | 579,895 |
Total Intangible Assets, net |  | $ | 829,345 |  |  | $ | 722,916 |

Approximate future amortization is as follows:

Year Ended: |  | Amount |
October 1 – December 31, 2021 |  | $ | 3,000 |
December 31, 2022 |  |  | 13,000 |
December 31, 2023 |  |  | 13,000 |
December 31, 2024 |  |  | 13,000 |
December 31, 2025 |  |  | 13,000 |
Thereafter |  |  | 135,000 |
|  | $ | 190,000 |

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 was scheduled to commence on December 1, 2018 or 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. 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: |  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Assets: |  |  |  |  |  |
Operating lease right-of-use asset |  | $ | 595,874 |  |  | $ | 631,527 |
Liabilities: |  |  |  |  |  |  |  |
Current Portion of Long-Term Operating Lease |  | $ | 89,059 |  |  | $ | 81,223 |
Long-Term Operating Lease, Net of Current Portion |  |  | 885,252 |  |  |  | 953,190 |
|  | $ | 974,311 |  |  | $ | 1,034,413 |

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 September 30, 2021 (Unaudited) |  |  | For the Three Months Ended September 30, 2020 (Unaudited) |
Operating lease expense |  | $ | 39,329 |  |  | $ | 39,329 |

|  | For the Nine Months Ended September 30, 2021 (Unaudited) |  |  | For the Nine Months Ended September 30, 2020 (Unaudited) |
Operating lease expense |  | $ | 117,986 |  |  | $ | 117,986 |

Other information related to leases where we are the lessee is as follows:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Weighted-average remaining lease term: |  |  |  |  |  |
Operating leases |  | 7.50 years |  |  | 8.25 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 September 30, 2021 (Unaudited) |  |  | For the Three Months Ended September 30, 2020 (Unaudited) |
Cash paid for amounts included in the measurement of lease liabilities: |  | $ | 38,049 |  |  | $ | 36,940 |

|  | For the Nine Months Ended September 30, 2021 (Unaudited) |  |  | For the Nine Months Ended September 30, 2020 (Unaudited) |
Cash paid for amounts included in the measurement of lease liabilities: |  | $ | 113,049 |  |  | $ | 109,747 |

As of September 30, 2021, the maturities of our operating lease liability are as follows:

Year Ended: |  | Operating Lease |
October 1 – December 31, 2021 |  | $ | 38,049 |
December 31, 2022 |  |  | 155,621 |
December 31, 2023 |  |  | 160,290 |
December 31, 2024 |  |  | 165,098 |
December 31, 2025 |  |  | 170,051 |
Thereafter |  |  | 575,131 |
Total minimum lease payments |  |  | 1,264,241 |
Less: Interest |  |  | 289,930 |
Present value of lease obligations |  |  | 974,311 |
Less: Current portion |  |  | 89,059 |
Long-term portion of lease obligations |  | $ | 885,252 |

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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:

|  | September 30, 2021 |  |  |  |
|  | (Unaudited) |  |  | December 31, 2020 |
Capitalized Software Development Costs |  | $ | 125,704 |  |  | $ | 125,704 |
Less: Accumulated Amortization |  |  | (104,753 | ) |  |  | (73,327 | )
Capitalized Software Development Costs - net |  | $ | 20,951 |  |  | $ | 52,377 |

Amortization expense for the three and nine months ended September 30, 2021 was $10,475 and $31,425, respectively. Amortization expense for the three and nine months ended September 30, 2020 was $10,475 and $31,425, 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 $62,677 in connection with the cloud computing service contract which have been capitalized in prepaid expenses and other assets as of September 30, 2021. 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 and nine months ended September 30, 2021 was $3,482 and $10,446, respectively. Amortization expense for the three and nine months ended September 30, 2020 was $0.

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.

Reverse Stock Split

On September 9, 2020, the Board approved a reverse stock split of our common stock and our Convertible Series A Preferred Stock, in each case, at a ratio of 1-for-8 and without any change to the respective par value thereof (the “Reverse Stock Split”), and, on September 10, 2020, we filed an Articles of Amendment to our Articles of Incorporation with the Department of State of the State of Florida to effect the Reverse Stock Split. The Reverse Stock Split became effective as of September 10, 2020. All per-share and share amounts have been retroactively restated in this Quarterly Report on Form 10-Q for all periods presented to reflect the reverse stock split.

Convertible Series A Preferred Stock

Our authorized Convertible Series A Preferred Stock, $0.01 par value, consists of 1,000,000 shares. At September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, 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 2020, we issued 50,000 shares of fully vested common stock valued at $48,000 to members of our Board (see Note 12).

In March 2020, 1,041,667 shares of common stock were issued in connection with the conversion of convertible notes payable aggregating $4,500,000.

In March 2020, 10,417 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $57,500.

In May 2020, 2,500 shares of common stock were issued in connection with the exercise of options for which we received proceeds of $1,000.

In June 2020, 26,940 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $62,500.

In July 2020, 26,940 shares of common stock were issued in connection with the exercise of warrants for which we received proceeds of $62,500

In January 2021, we issued 50,000 shares of common stock valued at $228,000 to members of our Board (see Note 12).

In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering and issued 1,434,721 warrants in a concurrent private placement. We received net proceeds from the transaction of $4,581,651, after deducting the placement agent’s fees and other estimated offering expenses. The Warrants are exercisable at an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance. In addition, we issued 172,167 warrants to the placement agent which have a term of five years and an exercise price of $2.18.

Stock Options

There were no options granted for the nine months ended September 30, 2021.

In January 2020 we issued two options to purchase an aggregate of 31,250 shares of common stock to our Chief Operating Officer at an exercise price of $0.80 and $0.96 per share in satisfaction of accrued compensation. The options were valued at a total of $23,595 and have a term of 5 years. We utilized the Black-Scholes method to fair value the options received by the COO with the following assumptions: volatility, 135%; expected dividend yield, 0%; risk free interest rate, 1.64%; and a life of 5 years. The grant date fair value of each share of common stock underlying the options was $0.72 and $0.80. The value of the stock option was included in accrued expenses at December 31, 2019.

The following table summarizes stock options outstanding as of September 30, 2021 and December 31, 2020:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
|  | Number of Options |  |  | Weighted Average Exercise Price |  |  | Number of Options |  |  | Weighted Average Exercise Price |
Outstanding, beginning of period |  |  | 132,500 |  |  | $ | 2.72 |  |  |  | 77,500 |  |  | $ | 2.56 |
Granted |  |  | - |  |  |  | - |  |  |  | 62,500 |  |  |  | 3.96 |
Exercised |  |  | - |  |  |  | - |  |  |  | (2,500 | ) |  |  | 0.40 |
Expired |  |  | - |  |  |  | - |  |  |  | (5,000 | ) |  |  | 16.80 |
Outstanding, end of period |  |  | 132,500 |  |  | $ | 2.72 |  |  |  | 132,500 |  |  | $ | 2.72 |

Options outstanding and exercisable by price range as of September 30, 2021 were as follows:

Outstanding Options |  |  | Average Weighted Remaining Contractual |  |  | Exercisable Options |
Range |  |  | Number |  |  | Life in Years |  |  | Number |  |  | Weighted Average Exercise Price |
$ | 0.80 |  |  |  | 27,500 |  |  |  | 3.45 |  |  |  | 27,500 |  |  | $ | 0.80 |
$ | 0.88 |  |  |  | 31,250 |  |  |  | 2.26 |  |  |  | 31,250 |  |  | $ | 0.88 |
$ | 0.96 |  |  |  | 25,000 |  |  |  | 2.27 |  |  |  | 25,000 |  |  | $ | 0.96 |
$ | 2.16 |  |  |  | 5,000 |  |  |  | 3.25 |  |  |  | 5,000 |  |  | $ | 2.16 |
$ | 4.40 |  |  |  | 12,500 |  |  |  | 4.35 |  |  |  | 12,500 |  |  | $ | 4.40 |
$ | 7.06 |  |  |  | 31,250 |  |  |  | 4.00 |  |  |  | 31,250 |  |  | $ | 7.06 |
|  |  |  |  | 132,500 |  |  |  | 3.14 |  |  |  | 132,500 |  |  | $ | 2.72 |

Stock Warrants

In January 2020 we issued a warrant to purchase 156,250 shares of common stock to our Chief Executive Officer at an exercise price of $1.20 per share pursuant to an employment agreement. The warrant was valued at $164,201 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by our Chief Executive Officer with the following assumptions: volatility, 136%; expected dividend yield, 0%; risk free interest rate, 1.64%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $1.04.

In January 2020 we issued a warrant to purchase 5,208 shares of common stock to an employee at an exercise price of $0.96 per share in satisfaction of accrued compensation. The warrant was valued at $3,594 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 135%; expected dividend yield, 0%; risk free interest rate, 1.58%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.72. The value of the warrants was expensed in the fourth quarter of 2019 and included in accrued expenses at December 31, 2019.

In February 2020 we issued a warrant to purchase 18,750 shares of common stock to an employee at an exercise price of $1.20 per share. The warrant was valued at $18,571 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 155%; expected dividend yield, 0%; risk free interest rate, 1.64%; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $0.96.

In April 2020 we issued a warrant to purchase 12,500 shares of common stock to the CEO at an exercise price of $4.00 per share pursuant to an employment agreement. The warrant was valued at $49,693 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the CEO with the following assumptions: volatility, 173%; expected dividend yield, 0%; risk free interest rate, 0.68%; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $4.00.

In April 2020 we issued a warrant to purchase6,250 shares of common stock to the COO at an exercise price of $4.00 per share pursuant to an employment agreement. The warrant was valued at $24,846 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the COO with the following assumptions: volatility, 173%; expected dividend yield, 0%; risk free interest rate, 0.68%; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $4.00.

In April 2020 we issued a warrant to purchase 6,250 shares of common stock to the CFO at an exercise price of $4.00 per share pursuant to an employment agreement. The warrant was valued at $24,846 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the CFO with the following assumptions: volatility, 173%; expected dividend yield, 0%; risk free interest rate, 0.68%; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $4.00.

In April 2020 we issued a warrant to purchase 3,750 shares of common stock to a consultant at an exercise price of $4.00 per share. The warrant was valued at $14,908 and has a term of 10 years. We utilized the Black-Scholes model to fair value the warrant received by the consultant with the following assumptions: volatility, 173%; expected dividend yield, 0%; risk free interest rate, 0.68%; and a life of 10 years. The grant date fair value of each share of common stock underlying the warrant was $4.00.

On February 11, 2021, we agreed to amend (the “Warrant Amendment”) the warrant to purchase 125,000 shares of TOMI common stock, par value $0.01 (the “Common Stock”), issued by TOMI to Dr. Halden S. Shane, TOMI’s Chief Executive Officer and a director on TOMI’s board of directors, on February 11, 2014 (the “Warrant”), to provide TOMI an option to repurchase the Warrant from Dr. Shane at a negotiated price. In connection with the Warrant Amendment, TOMI repurchased the warrant from Dr. Shane (the “Repurchase”) for an aggregate cash consideration of $314,500, representing a 15% discount of the net exercise cash value of the Warrant, which was calculated using the closing price of the Common Stock on the Nasdaq on February 11, 2021 of $5.36, less the exercise price of the warrants in the amount of $2.40. On the same date, the Warrant Amendment and the Repurchase was considered, approved and adopted by a disinterested majority of TOMI’s board of directors. The $314,500 charge in connection with the warrant amendment has been included in General and Administrative expenses for the nine months ended September 30, 2021.

In September 2021, we issued 1,434,721 warrants in a private placement in connection with the sale common stock through a registered direct offering. The Warrants are exercisable at an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance. In addition, we issued 172,167 warrants to the placement agent which have a term of five years and an exercise price of $2.18.

The following table summarizes the outstanding common stock warrants as of September 30, 2021 and December 31, 2020:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
|  | Number of Warrants |  |  | Weighted Average Exercise Price |  |  | Number of Warrants |  |  | Weighted Average Exercise Price |
Outstanding, beginning of period |  |  | 2,049,133 |  |  | $ | 2.55 |  |  |  | 2,155,065 |  |  | $ | 3.12 |
Granted |  |  | 1,606,888 |  |  |  | 1.73 |  |  |  | 585,447 |  |  |  | 4.97 |
Exercised |  |  | - |  |  |  | - |  |  |  | (76,796 | ) |  |  | (2.77 | )
Expired |  |  | (231,250 | ) |  |  | (2.88 | ) |  |  | (614,583 | ) |  |  | (6.40 | )
Outstanding, end of period |  |  | 3,424,771 |  |  | $ | 2.22 |  |  |  | 2,049,133 |  |  | $ | 2.55 |

Warrants outstanding and exercisable by price range as of September 30, 2021 were as follows:

Outstanding Warrants |  |  | Average Weighted Remaining Contractual |  |  | Exercisable Warrants |
Exercise Price |  |  | Number |  |  | Life in Years |  |  | Number |  |  | Weighted Average Exercise Price |
$ | 0.64 |  |  |  | 31,250 |  |  |  | 2.15 |  |  |  | 31,250 |  |  | $ | 0.64 |
$ | 0.80 |  |  |  | 158,125 |  |  |  | 2.01 |  |  |  | 158,125 |  |  | $ | 0.80 |
$ | 0.96 |  |  |  | 473,958 |  |  |  | 1.19 |  |  |  | 473,958 |  |  | $ | 0.96 |
$ | 1.12 |  |  |  | 6,250 |  |  |  | 2.55 |  |  |  | 6,250 |  |  | $ | 1.12 |
$ | 1.20 |  |  |  | 175,000 |  |  |  | 3.13 |  |  |  | 175,000 |  |  | $ | 1.20 |
$ | 1.36 |  |  |  | 1,250 |  |  |  | 1.07 |  |  |  | 1,250 |  |  | $ | 1.36 |
$ | 1.68 |  |  |  | 1,434,721 |  |  |  | 5.00 |  |  |  | 1,434,721 |  |  | $ | 1.68 |
$ | 2.16 |  |  |  | 31,250 |  |  |  | 0.25 |  |  |  | 31,250 |  |  | $ | 2.16 |
$ | 2.18 |  |  |  | 172,167 |  |  |  | 5.00 |  |  |  | 172,167 |  |  | $ | 2.18 |
$ | 2.32 |  |  |  | 523,061 |  |  |  | 0.42 |  |  |  | 523,061 |  |  | $ | 2.32 |
$ | 2.40 |  |  |  | 12,500 |  |  |  | 0.01 |  |  |  | 12,500 |  |  | $ | 2.40 |
$ | 4.00 |  |  |  | 28,750 |  |  |  | 8.57 |  |  |  | 28,750 |  |  | $ | 4.00 |
$ | 6.95 |  |  |  | 375,000 |  |  |  | 9.00 |  |  |  | 375,000 |  |  | $ | 6.95 |
$ | 8.40 |  |  |  | 1,488 |  |  |  | 1.88 |  |  |  | 1,488 |  |  | $ | 8.40 |
|  |  |  |  | 3,424,771 |  |  |  | 3.91 |  |  |  | 3,424,771 |  |  | $ | 2.65 |

There were no unvested warrants outstanding as of September 30, 2021.

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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.

Product Liability

As of September 30, 2021 and December 31, 2020, there were no claims against us for product liability.

COVID-19 Pandemic

The COVID-19 pandemic has increased the global demand for disinfection products and services that help prevent the spread and transmission of COVID-19 virus. The Company’s products have been identified as an essential disinfectant and decontamination vendor by various agencies and countries, which have materially affected its business and results of operations. The Company experienced a substantial increase in demand for our products and services in 2020 due to the pandemic. Throughout 2021, the Company experienced a reduction of demand due to various factors, including the closure of our major customers’ business operations due to the pandemic, which resulted in the suspension of many of its ongoing long-term projects. It is difficult to predict how COVID-19 pandemic will affect the Company’s financial performance in the remainder of 2021, as the global economy gradually reopens, customers adjust and change their operations, and the Company implements new marketing and sales strategies in response.

NOTE 12. CONTRACTS AND AGREEMENTS

Executive Agreements

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 term of the agreement is three years.

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.

The Board may terminate Dr. Shane for cause by written notification to Dr. Shane; provided, however, that no termination for cause will be effective unless Dr. Shane has been provided with prior written notice and opportunity for remedial action and fails to remedy within 30 days thereof, in the event of a termination by the Company (i) by reason of willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to, the Company, (ii) by reason of material breach of his employment agreement and (iii) by reason of gross negligence or intentional misconduct with respect to the performance of duties under the agreement. Upon termination for cause, Dr. Shane will be immediately paid an amount equal to his gross salary. The Board may terminate Dr. Shane other than for cause at any time upon giving notice to Dr. Shane. Upon such termination, Dr. Shane will be immediately paid an amount equal to his gross salary.

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.

Agreements with Directors

In December 2017, we increased the annual fee to the members of our Board to $40,000, to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee we increased to $45,000, also to be paid in cash on a quarterly basis. Director compensation also includes the annual issuance of our common stock.

For the nine months ended September 30, 2020, we issued an aggregate of 50,000 shares of common stock that were valued at $48,000 to members of our Board.

For the nine months ended September 30, 2021, we issued an aggregate of 50,000 shares of common stock that were valued at $228,000 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 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 |
October 1 - December 31, 2021 |  | $ | - |
December 31, 2022 |  |  | 30,000 |
December 31, 2023 |  |  | 30,000 |
December 31, 2024 |  |  | 30,000 |
December 31, 2025 |  |  | - |
|  | $ | 90,000 |

Other Agreements

TOMI Service Network (“TSN”) is a national service network composed of existing full-service restoration industry specialists that have entered initially into licensing agreements with us to become Primary Service Providers (“PSPs”). The licensing agreements originally granted protected territories to PSPs to perform services using our SteraMist® platform of products and also provide for potential job referrals to PSPs whereby we are entitled to referral fees. Additionally, the agreement provides for commissions due to PSPs for equipment and solution sales they facilitate to other service providers in their respective territories. As part of these agreements, we are obligated to provide to the PSPs various training, ongoing support and facilitate a referral network call center. As of September 30, 2021, we have 203 network companies in TSN. The nature and terms of our TSN agreements may represent multiple deliverable arrangements. Each of the deliverables in these arrangements typically represent a separate unit of accounting. There is no exclusivity in our TSN network.

NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following at:
|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Commissions |  | $ | 288,823 |  |  | $ | 151,709 |
Payroll and related costs |  |  | 240,233 |  |  |  | 84,000 |
Director fees |  |  | 31,250 |  |  |  | 41,250 |
Sales Tax Payable |  |  | 4,410 |  |  |  | 9,784 |
Income Taxes Payable (Note 16) |  |  | 2,000 |  |  |  | 77,000 |
Accrued warranty (Note 14) |  |  | 68,000 |  |  |  | 68,000 |
Other accrued expenses |  |  | 20,625 |  |  |  | 70,106 |
Total |  | $ | 655,341 |  |  | $ | 501,849 |

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:

|  | September 30, 2021 (Unaudited) |  |  | December 31, 2020 |
Beginning accrued warranty costs |  | $ | 68,000 |  |  | $ | 30,000 |
Provision for warranty expense |  |  | 18,834 |  |  |  | 101,041 |
Settlement of warranty claims |  |  | (18,834 | ) |  |  | (63,041 | )
Ending accrued warranty costs |  | $ | 68,000 |  |  | $ | 68,000 |

NOTE 15. LOAN PAYABLE

On April 21, 2020, we received $410,700 in loan funding from the Paycheck Protection Program (the "PPP") established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act") and administered by the U.S. Small Business Administration ("SBA"). The unsecured loan (the "PPP Loan") is evidenced by a promissory note of the Company, dated April 21, 2020 (the "Note") in the principal amount of $410,700 with City National Bank (the "Bank"), the lender.

Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note.

In May of 2021, the loan principal and related interest was forgiven and we recognized a gain upon debt extinguishment in our statement of operations in the amount of $414,583 for the nine months ended September 30, 2021.

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NOTE 16. INCOME TAXES

For the three and nine months ended September 30, 2021 and 2020, 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 ASC guidance for income taxes. As of September 30, 2021 and December 31, 2020, we recorded a valuation allowance of $4,307,000 and $3,530,000, 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 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 17. CUSTOMER CONCENTRATION

Two customers accounted for 29% of net revenue for the three months ended September 30, 2021. We had no customers/distributor whose revenue individually represented 10% or more of our total revenue for the nine months ended September 30, 2021.

For the nine months ended September 20, 2020, one customer accounted for 11% of net revenue

We had two customers/distributors that accounted for 25% of accounts receivable as of September 30, 2021. Three customers/distributors accounted for 36% of accounts receivable as of December 31, 2020.

NOTE 18. SUBSEQUENT EVENTS

On October 26, 2021, we filed a Form S-3 Registration Statement which registered 1,606,888 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants acquired in connection with registered direct offering on September 26, 2021 and due the placement agents. The registration statement was declared effective by the SEC on November 8, 2021. See note 10 (common stock) for additional details.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guaranteeing future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “TOMI” as used herein refers collectively to TOMI Environmental Solutions, Inc. unless otherwise stated.

The following discussion should be read in conjunction with the 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

Quarterly Highlights

Business Update

During 2021, the focused on the following initiatives: research and development projects, developing new innovate products to enhance sales throughout our current divisions and upgrading its current set of SteraMist products. We formally launched the SteraPak in Q3 and are fulfilling orders. Our initial market research is positive for our new products we are anticipating launching by the end of the year including the SteraMist Surface Select Plus and Transport Custom Engineered System (CES). We are developing the most intelligent permanent room CES for a large pharmaceutical company in Europe, which will expect to be installed by the end of 2021. The SteraBox continues to be of an interest for the Life Sciences and the Company has developed a rotating applicator option to distribute our iHP mist more efficiently. Finally, TOMI has modified and developed a new program for its SteraMist Environment system.

Throughout the first half of 2021, as the quarantines progressed, and more businesses were closed, the Company saw a slowdown in demand for products from our customers in the in the Hospital-HealthCare, TOMI Service Network, and Commercial divisions, which were affected by the work from home and the need for disinfection equipment such as SteraMist was not as predominant as compared to the same period of the prior year, which was primarily the result of the initial surge of the COVID-19 pandemic. Nonetheless, TOMI and its current customers who have been using SteraMist believe that disinfection products will be critical in post-COVID environment, and we continue to educate our current and potential customer base on the capabilities of our products. Currently we are seeing positive indicators in the marketplace amongst our current and prospective customers.

In 2021, our Life Sciences continued to flourish with onboarding high quality of customers. As we expand throughout this industry, we are receiving referrals and are striving to implement SteraMist throughout the top 10 global pharmaceutical companies and expect to expand throughout their other facilities.

Product Development

As many industrial companies are reducing R&D and capital expenditures spending due to the economic impact of the pandemic, we are moving ahead with many new products in development. In 2021, we intend to increase capital expenditures (CapEx) and operating expenditures (OpEx) including development of new products, services and process technologies to sharpen our competitive advantage. In addition, we intend to expand our commercial service location to meet the expanding needs of our customers.

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The second half of 2020 showed us that our customers prefer a lower cost disinfection devices. To respond to our customer demands of lower cost and more versatile product, we developed the Backpack (SteraPak) that includes our award winning 6-log and above kill technology and speed. In addition, our solution and process are environmentally friendly as the only biproduct from our decontamination process is oxygen and humidity. Our solution is OMRI certified and organically listed in the United States and Canada it is sustainably a green product with no or very little carbon footprint. We have competitively priced our SteraPak and expect to bring SteraMist to the largest cleaning market in the world, including members of ISSA (International Sanitary Supply Association) and its divisions IEHA (Integrated Environment and Health Assessment) and EMEA (Europe, Middle East & Africa). These organizations have historically been price conscious and were resistant early on to our SteraMist pricing of our professional decontamination equipment (SteraMist Surface and Environment Unit). As planned, we introduced our new innovative SteraPak domestically towards the end of the third quarter 2021.

During the third quarter 2021, we established and expanded our production capacity with the construction and purchase of the tooling and molds used in the production of our SteraPak. Our tooling and molds will allow us to streamline production and reduce manufacturing lead times and costs on the SteraPak.

Other new products that have been incorporated into our product line include the Select Plus, which is a hybrid product consisting of the Company’s current Surface Select and Environment systems. The unit will allow for enhanced flexibility by using a single applicator to decontaminate full-room to small-space volume while maintaining the size of the current Surface Select unit with more robust process controls. The Transport CES has been designed for the transportation market, specifically ambulances. The Transport CES is a simple timer based fogging system that can be installed semi-permanently or permanently and used for any transport and/or cargo vehicle. It will be an easy-to-use turn-key integration system. The implementation of this product and our patented non-corrosive iHP technology should replace the number one competitor in this marketplace, which uses an extremely harsh chemical.

Many of our customers have been waiting for the release and demonstration of these new products, especially the SteraPak. All SteraMist systems will remain important to the marketplace as they are designed for specific needs and budgets. The Select Surface Unit perform most of the functionality that the Plus offers and is priced at a lower cost, although Select Plus will provide additional options that are appealing to certain customers, such as laboratory and pharmaceutical. The SteraPak is a more cost-effective product and designed for residential and commercial real estate including large buildings and public space, any area that needs quick consistent disinfection. There are many new and existing clients that are interested in the SteraPak due to the cost and mobility.

In third quarter of 2021, we expanded our SteraMist® BIT™ solution product line with the introduction of a ten (10) liter and five (5) gallon bottles.

These new products and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction domestically and internationally.

Overview

TOMI Environmental Solutions, Inc. (“TOMI”, “we” and “our”) is a global bacteria decontamination and infectious disease control company, providing environmental solutions for indoor surface decontamination through the manufacturing, sales, service and licensing of our SteraMist® brand of products, including SteraMist® BIT™, a low percentage (7.8%) hydrogen peroxide-based fog or mist that uses Binary Ionization Technology (BIT™). Our solution and process are environmentally friendly as the only biproduct from our decontamination process is oxygen and humidity. Our solution is organically listed in the United States and Canada it is sustainably a green product with no or very little carbon footprint. Most of our competitors in the disinfection space leave significant byproducts and are corrosive. SteraMist is not corrosive, and it does not damage equipment or facilities.

Our SteraMist® is a patented technology that produces ionized Hydrogen Peroxide (iHP™) using cold plasma science created under a grant by the United States Defense Advanced Research Projects Agency (DARPA). Our EPA registered BIT™ Solution is composed of a low concentration of hydrogen peroxide converted to iHP™ after passing the trade secret blended solution including its sole active ingredient of 7.8% hydrogen peroxide through an atmospheric cold plasma arc. The newly formed iHP™ fog and mist consists of submicron’s to 3-micron radical particles that are carried throughout the treatment area in a fog or mist moving with the same velocity and characteristics of a gas. This allows the ionized hydrogen peroxide fog or mist to affect all surfaces and air space throughout the targeted treatment area, over, above and beyond the ability of a manual cleaning processes. iHP™ damages pathogenic organisms through the oxidation of proteins, carbohydrates, and lipids. SteraMist® no-touch disinfection and or decontamination treat areas mechanically, causing cellular disruptions and/or dysfunctions resulting in a 6-log (99.9999%) and greater kill or inactivation of all pathogens in the treatment area.

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Under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), we are required to register with the EPA and certain state regulatory authorities as a seller of disinfectants. In June 2015, SteraMist® BIT™ was registered with the EPA as a hospital-healthcare disinfectant and general broad-spectrum surface disinfectant for use as a misting/fogging agent. SteraMist® BIT™ now holds EPA registrations (# 90150-2) for mold control, and air and surface remediation (# 90150-1). In February 2016, we expanded our label with the EPA to include Clostridium difficile Spores and MRSA, as well as the influenza (Avian) virus h1n1, which we believe has better positioned us to penetrate all industries including the biodefense and healthcare industry. In August 2017, our EPA label was further expanded to include efficacy against Salmonella and Norovirus. As of January 27, 2017, our technology is one of 53 of the EPA’s “Registered Antimicrobial Products Effective against Clostridium difficile Spores”, as published on the EPA’s K List. Further, in December 2017, SteraMist® was included in the EPA’s list G (Norovirus), L (Ebola) and M (Avian Flu). In March 2020, our EPA label was further amended to include Emerging Viral Pathogens claims, thus meeting the criteria against Enveloped viruses and Large Non-enveloped viruses and included on List N (Emerging Viral Pathogens including SARS-CoV-2). In 2021, the EPA granted SteraMist® BIT™ 0.35% hydrogen peroxide – EPA registration number 90150-3.

SteraMist® BIT™ brings to the world a mechanical and automated method of cleaning using a game-changing technology and EPA registered Hospital-HealthCare disinfectant providing an upgrade to existing disinfecting and cleaning protocols while limiting liability in a facility when it comes to resistant infectious pathogens. We maintain this registration in all fifty (50) states, Washington DC, Canada, and approximately thirty-five (35) other countries.

Markets

Our SteraMist® products are designed to address a wide spectrum of industries using iHP™. Our operations consist of five main divisions based on our current target industries: Hospital-HealthCare, Life Sciences, TOMI Service Network (TSN), Food Safety and Commercial.

We continue to offer our customers a wide range of innovative mobile products designed to be easily incorporated into their existing disinfection and decontamination procedures and protocols. Our newly soon to be released SteraPak, among other product lines will allow us to progress further into market share, specifically for our Hospital-HealthCare, Life Sciences, TSN, and Commercial divisions. Additionally, we offer integrated facility equipment installations known as Custom Engineered Systems (CES), routine & emergency iHP Corporate Service, essential training packages, validations and qualifications, and onsite performance maintenance requests.

Each of these are structured to address the unique disinfection and decontamination needs of our customers worldwide regardless of industry requiring or requesting SteraMist® disinfection decontamination.

Divisions

Hospital-Healthcare

The SteraMist® line of products, specifically the SteraMist® Surface Unit and SteraMist® Total Disinfection Cart, are our main solutions to aid our Hospital-HealthCare customers in providing high quality of safety to their patients and personnel by disinfecting operating rooms, pharmacies, ambulances, and emergency environments throughout a healthcare facility. TOMI’s latest product, the SteraPak, further assists healthcare communities with an easy-to-use, cordless disinfection solution, creating a more mobile solution. Our customers that have successfully adopted our technology in Hospital-Healthcare facilities, have recurring revenue and reorder rates of our BIT™ Solution. We plan to continue to expand our marketing, advertising and educational campaigns targeted at the Hospital-Healthcare marketing in an effort to grow our customer base and increase adoption of our SteraMist® line of products.

Our team of technicians and representatives train, maintain, and service capital equipment throughout the world for our Hospital-HealthCare customers. As our Training and Implementation department expands, we expect continued growth and purchases in our Hospital-HealthCare division. TOMI provides protocol development and implementation of SteraMist® as it is critical in the healthcare setting. During 2020 the use of our SteraMist® in such campuses increased due to our comprehensive training for their day and night shift maintenance and housekeeping departments. Annual comparison case studies from healthcare facilities are now available, which shows lower transmission infection rates in COVID, Clostridium difficile Spores and overall, HAI cases.

UCLA recently completed a successful collection of critical data for the Shield Study. The Shield Study is a multi-year study comparing SteraMist with manual clean. The Study was conducted by multiple well-established hospitals. Initial findings have been positive regarding ease of use, overall efficacy, and quick turnaround time of patient rooms. TOMI looks forward to announcing the full results as soon as they are available to make public.

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Life Sciences

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

Long term, ongoing projects and validations continue to be a focus and lead to proposals and interest for our CES permanent decontamination room. As these are longer lead-time sales that can take months to design, build and implement, we expect installations to have impact to our results in late 2021 and into 2022.

Further, post COVID pandemic has brought some attention to the SteraMist product line, as our CES in Pfizer Missouri was recently showcased in a New York Times article as they featured their COVID vaccine processes. In addition, our iHP Corporate Service team treated one of four fill lines in a North Carolina pharmaceutical company that manufactures one of the COVID vaccines, with the remaining three lines set to be decontaminated in the future with SteraMist.

TOMI Service Network

The TOMI Service Network, or TSN, is an expansive network consisting of professionals throughout North America who are exclusively licensed and trained to use the SteraMist® products. With the purchase of SteraMist and joining TSN, TOMI trains and services a wide array of professional remediation companies in the use of SteraMist® throughout the TSN division. TSN allows for increased accessibility and brand awareness of iHP® services to facilities in need of local routine and emergency disinfection and decontamination.

The TOMI Service Network (TSN) division is addressing the cleaning protocols that have changed permanently due to the COVID-19 pandemic, and our network is expected to play a significant role in facilitating and maintaining these protocols throughout the United States and Canada. The urgency for emergency disinfection services may have declined, but the education and support of such services that TOMI personnel provide to our members creates an advantage by maintaining strong business relationships while they service thousands of SteraMist customers, and the world returns to the new normal.

Our SteraPak release is an important factor for this market that we will increase the new member onboarding. Current members are showing interest in purchasing the SteraPak to expand their current SteraMist offerings.

Food Safety

Food Safety presents significant potential as an opportunity for substantial growth with continued product research and compliance testing. With the food safety industry in North America coming under closer scrutiny with the implementation and enforcement of new and established guidelines. This concentration has previously been approved by the USDA and FDA for direct food and crop application and will allow SteraMist® to expand use sites beyond food processing machinery, restaurants, and food contact areas. This will assist compliance with the newly established Food Safety Modernization Act guidelines set in place by the FDA, as well as the Safe Food for Canadians Act and Safe Food for Canadians Regulations in Canada.

TOMI continues to work with premium companies in testing and validating SteraMist® technology in the Food Safety and seed industries. In 2021, we have made progress in enhancing brand awareness by promoting and marketing this division. We are receiving an increase in inquiries within the Food Safety division directly from these efforts.

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With the global population explosion, we anticipate an increase in the demand for a mechanical way to disinfect our food supply. Every day there are news articles around the world pertaining to the contamination of food supply. The many published articles that the USDA in cooperation with TOMI have demonstrated that our technology offers a consistent alternative to the decade’s old chemical disinfection process.

SteraMist will deliver more consistent and quicker results in all areas of our food supply- From Farm to Market, Processing to packaging and Storage to delivery. We plan on pursuing all these avenues. With the continued testing and need for the market coupled with our new .35% label, should make pursuing these opportunities successful. In addition, our solution and process is environmentally friendly in that the biproduct of SteraMist is only oxygen and humidity. We have our solution listed on OMRI and labeled as organic. Most disinfectants leave residue on furniture, objects, and foods. SteraMist does not leave any chemical residue on any surface. We have a very low carbon footprint, if any.

Commercial

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

Interest in SteraMist disinfection within the commercial division remains high. The SteraPak is a popular product for this division because customers are looking for a more cost-effective solution compared to the current disinfectants on the market. As quick and mobile disinfection solution is preferred in this industry, we believe that SteraPak will generate substantial customer interest and create sales opportunities. Currently our customers are purchasing our SteraPak in all of our divisions to provide quick disinfection throughout various sites in their facilities.

We have listed the SteraPak on Amazon to better enhance consumer sales and accessibility in this division. Working alongside a full-service Amazon consulting agency, ORCA Pacific, we can better position ourselves with optimized content and increase customer traffic with enhanced advertising. With the ease of purchase, we expect Amazon to boost sales for the remainder of 2021 and into 2022.

Business Highlights and Recent Events

Registered Direct Offering:

In September 2021, we closed a registered direct offering of approximately $5,000,000 priced At-The-Market under the Nasdaq rules. The proceeds from the offering will be used for sales and marketing expenses associated with our products, advertising, purchase of inventory and other general corporate purposes.

Customers:

We have a new international partner, Critical Sciences, based in Australia who will be our representative focusing on the Australian Government agencies responsible for scientific research. We have also added new customers in secured U.S. government facilities.

Revenues:

During the third quarter of 2021, we continued to add new customers, saw continued expansion of our technology from our existing customer base, launched our SteraPak and were engaged by a major pharmaceutical company in Europe to build an iHP Customer Engineered System which will be permanently installed into their facility.

In August 2021, we announced the launch our new Amazon store for our recently launched SteraPak, in the USA. . As the most cost effective SteraMist system, the SteraPak is primed to effectively target both businesses and consumer end users, making it, we believe, ideal flagship SteraMist product for sale on Amazon.

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TOMI received a purchase order from a global top five biopharmaceutical company in the end of July 2021. The order was for TOMI’s SteraMist Environment system and its validation service. TOMI has received an initial order for a new facility after creating a new companywide decontamination standard, creating an opportunity to expand to multiple locations across the world.

In the third quarter 2021, we saw positive signs from our prospective and existing customers as businesses began to reopen their standard business operations and locations. Our revenue for the three months ended September 30, 2021 grew sequentially to $2,204,569, which was a 50% increase over the our revenue reported for the three months ended June 30, 2021 of $1,465,525.

We experienced a decline in our revenue for the three and nine months ended September 30, 2021 when compared to the same period last year primarily because of the unsustainable spike in demand caused by the onset of the COVID-19 pandemic in the first half of 2020.

During of the second half of 2020 and early 2021, many of our established clients were closed or required to reduce or suspend their business operations. The markets that were negatively affected were our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies, both domestic and globally. In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore substantially reduced their elective surgical and clinical related services, resulting in limited non-essential onsite personnel.

These trends made it difficult for us to demo our equipment and execute our sales and marketing strategies. In addition, our customers have limited budgets for newer technologies. However, pandemic preparedness is now the radar of many companies throughout the world. The United States has earmarked federal for disinfection.

We expect increased revenues in the fourth quarter of 2021and into 2022 due to the launch of our new products, specifically our backpack solution ("SteraPak") across all verticals, especially hospital healthcare to replace our competitors recalled electrostatic sprayers at a similar price point, and from our service network members who have indicated interest in a portable SteraMist unit to add to their arsenal. Further, there has been an uptick in demand from our established life science customers for custom engineered systems with a portion of that revenue expected to be recognized in late 2021. In addition, the opening of the Amazon channel for our products should result in additional sales of our products.

We believe that we possess the best technologies in the world in the disinfection and decontamination space. This pandemic has provided us with the confidence to develop a clear strategy to manufacture what may be our best product portfolio to date. In addition, we continue to move our BIT technology closer to becoming the standard in disinfection and decontamination globally. This should lead to a greater market share, increased profitability, and capability strength. In addition, our products are an environmentally friendly solution and process which address the concerns of sustainability. Customers are starting to request and discuss the positive results of our product and the environmentally friendly results compared to the caustic results of other disinfectants.

Dangerous pathogens still exist “Disease X” and will exist long after we recover from this pandemic. While the United States and most of the world is currently recovering from the SARS CoV-2 coronavirus outbreak, there are many pathogens which are respiratory in nature that are still a looming threat, these cases are occurring globally to this day. We believe, SteraMist can mitigate and reduce the impact of the next pandemic as it has already proven during the outbreaks of Ebola, MERS and recently with SARS CoV-2 pandemic. The need for a speedy comprehensive mechanical disinfectant like SteraMist cannot be stressed enough and should be included as the new norm of cleaning. The world has seen how quickly viruses spread starting with just one child getting a virus from daycare, spreading to a parent, and passing on to colleagues in a workplace, which can shut down a business. With all the unknown viruses and their variants in the world, preparedness is the most important measure to ensure your family and business survives.

2021 Events:

On August 4, 2021, we announced the launch of the SteraPak. The Company is currently selling the SteraPak product through all divisions.

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On August 10, 2021, we secured a project to install an iHP Custom Engineered System (CES) for a major pharmaceutical company in Europe. This on track to be completed by the end of the year.

On September 13, 2021, we announced the launch a new Amazon store for select SteraMist products, including the recently launched SteraPak, in the USA.

On September 16, 2021, we announced that our technology has passed the EN 17272 evaluation. The EN 17272 is the European standard for airborne room disinfection in the form of gas, steam and/or aerosol.

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

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

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

As conferences and tradeshows are reopening in the third quarter of 2021for companies to exhibit live, TOMI will be attending multiple shows across the country. It is critical for TOMI to perform live demonstrations to showcase the difference between our SteraMist iHP technology and our competitors. TOMI looks forward to making a large impact with live demonstrations of SteraMist disinfection technology throughout our multiple divisions.

Research Studies:

The EPA has registered our 0.35% hydrogen peroxide product for the use in green houses, pre harvests and post harvests. We continue to pursue acceptance of the additional 1% hydrogen peroxide label with the EPA. Due to the pandemic, there have been significant delays by U.S. regulatory agencies in approving new submissions, including TOMI's new 1% registration focusing on direct food and agricultural applications. The 1% label has been delayed by EPA due to the reallocation of staff resources responding to an influx of product submissions to deal with COVID-19 (TOMI successfully added Emerging Pathogen claims and was added to EPA list in March 2020.), significantly delaying all other PRIA actions, well documented delays caused by staffing vacancies, and the continuing prohibition of in person meetings.

TOMI has partnered with the Department of Chemistry and Biochemistry of Texas Tech University to conduct a wide range of studies on spray pattern, deposition, and hydrogen peroxide content to compare our 1% label to other similar products on the market. TOMI has also once again partnered with USDA Agricultural Research Service for continued research on 1% solution. TOMI's long term relationship with USDA ARS continues to achieve results. In March 2021, an article entitled "Hydrogen peroxide residue on tomato, apple, cantaloupe, and Romaine lettuce after treatments with cold plasma-activated hydrogen peroxide” was accepted for publication in the Journal of Food Microbiology and we are excepting another paper to be published by the end of the year.

We continue to work with our German aircraft partner and Boeing in a third-party test required for the aviation industry. We will incur no costs for this work as both testing partners are clients. We anticipate the testing will be completed in the fourth quarter of 2021.

As previously discussed, TOMI has engaged HYGCEN Germany GmbH to perform a quantitative test of germ carriers for airborne room disinfection and testing of the effectiveness of a method for disinfecting room air to meet the new EU norm (standard) EN 17272. Certification that Binary Ionization Technology meets the new standard will continue to position iHP as the premier decontamination/disinfection technology available on the market today. On September 16, 2021, we announced that our technology has passed the EN 17272 evaluation. The EN 17272 is the European standard for airborne room disinfection in the form of gas, steam and/or aerosol.

October 2021, Applied Biosafety published a paper titled “Mechanisms of Sporicidal Activity Induced by Ionized Hydrogen Peroxide in the Spores of Bacillus astrophaeus.”

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As previously reported for a couple years, we have participated in a large multi-year federal funded study, known as the “SHIELD study” that compares hospital manual cleaning to a SteraMist® mechanical cleaning. Preliminary results collected by the current hospitals in the study is showing a decrease in the transference of pathogens resulting in HAIs and Clostridium difficile infections in the rooms that used SteraMist® for their terminal clean, as compared to the rooms that have been manually cleaned. We are eager to report that enough data has been collected to complete the study in 2021, and we expect that data to be provided to the examiners with a published paper to soon follow.

Registrations & Intellectual Property (IP):

Our portfolio includes more than twenty (20) Utility Patent applications worldwide for both method and system claims on SteraMist® BIT™, either published or undergoing prosecution. Most recently, in July 2021, we were granted allowance for our utility patent in South Korea covering our SteraMist® BIT™ technology; and we also received our second allowance of a utility patent application in Israel for a system applying our technology. Furthermore, in Taiwan, we received allowance for our utility application covering a method of controlling the aerosol particle size used in our SteraMist® BIT™ technology; this is a new dimension of patent protection, which we are pursuing in Europe, China, Brazil, Australia, and many other countries. In addition, in June 2021, our Canadian patent was issued covering our decontamination technology. In the recent past, we have obtained two related US utility patents giving us protection of our technology until the year 2038, and we are pursuing further claims to additional capabilities in on-going US and worldwide patent applications.

We continue to prosecute utility patent applications in multiple countries which are all in the national stage for review under the patent prosecution highway for claims found novel and inventive by the international search authority. Once these are allowed, we will hold international patent rights for the inherited patents and our newly issued patents. We also have design patent protection for our surface-mounted applicator device in the United States, China, Japan, Taiwan, and Korea. We have filed and have been granted or have pending acceptance on thirty-two (32) separate design patents for our: Decontamination Chamber(s), Decontamination Applicator, Decontamination Cart, Applicator, and Surface Mounted Applicator 90-Degree Device. These patents are published around the world, including but not limited to United States, China, Hong Kong, Europe, United Kingdom, Singapore, Taiwan, Vietnam, Canada, South Korea, and Japan. We are engaged in the process of filing further design and utility patent applications both in the United States and internationally. In July 2021, our design patent for our decontamination cart was issued in the United States.

Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of November 8, 2021, we held a total of over two hundred trademarks (word and logo) registered or pending across the globe. TOMI registers marks in eight (8) classes of specification of goods and services: Class 1 for Chemicals for Treating Hazardous Waste, Class 5 for Disinfectants, All-Purpose for Hard Surfaces and for Treating Mold, Class 7 for Handheld Power Operated Spraying Machines, Class 11 for Sterilizers for Medical Use and Air Purification, Class 35 for Business Consultation and Management Services, Class 37 for General Disinfecting Services, Class 40 for Chemical Decontamination and Manufacturing Services, and Class 41 for Providing Education Training and information related to biological and bacterial decontamination services..

Financial Operations Overview

Our financial position as of September 30, 2021 and December 31, 2020, respectively, was as follows:

|  | September 30, 2021 Unaudited |  |  | December 31, 2020 |
Total shareholders’ equity |  | $ | 15,236,000 |  |  | $ | 13,203,000 |
Cash and cash equivalents |  | $ | 5,663,000 |  |  | $ | 5,199,000 |
Accounts receivable, net |  | $ | 3,528,000 |  |  | $ | 3,717,000 |
Inventories |  | $ | 4,788,000 |  |  | $ | 3,782,000 |
Prepaid expenses |  | $ | 320,000 |  |  | $ | 421,000 |
Vendor Deposits |  | $ | 427,000 |  |  | $ | 389,000 |
Other Receivables |  | $ | 115,000 |  |  | $ | 199,000 |
Current liabilities |  | $ | 1,951,000 |  |  | $ | 2,203,000 |
Long-term liabilities |  | $ | 885,000 |  |  | $ | 1,364,000 |
Working Capital |  | $ | 12,890,000 |  |  | $ | 11,503,000 |

During the nine months ended September 30, 2021, our debt and liquidity positions were affected by the following:

| · | Net cash used in operations of approximately $3,823,000.
| · | Net cash used in investing activities $295,000.
| · | Gain upon debt extinguishment of $415,000.
| · | Net proceeds from the sale of stock and warrants of $4,582,000.

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Results of Operations for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Revenue, Net |  | $ | 2,205,000 |  |  | $ | 4,292,000 |  |  | $ | (2,087,000 | ) |  |  | -49 | % |  | $ | 5,744,000 |  |  | $ | 21,374,000 |  |  | $ | (15,630,000 | ) |  |  | -73 | %
Gross Profit |  |  | 1,314,000 |  |  |  | 2,836,000 |  |  |  | (1,522,000 | ) |  |  | -54 | % |  |  | 3,491,000 |  |  |  | 12,889,000 |  |  |  | (9,398,000 | ) |  |  | -73 | %
Total Operating Expenses (1) |  |  | 1,801,000 |  |  |  | 1,740,000 |  |  |  | 61,000 |  |  |  | 4 | % |  |  | 6,682,000 |  |  |  | 5,477,000 |  |  |  | 1,205,000 |  |  |  | 22 | %
Income (Loss) from Operations |  |  | (487,000 | ) |  |  | 1,096,000 |  |  |  | (1,583,000 | ) |  | NM |  |  |  | (3,191,000 | ) |  |  | 7,412,000 |  |  |  | (10,603,000 | ) |  | NM |
Total Other Income (Expense) |  |  | - |  |  |  | - |  |  |  | - |  |  | NM |  |  |  | 415,000 |  |  |  | (40,000 | ) |  |  | 455,000 |  |  | NM |
Provision for Income Taxes |  |  | - |  |  |  | (77,000 | ) |  |  | 77,000 |  |  | NM |  |  |  |  |  |  |  | (77,000 | ) |  |  | 77,000 |  |  | NM |
Net Income (Loss) |  | $ | (487,000 | ) |  | $ | 1,019,000 |  |  |  | (1,506,000 | ) |  | NM |  |  | $ | (2,776,000 | ) |  | $ | 7,295,000 |  |  |  | (10,071,000 | ) |  | NM |
Basic Net Income (Loss) per share |  | $ | (0.03 | ) |  | $ | 0.06 |  |  | $ | (0.09 | ) |  | NM |  |  | $ | (0.17 | ) |  | $ | 0.44 |  |  | $ | (0.61 | ) |  | NM |
Diluted Net Income (Loss) per share |  | $ | (0.03 | ) |  | $ | 0.05 |  |  | $ | (0.08 | ) |  | NM |  |  | $ | (0.17 | ) |  | $ | 0.40 |  |  | $ | (0.56 | ) |  | NM |

(1) | Includes $0 and $11,000 in non-cash option and warrant based equity compensation expense for the three months ended September 30, 2021 and 2020, respectively. Includes $0 and $308,000 in non-cash equity compensation expense for the nine months ended September 30, 2021 and 2020, respectively.
(2) | NM – Not Meaningful

Sales and Revenue

Total revenue for the three months ended September 30, 2021 and 2020, was $2,205,000 and $4,292,000, respectively, representing a decrease of $2,087,000, or 49% compared to the same prior year period. For the nine months ended September 30, 2021 and 2020, our total revenue was $5,744,000 and $21,374,000, respectively, representing a decrease of $15,630,000, or 73% compared to the same prior year period.

We experienced a decline in our revenue for the three and nine months ended September 30, 2021 as compared to the same prior year periods primarily due to the significant increase of demand caused by the onset of COVID-19 pandemic in the first half of 2020. We were positioned well to respond to the pandemic related spike in demand due to our inventory levels and increased production capacity, which led to substantial revenue growth in the first and second quarter of 2020. However, during the second half of 2020 and early 2021, many of our established vertical clients were closed or required to reduce operation due to the impact of COVID-19 pandemic on their businesses. The markets that were negatively affected included our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies globally. In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore substantially reduced elective surgical and clinical related services, resulting in limited non-essential onsite personnel. These trends made it more difficult for us to demo our equipment and execute our sales and marketing strategies.

As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic subsides, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities.

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Net Revenue

Product and Service Revenue

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
SteraMist Product |  | $ | 1,657,000 |  |  | $ | 3,677,000 |  |  | $ | (2,020,000 | ) |  |  | -55 | % |  | $ | 4,329,000 |  |  | $ | 19,557,000 |  |  | $ | (15,228,000 | ) |  |  | -78 | %
Service and Training |  |  | 548,000 |  |  |  | 615,000 |  |  |  | (67,000 | ) |  |  | -11 | % |  |  | 1,415,000 |  |  |  | 1,817,000 |  |  |  | (402,000 | ) |  |  | -22 | %
Total |  | $ | 2,205,000 |  |  | $ | 4,292,000 |  |  | $ | (2,087,000 | ) |  |  | -49 | % |  | $ | 5,744,000 |  |  | $ | 21,374,000 |  |  | $ | (15,630,000 | ) |  |  | -73 | %

SteraMist product-based revenues for the three months ended September 30, 2021 and 2020, were $1,657,000 and $3,677,000, representing a decrease of ($2,020,000) or (55%) when compared to the same prior year period. Product based revenues for the nine months ended September 30, 2021 and 2020, were $4,328,000 and $19,557,000, representing a decrease of ($15,229,000) or (78%) when compared to the same prior year period.

Our service-based revenue for the three months ended September 30, 2021 and 2020, was $548,000 and $615,000, respectively, representing a year over year decrease of (11%). For the nine months ended September 30, 2021 and 2020, our service-based revenue was $1,415,000 and $1,817,000, representing a decrease of ($402,000) or (22%) when compared to the same prior period in 2020.

Revenue by Geographic Region

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
United States |  | $ | 2,028,000 |  |  | $ | 3,446,000 |  |  | $ | (1,418,000 | ) |  |  | -41 | % |  | $ | 5,017,000 |  |  | $ | 15,437,000 |  |  | $ | (10,420,000 | ) |  |  | -68 | %
International |  |  | 177,000 |  |  |  | 846,000 |  |  |  | (669,000 | ) |  |  | -79 | % |  |  | 727,000 |  |  |  | 5,937,000 |  |  |  | (5,210,000 | ) |  |  | -88 | %
Total |  | $ | 2,205,000 |  |  | $ | 4,292,000 |  |  | $ | (2,088,000 | ) |  |  | -49 | % |  | $ | 5,744,000 |  |  | $ | 21,374,000 |  |  | $ | (15,631,000 | ) |  |  | -73 | %

Our domestic revenue for the three months ended September 30, 2021 and 2020 was $2,028,000 and $3,446,000, respectively, a decrease of ($1,418,000), or (41%) when compared to the same prior year period. For the nine months ended September 30, 2021 and 2020, our domestic revenues were $5,017,000 and $15,437,000, representing a decrease of ($10,420,000) or (68%).

Internationally, our revenue for the three months ended September 30, 2021 and 2020, was approximately $177,000 and $846,000, respectively, representing a decrease of ($669,000) or (79%) when compared to the third quarter of 2020. For the nine months ended September 30, 2021 and 2020, our international revenues were $727,000 and $5,937,000, representing a decrease of ($5,210,000) or (88%).

Cost of Sales

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Cost of Sales |  | $ | 890,000 |  |  | $ | 1,456,000 |  |  |  | (566,000 | ) |  |  | -39 | % |  | $ | 2,252,000 |  |  | $ | 8,485,000 |  |  |  | (6,233,000 | ) |  |  | -73 | %

Cost of sales was $890,000 and $1,456,000 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $566,000, or 39%, compared to the prior year. The primary reason for the decline in cost of sales is attributable to lower revenue in the current quarter. Our gross profit as a percentage of sales for the three months ended September 30, 2021 was 59.6% compared to 66.0% in the same prior period, respectively. The lower gross profit is attributable to the product mix in sales. In the prior year period and due to the pandemic, there was a higher concentration of solution-based revenue due to panic buying and hoarding of solution by our clients as our solution sales carries a higher gross profit.

Cost of sales was $2,252,000 and $8,485,000 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $6,233,000, or 73%, compared to the prior year. The primary reason for the decline in cost of sales is attributable to lower revenue in the current quarter. Our gross profit as a percentage of sales for the nine months ended September 30, 2021 was 60.8% compared to 60.3% in the same prior period, respectively. The higher gross profit is attributable to the product mix in sales. As revenues continue to grow and we are able to negotiate more favorable pricing from our vendors, we anticipate that our cost per unit could decrease.

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Professional Fees

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Professional Fees |  | $ | 118,000 |  |  | $ | 228,000 |  |  | $ | (110,000 | ) |  |  | -48 | % |  | $ | 398,000 |  |  | $ | 419,000 |  |  | $ | (21,000 | ) |  |  | -5 | %

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

Professional fees were $118,000 and $228,000 for the three months ended September 30, 2021 and 2020, respectively, a decrease of approximately $110,000, or 48%, in the current year period. The decrease is attributable to additional professional fees in connection with the maintenance of our intellectual property that occurred in the same prior year period and legal costs incurred in connection with our up list to Nasdaq.

Professional fees were $398,000 and $419,000 for the nine months ended September 30, 2021 and 2020, respectively, a decrease of approximately $21,000, or 5%, in the current year period. The decrease is attributable to additional professional fees in connection with the maintenance of our intellectual property that occurred in the same prior year period and legal costs incurred in connection with our up list to Nasdaq.

Depreciation and Amortization

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Depreciation and Amortization |  | $ | 70,000 |  |  | $ | 177,000 |  |  | $ | (107,000 | ) |  |  | -60 | % |  | $ | 226,000 |  |  | $ | 521,000 |  |  | $ | (295,000 | ) |  |  | -57 | %

Depreciation and amortization were approximately $70,000 and $177,000 for the three months ended September 30, 2021 and 2020, respectively, representing a decrease of $107,000, or 60%. The decline is due to intangible assets that became fully amortized in 2020 which has led to a lower amortization expense in the current year period.

Depreciation and amortization were approximately $226,000 and $521,000 for the nine months ended September 30, 2021 and 2020, respectively, representing a decrease of $295,000, or 57%. The decline is due to intangible assets that became fully amortized in 2020 which has led to a lower amortization expense in the current year period.

Selling Expenses

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Selling Expenses |  | $ | 465,000 |  |  | $ | 213,000 |  |  | $ | 252,000 |  |  |  | 118 | % |  | $ | 1,275,000 |  |  | $ | 980,000 |  |  | $ | 295,000 |  |  |  | 30 | %

Selling expenses for the three months ended September 30, 2021 were approximately $465,000, as compared to $213,000 for the quarter ended September 30, 2020, representing an increase of approximately $252,000 or 118%. The increase in selling expense is attributable to higher commissions, increased employee headcount as well as increased advertising and marketing costs incurred in the current year period.

Selling expenses for the nine months ended September 30, 2021 were approximately $1,275,000, as compared to $980,000 for the nine months ended September 30, 2020, representing an increase of approximately $295,000 or 30%. The increase in selling expense is attributable to a higher employee headcount and the related increase in payroll as well as increased advertising and marketing costs incurred in the current year period. We continue to invest and allocate resources into our sales, marketing and advertising initiatives and have increased efforts in the current year in order to further develop our brand recognition and grow our base of customers.

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Research and Development

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Research and Development |  | $ | 93,000 |  |  | $ | 45,000 |  |  | $ | 48,000 |  |  |  | 107 | % |  | $ | 495,000 |  |  | $ | 245,000 |  |  | $ | 250,000 |  |  |  | 102 | %

Research and development expenses for the three months ended September 30, 2021 were approximately $93,000, as compared to $45,000 for the quarter ended September 30, 2020, representing an increase of approximately $48, 000, or 107%.

Research and development expenses for the nine months ended September 30, 2021 were approximately $495,000, as compared to $250,000 for the nine months ended September 30, 2020, representing an increase of approximately $250,000, or 102%.

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

Equity Compensation Expense

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Equity Compensation Expense |  | $ | - |  |  | $ | 11,000 |  |  | $ | (11,000 | ) |  |  | -100 | % |  | $ | - |  |  | $ | 308,000 |  |  | $ | (308,000 | ) |  |  | -100 | %

Equity compensation expense was $0 and $11,000 for the three months ended September 30, 2021 and 2020, respectively, representing a decrease of $11,000.

Equity compensation expense was $0 and $308,000 for the nine months ended September 30, 2021 and 2020, respectively, representing a decrease of $308,000.

The decrease in equity compensation expense relates to the timing of warrants and options issued to executives and consultants in 2020.

Consulting Fees

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Consulting Fees |  | $ | 64,000 |  |  | $ | 75,000 |  |  | $ | (11,000 | ) |  |  | -15 | % |  | $ | 266,000 |  |  | $ | 226,000 |  |  | $ | 40,000 |  |  |  | 18 | %

Consulting fees were $64,000 and $75,000 for the three months ended September 30, 2021 and 2020, respectively, representing a decrease of $11,000, or 15%, in the current quarter period. The decrease is due to the timing of certain projects that occurred in the prior year that did not occur in the same current year period.

Consulting fees were $266,000 and $226,000 for the nine months ended September 30, 2021 and 2020, respectively, representing an increase of $40,000, or 18%, in the current period. The increase is due consulting expenses incurred with new product registrations with the EPA and FDA.

General and Administrative Expense

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
General and Administrative |  | $ | 991,000 |  |  | $ | 992,000 |  |  | $ | (1,000 | ) |  |  | 0 | % |  | $ | 4,023,000 |  |  | $ | 2,777,000 |  |  | $ | 1,246,000 |  |  |  | 45 | %

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

General and administrative expense was $991,000 and $992,000 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $1,000, in the current period.

General and administrative expense was $4,023,000 and $2,777,000 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $1,246,000, or 45%, in the current period. The increase in general and administrative expense is primarily attributable to higher insurance and listing fees associated with the up list to the Nasdaq Capital Market as well as a higher employee headcount and wages that incurred in the first quarter of 2021.

Other Income and Expense

|  | For the three months ended September 30, |  |  | Change |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  | 2021 |  |  | 2020 |  |  | $ |  |  | a% |
Gain Upon Debt Extinguishment |  |  | - |  |  |  | - |  |  |  | - |  |  | NM |  |  | 415,000 |  |  |  | - |  |  |  | 415,000 |  |  | NM |
Interest Income |  |  | - |  |  |  | 1,000 |  |  |  | (1,000 | ) |  | NM |  |  | 1,000 |  |  |  | 2,000 |  |  |  | (1,000 | ) |  | NM |
Interest Expense |  |  | - |  |  |  | (1,000 | ) |  |  | 1,000 |  |  | NM |  |  | (1,000 | ) |  |  | (42,000 | ) |  |  | 41,000 |  |  |  | 98 | %
Other Income (Expense) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | NM |  | $ | 415,000 |  |  | $ | (40,000 | ) |  | $ | 455,000 |  |  | NM |

Gain upon debt extinguishment of $415,000 in connection with the forgiveness of a loan payable.

Interest income was approximately $0 and $1,000 for the three months ended September 30, 2021 and 2020, respectively.

Interest income was approximately $1,000 and $2,000 for the nine months ended September 30, 2021 and 2020, respectively.

Interest expense was $0 for the three months ended September 30, 2021 and 2020, respectively.

Interest expense was $1,000 and $42,000 for the nine months ended September 30, 2021 and 2020, respectively.

Provision for Income Taxes

|  | For the three months ended September 30, |  |  | Change |  |  | For the nine months ended September 30, |  |  | Change |
|  | 2021 |  |  | 2020 |  |  | $ |  |  | % |  |  | 2021 |  |  | 2020 |  |  | $ |  |  | % |
Provision for Income Taxes |  | $ | - |  |  | $ | 77,000 |  |  | $ | (77,000 | ) |  |  | 100 | % |  | $ | - |  |  | $ | 77,000 |  |  | $ | (77,000 | ) |  |  | 100 | %

Provision for income taxes for the three and nine months ended September 30, 2021 and 2020 was $0 and $77,000, respectively.

Liquidity and Capital Resources

As of September 30, 2021, we had cash and cash equivalents of $5,663,000 and working capital of $12,890,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of public company reporting requirements. We have historically funded our operations through funds generated through operations and debt and equity financings. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.

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In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering to certain institutional investors and issued 1,434,721 warrants in a concurrent private placement. We received net proceeds from the transaction of $4,581,651, after deducting the placement agent’s fees and other estimated offering expenses. The Warrants are exercisable at an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance.

For the nine months ended September 30, 2021, we incurred a loss from operations of ($3,190,000) and for the nine months ended September 30, 2021, we generated income from operations of $7,412,000. Cash used in operations for the nine months ended September 30, 2021, was ($3,823,000). Cash provided from operations was $4,945,000 for the nine months ended September 30, 2020.

A breakdown of our statement of cash flows for the nine months ended September 30, 2021 and 2020 is provided below:

|  | For the nine months ended September 30, |
|  | 2021 |  |  | 2020 |
Net Cash Provided By (Used) in Operating Activities |  | $ | (3,823,000 | ) |  | $ | 4,945,000 |
Net Cash Used in Investing Activities |  | $ | (295,000 | ) |  | $ | (51,000 | )
Net Cash Provided by Financing Activities: |  | $ | 4,582,000 |  |  | $ | 94,000 |

Operating Activities

Cash used in operating activities for the nine months ended September 30, 2021 was ($3,823,000), compared to cash provided by operations for the nine months ended September 30, 2020 of $4,945,000. Our cash provided by operations declined in the current year period as a result of lower revenue and an increase in net loss.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2021 and 2020 was $295,000 and $51,000, respectively. The increase is attributable to fixed assets purchased in the year and capitalized patent and trademark costs.

Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2021 and 2020 was $4,582,000 and $94,000 respectively. The cash provided by financing activities increased as a result of the proceeds we received in connection with the sale of our common stock and warrants.

Liquidity

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

| · | global response to the COVID-19 pandemic and market demand for our products;
| · | ramp up and expansion of our internal sales force and manufacturers’ representatives;
| · | length of our sales cycle;
| · | expansion into new territories and markets; and
| · | timing of orders from distributors.

We could incur operating losses and an increase of costs related to the continuation of product and technology development, and sales expense as we continue to grow our sales teams and geographic presence, tooling capital expenditures as we ramp up and streamline our production and administrative activities including compliance with the Sarbanes-Oxley Act of 2002 Section 404.

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Management has taken and will endeavor to continue to take a number of actions in order to improve our results of operations and the related cash flows generated from operations in order to strengthen our financial position, including the following items:

| · | expanding our label with the EPA to further our product registration internationally;
| · | continued expansion of our internal sales force and manufacturer representatives in an effort to drive global revenue in all verticals;
| · | Continue research and development and add new products to our “Stera” product line
| · | source alternative lower-cost suppliers;
| · | expansion of international distributors; and
| · | continued growth in all of our verticals.

We expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources.

We believe that our existing balance of cash and cash equivalents and amounts expected to be provided by operations will provide us with sufficient financial resources to meet our cash requirements for operations, working capital and capital expenditures over the next twelve months.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates.

The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following policies to be critical to an understanding of our condensed consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows.

Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) ASC 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.

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.

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.

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Costs to Obtain a Contract with a Customer

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses.

Contract Balances

As of September 30, 2021, and December 31, 2020 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations.

Significant Judgments

Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying condensed consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventory, fair values of financial instruments, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of our assets and liabilities.

Fair Value Measurements

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

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.

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.

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Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents includes cash on hand, held at financial institutions and other liquid investments with original maturities of three months or less. At times, these deposits may be in excess of insured limits.

Accounts Receivable

Our accounts receivable are typically from credit worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventories

Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods.

We expense costs to maintain certification to cost of goods sold as incurred.

We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable.

Property and Equipment

We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter.

Leases

In February 2016, the FASB issued ASU No. 2016-02 (ASC 842), Leases, to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We adopted ASC 842 as of January 1, 2019 using the modified retrospective basis with a cumulative effect adjustment as of that date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. Accordingly, previously reported financial statements, including footnote disclosures, have not been recast to reflect the application of the new standard to all comparative periods presented.

Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current portion on our condensed consolidated balance sheet as of September 30, 2021 and December 31, 2020.

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We have elected not to present short-term leases on the consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

Capitalized Software Development Costs

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

Accrued Warranties

Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results.

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 Accounting Standards Codification (ASC) guidance for income taxes.

Net Income (Loss) Per Share

Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the treasury stock method and includes the effect from potential issuance of shares of common stock, such as shares issuable pursuant to the exercise of options and warrants and conversions of preferred stock or debentures.

Equity Compensation Expense

We account for equity compensation expense in accordance with FASB ASC 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period.

On July 7, 2017, our shareholders approved the 2016 Equity Incentive Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 625,000 shares of common stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of common stock for numerous reasons, including, but not limited to, shares of common stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award; awards under the 2016 Plan are expressly conditioned upon such agreements.

On December 30, 2020, we received shareholder approval to restate and amend the 2016 Equity Incentive Plan to increase the maximum number of shares of common stock authorized from issuance by 1,375,000, from 625,000 shares to 2,000,000.

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Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $250,000 at times during the year.

Long-Lived Assets Including Acquired Intangible Assets

We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three and nine months ended September 30, 2021 and 2020.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. We elected to adopt this guidance early, in 2020 on a prospective basis. The guidance did not have a material impact on our Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 above.

Off-Balance Sheet Arrangements

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

Available Information

The Company periodically provides certain information for investors on its corporate website, www.tomimist.com, and its investor relations page of its website, www.investor.tomimist.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites and referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, 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 quarterly report on Form 10-Q. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting 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.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. Regardless of the outcome, any litigation could have an adverse impact on us due to defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors.

You should carefully consider the information described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 30, 2021. There have been no material changes to the risk factors we previously disclosed in our filings with the SEC, including the Form 10-K. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In September 2021, we sold 2,869,442 shares of common stock through a registered direct offering and issued 1,434,721 warrants in a concurrent private placement. We received net proceeds from the transaction of $4,581,651, after deducting the placement agent’s fees and other estimated offering expenses. The Warrants are exercisable at an exercise price of $1.68 per share, are exercisable immediately upon issuance and have a term of exercise equal to five years from the date of issuance. The warrants were issued pursuant to an exemption under Regulation D of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The documents listed in the Exhibit Index of this Form 10-Q are incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements 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.

| TOMI ENVIRONMENTAL SOLUTIONS, INC. |
Date: November 15, 2021 | By: | /s/ Halden S. Shane |
|  | Halden S. Shane |
|  | Chief Executive Officer |
|  | (Principal Executive Officer) |
Date: November 15, 2021 | By: | /s/ Nick Jennings |
|  | Nick Jennings |
|  | Chief Financial Officer |
|  | (Principal Financial Officer and Principal Accounting Officer) |

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EXHIBIT INDEX

|  |  |  | Incorporated by Reference |  | Filed
Exhibit Number |  | Exhibit Description |  | Form |  | File No. |  | Exhibit |  | Filing Date |  | Herewith
31.1 |  | Certification of Halden S. Shane, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |  |  |  |  |  |  |  |  | x
31.2 |  | Certification of Nick Jennings, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |  |  |  |  |  |  |  |  | x
32.1# |  | Certification of Halden S. Shane, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |  |  |  |  |  |  |  |  | x
32.2# |  | Certification of Nick Jennings, 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 Document. |  |  |  |  |  |  |  |  |  | x
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document. |  |  |  |  |  |  |  |  |  | x
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document. |  |  |  |  |  |  |  |  |  | x
101.LAB |  | XBRL Taxonomy Extension Labels Linkbase Document. |  |  |  |  |  |  |  |  |  | x
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document. |  |  |  |  |  |  |  |  |  | x

+ Indicates a management contract or compensatory plan.

# This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, or the Exchange Act.

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