TOMI Environmental Solutions, Inc. - Quarter Report: 2023 September (Form 10-Q)

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, 2023

☐ 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 6, 2023 the registrant had 19,823,955 shares of common stock outstanding.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2023

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		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.	32

Item 3	Quantitative and Qualitative Disclosures About Market Risk.	56

Item 4	Controls and Procedures.	57

PART II	OTHER INFORMATION

Item 1	Legal Proceedings.	58

Item 1A	Risk Factors.	58

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds.	58

Item 3	Defaults Upon Senior Securities.	58

Item 4	Mine Safety Disclosures.	58

Item 5	Other Information.	58

Item 6	Exhibits.	58

SIGNATURES		59

EXHIBIT INDEX		60

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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.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. 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 previously filed with the Securities and Exchange Commission on March 16, 2023. 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.

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

Current Assets:	September 30, 2023 (Unaudited)			December 31, 2022
Cash and Cash Equivalents	$	1,410,697		$	3,866,733
Accounts Receivable - net		2,368,043			2,772,340
Other Receivables		164,150			164,150
Inventories (Note 3)		4,481,644			4,495,999
Vendor Deposits (Note 4)		89,860			447,052
Prepaid Expenses		442,303			388,359
Total Current Assets		8,956,697			12,134,633

Property and Equipment – net (Note 5)		1,138,287			1,335,331

Other Assets:
Intangible Assets – net (Note 6)		1,014,416			1,025,736
Operating Lease - Right of Use Asset (Note - 7)		483,884			528,996

Other Assets		596,164			475,103
Total Other Assets		2,094,464			2,029,835
Total Assets	$	12,189,448		$	15,499,799

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts Payable	$	1,248,936		$	1,761,750
Accrued Expenses and Other Current Liabilities (Note 13)		674,367			728,703
Deferred Revenue		-			699,732
Current Portion of Long-Term Operating Lease		112,460			100,282
Total Current Liabilities		2,035,763			3,290,467

Long-Term Liabilities:
Long-Term Operating Lease, Net of Current Portion (Note 7)		672,510			761,132
Total Long-Term Liabilities		672,510			761,132
Total Liabilities		2,708,273			4,051,599

Commitment 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, 2023 and December 31, 2022		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, 2023 and December 31, 2022		-			-
Common stock; par value $0.01 per share, 250,000,000 shares authorized; 19,823,955 and 19,763,855 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively.		198,240			197,640
Additional Paid-In Capital		57,882,792			57,673,559
Accumulated Deficit		(48,600,495	)		(46,423,637	)
Total Shareholders’ Equity		9,481,175			11,448,200
Total Liabilities and Shareholders’ Equity	$	12,189,448		$	15,499,799

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 OPERATIONS

	For The Three Months Ended						For The Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022

Sales, net	$	1,470,019		$	1,759,620		$	5,826,890		$	5,526,598
Cost of Sales		661,087			688,633			2,376,442			2,113,624
Gross Profit		808,932			1,070,987			3,450,448			3,412,974

Operating Expenses:
Professional Fees		207,673			106,411			456,518			391,737
Depreciation and Amortization		93,929			82,619			273,265			247,662
Selling Expenses		283,054			365,054			1,160,752			1,271,788
Research and Development		76,339			118,182			220,587			254,608
Consulting Fees		44,355			43,012			188,722			145,757
General and Administrative		1,004,618			1,009,229			3,328,726			3,277,485
Total Operating Expenses		1,709,968			1,724,507			5,628,570			5,589,037
Loss from Operations		(901,036	)		(653,520	)		(2,178,122	)		(2,176,063	)

Other Income (Expense):
Interest Income		256			370			1,264			1,048
Total Other Income (Expense)		256			370			1,264			1,048

Loss before income taxes		(900,780	)		(653,150	)		(2,176,858	)		(2,175,015	)
Provision for Income Taxes (Note 16)		-			-			-			-
Net Loss	$	(900,780	)	$	(653,150	)	$	(2,176,858	)	$	(2,175,015	)

Net income (loss) Per Common Share
Basic	$	(0.05	)	$	(0.03	)	$	(0.11	)	$	(0.11	)
Diluted	$	(0.05	)	$	(0.03	)	$	(0.11	)	$	(0.11	)

Basic Weighted Average Common Shares Outstanding		19,823,955			19,758,520			19,818,241			19,736,666
Diluted Weighted Average Common Shares Outstanding		19,823,955			19,758,520			19,818,241			19,736,666

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 SHAREHOLDERS’ EQUITY (UNAUDITED)

	For the nine months ended September 30, 2023
	Series A Preferred				Common Stock				Additional Paid in		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity

Balance at January 1, 2023		63,750		638		19,763,955		197,640	$	57,673,559	$	(46,423,637	)	$	11,448,200
Equity Compensation										158,833					158,833
Common Stock Issued for Services Provided						60,000		600		50,400					51,000
Net (Loss) for the nine months ended September 30, 2023												(2,176,858	)		(2,176,858	)
Balance at September 30, 2023		63,750	$	638		19,823,955	$	198,240	$	57,882,792	$	(48,600,495	)	$	9,481,175

	For the nine months ended September 30, 2022
	Series A Preferred				Common Stock				Additional Paid in		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity

Balance at January 1, 2022		63,750		638		19,680,955		196,809	$	56,941,209	$	(43,543,575	)	$	13,595,080
Equity Compensation										297,766					297,766
Common Stock Issued for Services Provided						51,750		518		53,820					54,338
Warrants and Options Exercised						31,250		313		24,687					25,000
Net (Loss) for the nine months ended September 30, 2022												(2,175,015	)		(2,175,015	)
Balance at September 30, 2022		63,750	$	638		19,763,955	$	197,640	$	57,317,482	$	(45,718,590	)	$	11,797,169

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 SHAREHOLDERS’ EQUITY

(UNAUDITED)

	For the three months ended September 30, 2023
	Series A Preferred				Common Stock				Additional Paid in		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity

Balance at July 1, 2023		63,750		638		19,823,955		198,240	$	57,882,792	$	(47,699,715	)	$	10,381,955
Net (Loss) for the three months ended September 30, 2023												(900,780	)		(900,780	)
Balance at September 30, 2023		63,750	$	638		19,823,955	$	198,240	$	57,882,792	$	(48,600,495	)	$	9,481,175

	For the three months ended September 30, 2022
	Series A Preferred				Common Stock				Additional Paid in		Accumulated			Total Shareholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity

Balance at July 1, 2022		63,750		638		19,732,705		197,327	$	57,292,795	$	(45,065,440	)	$	12,425,320
Warrants and Options Exercised						31,250		313		24,687					25,000
Net (Loss) for the three months ended September 30, 2022												(653,150	)		(653,150	)
Balance at September 30, 2022		63,750	$	638		19,763,955	$	197,640	$	57,317,482	$	(45,718,590	)	$	11,797,169

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,
	2023			2022
Cash Flow From Operating Activities:
Net Income (Loss)	$	(2,176,858	)	$	(2,175,015	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used) In Operating Activities:
Depreciation and Amortization		273,265			247,662
Amortization of Right of Use Asset		117,986			117,986
Amortization of Software Costs		-			10,475
Equity Compensation Expense		158,833			297,766
Value of Equity Issued for Services		51,000			54,338
Reserve for Credit Losses		(239,722	)		-
Changes in Operating Assets and Liabilities:
Decrease (Increase) in:
Accounts Receivable		644,019			(373,139	)
Inventory		14,355			30,328
Prepaid Expenses		(53,947	)		(5,755	)
Vendor Deposits		357,193			(193,202	)
Other Receivables		-			71,754
Other Assets		(121,061	)		(133,254	)
Increase (Decrease) in:
Accounts Payable		(546,391	)		126,765
Accrued Expenses		(20,758	)		(38,098	)
Customer Deposits		(699,732	)		1,149,025
Lease Liability		(119,923	)		(116,428	)
Net Cash Used in Operating Activities		(2,361,741	)		(928,792	)

Cash Flow From Investing Activities:
Capitalized Patent and Trademark Costs		-			(14,459	)
Purchase of Property and Equipment		(94,295	)		(63,711	)
Net Cash Used in Investing Activities		(94,295	)		(78,170	)

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,
	2023			2022
Cash Flow From Financing Activities:
Proceeds from Issuance of Stock and Warrants		-			25,000
Net Cash Provided by Financing Activities		-			25,000
Decrease In Cash and Cash Equivalents		(2,456,036	)		(981,962	)
Cash and Cash Equivalents - Beginning		3,866,733			5,317,443
Cash and Cash Equivalents – Ending	$	1,410,697		$	4,335,481

Supplemental Cash Flow Information:
Cash Paid for Interest	$	-		$	-
Cash Paid (Refunded) for Income Taxes	$	-		$	(72,086	)

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 water in the form of humidity. Our solution is organically listed in the United States and Canada as a sustainably green product with no or very little carbon footprint. Our business is organized into five divisions: Life Sciences, Healthcare, TOMI Service Network, Food Safety and Commercial.

Invented under a defense grant in association with the Defense Advanced Research Projects Agency (“DARPA”) of the U.S. Department of Defense, BIT™ is registered with the U.S. Environmental Protection Agency (the “EPA”) and uses a low percentage hydrogen peroxide as its only active ingredient to produce a fog composed mostly of a hydroxyl radical (^.OH ion), known as ionized Hydrogen Peroxide (iHP™). Represented by the SteraMist® brand of products, iHP™ produces a germ-killing aerosol that works like a visual non-caustic gas.

Our products are designed to service a broad spectrum of commercial structures, including, but not limited to, hospitals and medical facilities, bio-safety labs, pharmaceutical facilities, meat and produce processing facilities, universities and research facilities, vivarium labs, other service industries including cruise ships, office buildings, hotel and motel rooms, schools, restaurants, military barracks, police and fire departments, prisons, and athletic facilities. Our products are also used in single-family homes and multi-unit residences. Additionally, our products have been listed on the EPA’s List N as products that help combat COVID-19 and are actively being used for this purpose.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein, presented in accordance with generally accepted accounting principles utilized in the United States of America (“GAAP”), and stated in U.S. dollars, have been prepared by us, without an audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

These financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2022 and notes thereto which are included in the annual report on Form 10-K previously filed with the SEC on March 16, 2023 (the “Annual Report”). We follow the same accounting policies in the preparation of interim reports. The results of operations for the interim periods covered by this Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.

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Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of TOMI and its wholly-owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. All intercompany accounts and transactions have been eliminated in consolidation.

Reclassification of Accounts

Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These reclassifications had no material effect on previously reported results of operations or financial position.

Use of Estimates

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

Fair Value Measurements

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

	Level 1:	Quoted prices in active markets for identical assets or liabilities.

	Level 2:	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities.

	Level 3:	Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities.

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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 include 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, 2023 and December 31, 2022, there were no cash equivalents.

Accounts Receivable

Our accounts receivable are typically from credit-worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of their status and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for credit losses based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Bad debt expense (recovery) for the three and nine months ended September 30, 2023, was approximately $0 and ($19,000), respectively. Bad debt expense for the three and nine months ended September 30, 2022 was approximately $96,000 and $109,000. At September 30, 2023 and December 31, 2022, the reserve allowance for credit losses was $1,438,000 and $1,678,000, 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 $95,000 as of September 30, 2023 and December 31, 2022.

Property and Equipment

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

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Leases

We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease.

As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense in the period in which they are incurred.

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, 2023 was $0. Amortization expense for the three and nine months ended September 30, 2022 was $0 and $10,475, respectively.

Accounts Payable

As of September 30, 2023, two vendors accounted for approximately 52% of accounts payable. As of December 31, 2022, two vendors accounted for approximately 55% of accounts payable.

For the three and nine months ended September 30, 2023, two vendors accounted for 60% and 72% of cost of sales, respectively. For the three and nine months ended September 30, 2022, two vendors accounted for 68% and 66% 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, 2023, and December 31, 2022, our warranty reserve was $30,000 and $68,000, respectively. (See Note 14).

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Income Taxes

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with FASB ASC Topic 740, Income Taxes guidance for income taxes. Net deferred tax benefits have been fully reserved at September 30, 2023 and December 31, 2022.

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, 2023 consisted of 2,773,585 shares of common stock issuable upon exercise of outstanding warrants, 610,500 shares of common stock issuable upon vesting and exercise and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”).

Potentially dilutive securities as of September 30, 2022 consisted of 2,793,585 shares of common stock issuable upon exercise of outstanding warrants, 413,000 shares of common stock issuable upon outstanding options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”).

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 3.4 million and 3.3 million exercisable or convertible into shares of common stock were outstanding at September 30, 2023 and September 30, 2022, respectively, but were excluded from the computation of diluted net loss per share for each respective period due to the anti-dilutive effect on net loss per share.

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Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations.

We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above.

Title and risk of loss generally pass to our customers upon shipment. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from Customers.

Disaggregation of Revenue

The following table presents our approximate revenues disaggregated by revenue source.

Product and Service Revenue

	For the three months ended September 30, (Unaudited)
	2023		2022
SteraMist Product	$	953,000	$	1,435,000
Service and Training		517,000		325,000
Total	$	1,470,000	$	1,760,000

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Revenue by Geographic Region

	For the three months ended September 30, (Unaudited)
	2023		2022
United States	$	1,271,000	$	1,632,000
International		199,000		128,000
Total	$	1,470,000	$	1,760,000

Product and Service Revenue

	For the nine months ended September 30, (Unaudited)
	2023		2022
SteraMist Product	$	4,501,000	$	4,448,000
Service and Training		1,326,000		1,079,000
Total	$	5,827,000	$	5,527,000

Revenue by Geographic Region

	For the nine months ended September 30, (Unaudited)
	2023		2022
United States	$	5,001,000	$	4,336,000
International		826,000		1,191,000
Total	$	5,827,000	$	5,527,000

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.

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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, 2023, and December 31, 2022, we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Arrangements with Multiple Performance Obligations

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

Significant Judgments

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

Equity Compensation Expense

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

The valuation methodology used to determine the fair value of options and warrants issued as compensation during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The expected term of the Company’s warrants has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” warrants. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its common stock, par value $0.01 (the “Common Stock”) and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment.

On July 7, 2017, our shareholders approved the Company’s Amended and Restated 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 2,000,000 shares of Common Stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of Common Stock for numerous reasons, including, but not limited to, shares of Common Stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award, and awards under the 2016 Plan are expressly conditioned upon such agreements. For the nine months ended September 30, 2023 and 2022, we issued 60,000 and 51,750 shares of Common Stock, respectively, out of the 2016 Plan.

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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, 2023 and 2022.

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, 2023 were approximately $66,000 and $405,000, respectively. Advertising and promotional expenses included in selling expenses for the three and nine months ended September 30, 2022 were approximately $102,000 and $454,000, 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, 2023, research and development expenses were approximately $76,000 and $221,000, respectively. For the three and nine months ended September 30, 2022, research and development expenses were approximately $118,000 and $255,000, 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.

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Recent Accounting Pronouncements

In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020. This ASU also enhances the disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the ASU amends the guidance on vintage disclosures to require entities to disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. We adopted the ASU prospectively on January 1, 2023. This ASU did not have a material impact on our consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. We adopted this ASU prospectively on January 1, 2023. This ASU did not have a material impact on our consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and improves the disclosures for convertible instruments and related earnings per share guidance. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance. For public entities that qualify as a filer with the SEC, excluding entities eligible to be smaller reporting companies, ASU 2020-06 is effective for fiscal annual periods beginning after December 15, 2021, including interim periods within those fiscal years. For nonpublic entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption was permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. ASU 2020-06 must be adopted as of the beginning of a company’s annual fiscal year. ASU 2020-06 may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. The Company adopted ASU 2020-06 on January 1, 2021. The adoption did not have an impact on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”), which provides new authoritative guidance with respect to the measurement of credit losses on financial instruments. This update changes the impairment model for most financial assets and certain other instruments by introducing a current expected credit loss (“CECL”) model. The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company adopted ASU 2016-13 on January 1, 2023. The adoption did not have an impact on our condensed consolidated financial statements.

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NOTE 3. INVENTORIES

Inventories consist of the following at:

	September 30, 2023 (Unaudited)			December 31, 2022
Finished Goods	$	3,841,231		$	3,929,000
Raw Materials		735,413			661,999
Inventory Reserve		(95,000	)		(95,000	)
Total	$	4,481,644		$	4,495,999

NOTE 4. VENDOR DEPOSITS

At September 30, 2023 and December 31, 2022, we maintained vendor deposits of $89,860 and $447,052, respectively, for open purchase orders for inventory.

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at:

	September 30, 2023 (Unaudited)		December 31, 2022
Furniture and fixtures	$	364,819	$	364,819
Equipment		2,269,185		2,236,510
Vehicles		66,170		60,703
Computer and software		302,791		246,638
Leasehold improvements		393,381		393,381
Tenant Improvement Allowance		405,000		405,000
Total cost of property and equipment		3,801,346		3,707,051
Less: Accumulated depreciation		2,663,059		2,371,720
Property and Equipment, net	$	1,138,287	$	1,335,331

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For the three and nine months ended September 30, 2023, depreciation was $90,156 and $261,945, respectively for the three and nine months ended September 30, 2022, depreciation was $78,991 and $237,164, respectively for the three and nine months ended September 30, 2023 and 2022, 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.

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 $3,773 and $11,312 for the three and nine months ended September 30, 2023, respectively. Amortization expense was $3,628 and $10,498 for the three and nine months ended September 30, 2022, respectively.

Definite life intangible assets consist of the following:

	September 30, 2023 (Unaudited)		December 31, 2022
Intellectual Property and Patents	$	3,108,063	$	3,108,063
Less: Accumulated Amortization		2,894,212		2,882,892
Patents, net	$	213,851	$	225,171

Indefinite life intangible assets consist of the following:

Trademarks		800,565		800,565

Total Intangible Assets, net	$	1,014,416	$	1,025,736

Approximate future amortization is as follows:

Year Ended:	Amount

October 1 – December 31, 2023	$	3,750
December 31, 2024		15,000
December 31, 2025		15,000
December 31, 2026		15,000
December 31, 2027		15,000
Thereafter		150,101
Total	$	213,851

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NOTE 7. LEASES

In April 2018, we entered into a 10-year lease agreement for a new 9,000-square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement commenced in December 2018 when the property was ready for occupancy. The agreement provided for annual rent of $143,460, an escalation clause that increases the rent 3% year over year, a landlord tenant improvement allowance of $405,000 and additional landlord work as discussed in the lease agreement. We took occupancy of the property on December 17, 2018 and the lease was amended in March 2019 to provide for a 4-month rent holiday and a commencement date of April 1, 2019. A 7% discount rate was determined using our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

The balances for our operating lease where we are the lessee are presented as follows within our condensed consolidated balance sheet:

Operating leases:	September 30, 2023 (Unaudited)		December 31, 2022
Assets:
Operating lease right-of-use asset	$	483,884	$	528,996
Liabilities:
Current Portion of Long-Term Operating Lease	$	112,460	$	100,282
Long-Term Operating Lease, Net of Current Portion		672,510		761,132
Total Right of Use Liability	$	784,970	$	861,414

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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, 2023

(Unaudited)

For the Three Months Ended September 30, 2022

(Unaudited)

Operating lease expense

39,329

For the Nine Months Ended September 30, 2023

(Unaudited)

For the Nine Months Ended September 30, 2022

(Unaudited)

Operating lease expense

117,986

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

	September 30, 2023 (Unaudited)			December 31, 2022
Weighted-average remaining lease term:
Operating leases	5.25 years			6.00 years
Discount rate:
Operating leases		7.00	%		7.00	%

Supplemental cash flow information related to leases where we are the lessee is as follows:

For the Three Months Ended September 30, 2023

(Unaudited)

For the Three Months Ended September 30, 2022

(Unaudited)

Cash paid for amounts included in the measurement of lease liabilities:

40,366

39,191

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For the Nine Months Ended September 30, 2023

(Unaudited)

For the Nine Months Ended September 30, 2022

(Unaudited)

Cash paid for amounts included in the measurement of lease liabilities:

119,923

116,430

As of September 30, 2023, the maturities of our operating lease liability are as follows:

Year Ended:	Operating Lease
October 1 – December 31, 2023	$	40,366
December 31, 2024		165,098
December 31, 2025		170,051
December 31, 2026		175,153
December 31, 2027		180,408
Thereafter		219,571
Total minimum lease payments		950,647
Less: Interest		165,677
Imputed value of lease obligations		784,970
Less: Current portion		112,460
Long-term portion of lease obligations	$	672,510

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, 2023			December 31,
	(Unaudited)			2022
Capitalized Software Development Costs	$	125,704		$	125,704
Less: Accumulated Amortization		(125,704	)		(125,704	)
Capitalized Software Development Costs - net	$	-		$	-

Amortization expense for the three and nine months ended September 30, 2023, was $0. Amortization expense for the three and nine months ended September 30, 2022, was $0 and $10,475, respectively.

NOTE 9. CLOUD COMPUTING SERVICE CONTRACT

In May 2020, we entered into a cloud computing service contract with a vendor. The contract provides for annual payments in the amount of $30,409 and has a term of 5 years. The annual contract payments are capitalized as a prepaid expense and amortized over a twelve-month period.

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We have incurred implementation costs of $66,857 in connection with the cloud computing service contract which have been capitalized in prepaid expenses and other assets as of September 30, 2023. In accordance with ASU No. 2018-15, such implementation costs are being amortized over the remaining contract terms beginning January 1, 2021, which was when the cloud-based service contract was placed in service. Amortization expense for the three and nine months ended September 30, 2023 was $3,766 and $11,297, respectively. Amortization expense for the three and nine months ended September 30, 2022 was $3,766 and $11,297, respectively.

NOTE 10. SHAREHOLDERS’ EQUITY

Our Board of Directors (the “Board”) may, without further action by our shareholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of such preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up by us before any payment is made to the holders of our Common Stock. Furthermore, the Board could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our Common Stock.

Convertible Series A Preferred Stock

Our authorized Convertible Series A Preferred Stock, $0.01 par value, consists of 1,000,000 shares. At September 30, 2023 and December 31, 2022, there were 63,750 shares issued and outstanding. The Convertible Series A Preferred Stock is convertible at the rate of one share of Common Stock for one share of Convertible Series A Preferred Stock.

Convertible Series B Preferred Stock

Our authorized Convertible Series B Preferred Stock, $1,000 stated value, 7.5% cumulative dividend, consists of 4,000 shares. At September 30, 2023 and December 31, 2022, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our Common Stock.

Common Stock

In January 2022, we issued 51,750 shares of Common Stock valued at approximately $54,000 to members of our Board pursuant to our equity plan (see Note 12).

In January 2023, we issued 60,000 shares of Common Stock valued at approximately $51,000 to members of our Board pursuant to our equity plan (see Note 12).

Stock Options

In January 2022, we issued options to purchase 270,000 shares of Common Stock to Officers at an exercise price of $1.12 per share pursuant to an employment agreement. The options were valued at $297,766 and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options received by the Officers with the following assumptions: volatility, 156%; expected dividend yield, 0%; risk free interest rate, 1.65%; and an expected life of 5 years. The grant date fair value of each share of Common Stock underlying the options was $1.03.

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In January 2023, we issued options to purchase 175,000 shares of Common Stock to Officers at an exercise price of $0.85 per share pursuant to an employment agreement. The options were valued at $132,361 and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options received by Officers with the following assumptions: volatility, 139%; expected dividend yield, 0%; risk free interest rate, 3.59%; and an expected life of 5 years. The grant date fair value of each share of Common Stock underlying the options was $0.76.

In January 2023, we issued an option to purchase 35,000 shares of Common Stock to an employee at an exercise price of $0.85 per share pursuant to an employment agreement. The option was valued at $26,472 and have a contractual term of 10 years. We utilized the Black-Scholes model to fair value the options received by our Chief Executive Officer with the following assumptions: volatility, 139%; expected dividend yield, 0%; risk free interest rate, 3.59%; and an expected life of 5 years. The grant date fair value of each share of Common Stock underlying the options was $0.76.

The following table summarizes stock options outstanding as of September 30, 2023 and December 31, 2022:

	September 30, 2023 (Unaudited)					December 31, 2022
	Number of Options			Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding, beginning of period		413,000		$	1.65		143,000	$	2.66
Granted		210,000			0.85		270,000		1.12
Exercised		-			-		-		-
Expired		(12,500	)		0.96		-		-
Outstanding, end of period		610,500		$	1.10		413,000	$	1.65

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Options outstanding and exercisable by price range as of September 30, 2023 were as follows:

Outstanding Options				Average Weighted		Exercisable Options
Range		Number		Remaining Contractual Life in Years		Number		Weighted Average Exercise Price
$	0.80		27,500		1.60		27,500	$	0.80
$	0.85		210,000		9.33		210,000	$	0.85
$	0.88		31,250		0.51		31,250	$	0.88
$	0.96		12,500		0.52		12,500	$	0.96
$	1.12		270,000		8.56		270,000	$	1.12
$	1.93		10,500		3.56		10,500	$	1.93
$	2.16		5,000		1.50		5,000	$	2.16
$	4.40		12,500		2.55		12,500	$	4.40
$	7.06		31,250		2.00		31,250	$	7.06

			610,500		7.34		610,500	$	1.10

Stock Warrants

The following table summarizes the outstanding common stock warrants as of September 30, 2023 and December 31, 2022:

	September 30, 2023 (Unaudited)						December 31, 2022
	(Unaudited)			Weighted Average Exercise Price			Number of Warrants			Weighted Average Exercise Price
Outstanding, beginning of period		2,792,335		$	2.25			3,381,021		$	2.22
Granted		-			-			-			-
Exercised		-			-			(31,250	)		(0.21	)
Expired		(20,238	)		(1.73	)		(557,436	)		(2.23	)
Outstanding, end of period		2,772,097		$	2.25			2,792,335		$	2.25

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Warrants outstanding and exercisable by price range as of September 30, 2023 were as follows:

Outstanding Warrants				Average Weighted		Exercisable Warrants
Exercise Price		Number		Remaining Contractual Life in Years		Number		Weighted Average Exercise Price
$	0.64		31,250		10.15		31,250	$	0.64
$	0.80		125,000		10.33		125,000	$	0.80
$	0.96		442,709		9.14		442,709	$	0.96
$	1.12		6,250		0.65		6,250	$	1.12
$	1.20		156,250		1.34		156,250	$	1.20
$	1.68		1,434,721		3.00		1,434,721	$	1.68
$	2.18		172,167		3.00		172,167	$	2.18
$	4.00		28,750		6.57		28,750	$	4.00
$	6.95		375,000		7.01		375,000	$	6.95
			2,772,097		5.12		2,772,097	$	2.25

There were no unvested warrants outstanding as of September 30, 2023.

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, 2022 and December 31, 2022, there were no claims against us for product liability.

COVID-19 Pandemic

The COVID-19 pandemic has temporarily 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. As the impact of the COVID-19 pandemic began to subside and economic activities gradually return to normal in 2022, customers reallocated their resources elsewhere and reduced their spending on disinfection products, which resulted in lower demand for our products. It is difficult to predict how COVID-19 pandemic will affect the Company’s financial performance throughout fiscal year 2023, as the global economy gradually reopens, customers adjust and change their operations, and the Company implements new marketing and sales strategies in response.

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NOTE 12. CONTRACTS AND AGREEMENTS

Director Compensation

In January 2023, we increased the annual fee to the non-employee members of our Board to $48,000, to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee was increased to $54,600, also to be paid in cash on a quarterly basis. Non-employee Director compensation also includes the annual issuance of our Common Stock.

For the nine months ended September 30, 2022, we issued an aggregate of 51,750 shares of Common Stock that were valued at approximately $54,000 to members of our Board.

For the nine months ended September 30, 2023, we issued an aggregate of 60,000 shares of Common Stock that were valued at approximately $51,000 to members of our Board.

Manufacturing Agreement

In June 2020, we entered into a manufacturing agreement with Planet Innovation Products, Pty Ltd (“PI”). The agreement does not provide for any minimum purchase commitments and is for a term of three years. The agreement also provides for a warranty against product defects.

Cloud Computing Service Contract

In May 2020, we entered into an agreement with a vendor for a cloud computing service contract. The contract provides for annual payments in the amount of $30,409 and has a term of 5 years. Approximate minimum future payments under the contract are as follows:

Year Ended:	Amount

July 1 - December 31, 2023	$	-
December 31, 2024		30,000
December 31, 2025		-
Total	$	30,000

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NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following at:

	September 30, 2023 (Unaudited)			December 31, 2022
Commissions	$	401,258		$	442,805
Payroll and related costs		159,926			136,000
Director fees		37,650			34,650
Sales Tax Payable		(926	)		(1,351	)
Accrued warranty (Note 14)		30,000			68,000
Other accrued expenses		46,459			48,599
Total	$	674,367		$	728,703

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, 2023 (Unaudited)			December 31, 2022
Beginning accrued warranty costs	$	68,000		$	68,000
Provision for warranty expense		8,615			24,158
Settlement of warranty claims		(46,615	)		(24,158	)
Ending accrued warranty costs	$	30,000		$	68,000

NOTE 15. INCOME TAXES

For the three months ended September 30, 2023 and 2022, our provision for income tax was $0. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized in accordance with FASB ASC Topic 740, Income Taxes. As of September 30, 2023 and December 31, 2022, we recorded a valuation allowance of $5,941,000 and $5,332,000, respectively for the portion of the deferred tax assets that we do not expect to be realized. Management believes that based on the available information, it is more likely than not that the remaining U.S. deferred tax assets will not be realized, such that a full of 100% valuation allowance is required against U.S. deferred tax assets. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

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NOTE 16. CUSTOMER CONCENTRATION

Three customers accounted for 55% of net revenue for the three months ended September 30, 2023. One customer accounted for 20% of net revenue for the three months ended September 30, 2022.

Three customers accounted for 32% of our revenue for the nine months ended September 30, 2023.

As of September 30, 2023 and December 31, 2022, one customer accounted for 16% and 14% of our gross accounts receivable, respectively.

NOTE 17. SUBSEQUENT EVENTS

On November 7, 2023, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (collectively, the “Investors”) pursuant to which we agreed to sell and issue to the Investors in a private placement transaction (the “Private Placement”) in one or more closings up to an aggregate principal amount of $5,000,000 of Convertible Notes (the “Notes”). As of November 7, 2023, we issued and sold an aggregate of $2,600,000 of Notes to certain Investors pursuant to the SPA.

The gross proceeds from the transaction are approximately $2,600,000, before deducting the Placement Agent’s fees and other estimated offering expenses. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. The initial closing of the Private Placement occurred on November 7, 2023.

The Notes are due on the fifth anniversary of the issuance date of the Notes and bear simple interest at a rate of 12% per annum, payable in equal monthly installments. The Notes are convertible into shares of our Common Stock, at the option of the holder, at a conversion price of $1.25 per share, which shall not exceed $1.55 per share. In addition, we can require Investors to convert the Notes at the then current conversion price at any time after 90 days from the issue date if the Common Stock has a closing bid price of $1.55 per share or higher on any twenty (20) days within a thirty (30) day period of consecutive trading days, or if a “fundamental change” occurs (as defined in the SPA). The Notes are unsecured and senior to other indebtedness subject to certain exceptions.

The offer and sale of the Notes pursuant to the SPA was not registered under the Securities Act of 1933, as amended (the “Securities Act”), and was exempt from registration pursuant to Section 4(a)(2) thereof and Rule 506(b) promulgated thereunder.

The SPA included customary representations, warranties and agreements by us, customary conditions to closing, indemnification obligations of the Company, certain other obligations of the parties and termination provisions.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) 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. 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 involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Forward-looking statements are not guaranteeing future performance and the TOMI Environmental Solutions, Inc. (the “Company,” “TOMI,” “we,” and “our”) 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, 2022, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2023 (the “Annual Report”) 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 MD&A should be read in conjunction with the Annual Report filed with 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 the third quarter of 2023, we continued to expand our sales channels and business development initiatives, collaborate with key customers, and diversified our product line to support our expanding customer base and the related utilization of our SteraMist technology. Our quarter-over-quarter revenue declined as a result of the timing of customer orders and the related revenue recognition in the current year period.

Subsequent to the close of the third quarter of 2023, we agreed to sell and issue convertible notes in a private placement in one or more closings up to an aggregate principal amount of $5,000,000. As of November 7, 2023, we sold and issued an aggregate of $2,600,000 to a group of institutional and accredited investors, most of whom are new investors in the company’s securities. The Notes contain no restrictive covenants or restrictions that may impose burdens or limitation on our operations. We intend to use the net proceeds from this offering for working capital, expansion of our existing Frederick facility and other general corporate purposes, including expanding our sales channels through the addition of distributors, outside sale representatives, internal sales staff, and external consultants.

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During the third quarter of 2023, we partnered with Colcom, Inc. to offer our SteraMist iHP products as part of Colcom’s life sciences and healthcare portfolio of products. With a combined 50 years of technical sales expertise, Colcom, Inc. joined forces with us under the leadership of Bridget Collins. Established in 1970, Colcom, Inc. is a trusted supplier of high-quality clinical and laboratory equipment. Given its established customer base and extensive expertise in the decontamination industry, this partnership will be mutually advantageous.

In August 2023, we entered into a business development consulting agreement with DAR, Inc., a company specializing in food safety and food processing spaces. We anticipate the agreement will better position us in providing education to the food safety markets through the education of the advantages of the SteraMist platform of products and expand our sales channels as well as our customer bases on the food safety markets.

In September 2023, we entered into a sales representative agreement with Universal Disinfection to better facilitate growth in the European region in the commercial, aviation and life science markets.

In November 2023, we entered into a agreement with Patty Olinger the Founder of BEAMS, LLC who specializes in Public Health Preparedness. Patty is also a Director of Frontline Foundation dedicated to protecting American citizens from bioterror threats. In the past she was Assistant Vice President of the Office of Research Administration, and Executive Director of Environmental Health and Safety Office of Emory University Hospital System and most recently the Executive Director of Global Biorisk Advisory Council, a division of ISSA. Patty will assist to strengthen and expand the TOMI SteraMist Network and increase business development in the commercial market. Patty Olinger brings over 20 years’ experience establishing executive strategic vision and direction of large institutions and companies spanning multiple industries, including higher education, not-for-profit, healthcare, consultancy, hospitality, and pharmaceutical sectors.

Thus far in 2023, we have brought on and onboarded 8 distributors and 11 sales representatives which has expanded our presence domestically and on an international basis. We anticipate the increased bandwidth of our internal and external sales channels will have a positive impact on our revenue as we close out our current year and heading into 2024.

Our revenue for the nine months ended September 2023 was $5,827,000, which represents 5% growth over what we reported in the same prior year period.

For the three months ended September 30, 2023, our iHP service revenue was $517,000, up 59% from the same prior year period. Our iHP service revenue for the nine months ended September 30, 2023 was $1,326,000, representing 16% growth when compared to the same prior year period. The increase in revenue was due to higher demand for iHP service revenue.

In August of 2023, Pfizer Rocky Mount engaged our iHP service team to conduct emergency decontamination within their facility, which suffered substantial damage due to a tornado. Pfizer Rocky Mount has been a long-term, loyal client of TOMI, having commenced their utilization of SteraMist iHP Corporate Service in 2014. Since then, TOMI has been performing decontamination service twice a year during their facility's routine scheduled shutdowns and called on as necessary throughout the years.

As the market shifts to fully automatic disinfection and decontamination solutions, TOMI remains actively engaged in marketing and submitting bids for Custom Engineered Systems (“CES”) projects. We are also diligently working with existing outstanding potential purchasers while simultaneously building a robust pipeline for these long-term installations. Further, TOMI has expanded our bandwidth to meet the increasing demands for the product line, which includes the SteraMist Integration System for enclosures and have successfully navigated the challenges posed by the global supply chain issues.

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During the third quarter of 2023, we delivered a three (3) applicator CES system to Ragon Institute of MGH, MIT and Harvard for implementation in their research and clinical lab located in Cambridge, MA.

We continue to collaborate with Cellares to integrate our patented technology into the innovative Cell Shuttle, a cutting-edge cell therapy manufacturing solution designed and produced by Cellares. The selection of SteraMist iHP technology brings unparalleled decontamination capabilities, thanks to its small micron particles, which provide distinct advantages in terms of efficacy and safety compared to other commercially available decontamination methods. This strategic integration enhances the overall performance and reliability of the Cell Shuttle, ensuring comprehensive and efficient decontamination processes.

To date, we have received 15 orders for CES systems. With the successful completion of each project, our iHP technology is rapidly gaining popularity as the preferred decontamination solution for pharmaceutical and biotech companies. Further, as we continue to install our technology in new CES projects, the product line evolves into a comprehensive turnkey solution.

Indeed, the timing is favorable as the industry is experiencing a shift towards modular cleanroom requirements. The adaptability and efficiency offered by our iHP technology align perfectly with the changing needs of cleanroom setups. This trend allows us to capitalize on the increasing demand for flexible and scalable cleanroom solutions, further enhancing the relevance and value of our products within the industry.

We believe our growing portfolio of CES systems will give us a competitive edge in the Life Sciences market segment improving our brand recognition. This should create new business and sales opportunities for us. In addition, after our installed CES projects are fully qualified and established for use, and our portfolio grows, we anticipate this will have a positive impact on our long-term recurring BIT solution sales thus providing the potential to enhance our operating margins, further strengthening our position in the industry and supporting sustainable growth.

In the third quarter of 2023, we introduced two new products, the SteraMist

Hybrid and SteraMist Transport, to support its ongoing commitment to providing superior disinfection decontamination solutions for our growing customer base.

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

We remained active in our marketing initiatives and attended and presented our SteraMist brand of products at the following tradeshows: The Experience Convention and Tradeshow, National Cancer Institute/Frederick Lab – Tech Showcase, NCAB AALAS Seminar, OR Manager, EMS World and Vizient Connections Summit.

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Product Development

Our recent products developed and launched are as follows:

SteraMist Engineering continues to make strides collaborating with key manufactures of cleanroom technology and equipment developing a turnkey seamless decontamination integration to chambers, cabinets, passthroughs, isolators, cage washers, heat sterilizers, hot cells and more. TOMI begins this endeavor with a project management, turnkey modular solution, and process design consulting firm that we have partnered with in one of our previous CES projects.

The SteraMist Hybrid, an integral component of the SteraMist Environment System, SteraMist Hybrid is designed with capabilities to communicate with a facility. The system is strategically positioned in a centralized location of the facility through a docking station and features our newly designed permanently mounted stainless steel applicators.

Recently, TOMI successfully installed the first SteraMist Hybrid at Indigo Pharmaceutical, Inc.’s existing research facility, which selected the SteraMist Hybrid because it met the client’s strict delivery timeline while adhering to the facility's budget constraints. We remain in specification discussions with Indigo for a Custom Engineered System for a future site dedicated to injectibles.

The SteraMist Transport has seen positive reception of its SteraMist Transport unit, an all-in-one dual voltage fogging product designed to treat a wide variety of vehicle sizes with an application time of only 20 minutes per 1,000 cubic foot. The initial batch of this innovative product is currently in a soft launch phase and has been sold this quarter for live practical assessment with an existing international customer.

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

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

TOMI recently launched its fourth generation SteraMist Environment System. The system will now be 24 volts, allowing for universal outlet usage and convert even more of the hydrogen peroxide BIT Solution to hydroxyl radicals thus lowering H₂O₂ PPM levels allowing for faster turnaround time. In addition, the unit will have eight (8) outputs where four (4) are dedicated to our regular process of constant or pulse Injection, Dwell, and Aeration along with a light beacon status bar and four (4) are programmable to meet the customer needs for any external equipment they may desire to work with the system. This system is currently on the market, has been implemented by customers, and is receiving praise for its further developments.

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Our SteraMist^® BIT^™ solution product line is currently made up of a 32-ounce bottle for the SteraPak, a ten (10) liter, five (5) gallon, 55-gallon drum for our custom built-ins and our traditional one (1) gallon bottle. This brings the BIT Solution product line to a total of five (5) options provided to our customers, which will benefit our razor/razor-blade business model.

We expect these new products and service introductions will positively impact our net sales, cost of sales and operating expenses during this fiscal year.

Overview

The Company is a global bacteria decontamination and infectious disease control company, providing environmental solutions for indoor air and 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 by-product from our decontamination process is oxygen and humidity. Our solution is organic and is listed in Canada as a sustainably green product with no or very little carbon footprint. Most of our competitors in the disinfection space leave significant by-products 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 Environmental Protection Agency (“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 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 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. This is a science that the world needs to follow. This simple and effective process-takes 7.8% hydrogen peroxide and under pressure pushes the liquid through a nozzle in which the stream is met by an atmospheric cold plasma arc which converts the hydrogen peroxide into a plasma created hydroxyl radical with 6-log and greater kill. This is a duplication of what occurs in atmospheric chemistry and the only by-product is oxygen and humidity. The world needs to thank Titan Defense, DARPA and of course nature for the science behind our technology!

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. On June 2, 2022, SteraMist was included on the EPA’s List Q for the use of its BIT solution to help fight the spread of rare or novel viruses such as Monkeypox virus, SARS-CoV-2 and its variants that cause COVID-19.

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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 forty (40) other countries that receive our products.

Markets

Our SteraMist^® products are designed to address a wide spectrum of industries. 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 SteraPak, among other product lines, will allow us to progress further into the market share, specifically for our Life Science, Hospital-HealthCare, TSN, and Commercial divisions. Additionally, we offer integrated facility equipment installations known as 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.

A brief overview of the target industries is presented below:

Life Sciences

The SteraMist® Environment System, CES, the SteraMist^® Select Surface Unit, Select Surface Unit (Plus), SteraMist Transport System, 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 and manufactured upon order that can take months to design, procure, assemble, and install. The continuous use of the systems or purchasing of BIT Solution occurs once the system has been commissioned and validated. We expect installations to have a positive material impact to our results in 2023 and 2024.

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TOMI’s iHP service department continues to grow with new and existing customers in several divisions. In the life science sector, TOMI’s iHP service department has kept its relationships with large pharmaceuticals, such as Pfizer and ThermoFisher, as well as adding several smaller life science companies, like ForDoz and Lonza, to a regular decontamination schedule. In addition to these productions’ facilities, TOMI has treated four (4) BSL-3 research laboratories in all parts of the country within the last two months (UNM/UNC/Bioqual/Scripps). The food safety department steadily gains traction as several plant/produce companies have expressed interest as new and emerging bacteria, toxins, and fungi hamper production. Finally, the commercial division is a stable source of revenue for TOMI and its service network who are routinely treating public facilities after man-made and natural disasters.

For 2023 and beyond, TOMI expects growth in SteraMist CES bids and the manufacturing and implementation of these fully automated decontamination systems. The installed CES will also result in increased solution sales for the life sciences division, as the CES’s are used at regular intervals. The first CES system was completed in 2016 for Dana Farber Cancer Institute, as Dana Farber was designing a new vivarium and had the opportunity to integrate several new technologies to advance overall efficiency, quality, and design. One such technology was the use of our iHP decontamination. TOMI’s CES is an automated system that can be fully integrated into any company’s infrastructure, enabling decontamination, without burdening manual use and with the collaboration of current premier customers and partners, TOMI since then has further perfected the system. The CES eliminates issues such as human error, guarantees accuracy that is unmatched by competitors, and decreases a client’s labor cost and downtime, and in a short time the CES may make up a majority of TOMI’s revenue. Since its launch, SteraMist’s CES has become a leading solution to growing customer demands.

Hospital-Healthcare

The SteraMist^® line of products, specifically the SteraMist^® Surface Unit, SteraMist^® Total Disinfection Cart and the SteraMist Transport System, 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 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, including pandemic preparedness.

TOMI anticipates expansion of current HealthCare customers to follow the model of Gila River Health Care. Gila River is one of TOMI’s largest Healthcare customers owning a total of fourteen (14) Surface Units and eight (8) SteraPak’s. The Gila River Indian Community (GRIC) is an Indian reservation in Arizona that is made up of seven (7) districts and is home to the Akimel O’oodham (Pima) and the Pee-Posh (Maricopa) tribes. Gila River Health Care, a premier Native American healthcare system, provides high quality patient care, delivering a wide variety of medical services such as general surgery, dental, and emergency medicine, as well as associated health services such as pharmacy and laboratory operations, skilled nursing, rehabilitation, and medical transport.

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Food Safety

New challenges to food safety will continue to emerge, largely due to changes in our food production, food supply, storage complexities, transportation delays, including more imported foods. Changes in the environment leads to food contamination, new and emergent bacteria, toxins, and antimicrobial resistance. Food Safety presents an opportunity for significant growth for TOMI with continued product research and compliance testing.

The food safety industry in North America is under closer scrutiny, with the implementation and enforcement of new and established guidelines. SteraMist® aerosolizing cold plasma technology is an effective decontaminant in the food safety industry. SteraMist can assist in 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. Additionally, the current geopolitical aspects of farming and ranching has created an extra layer of concern for the protection of our global limited food supply, as well as for food transportation.

TOMI continues to work with premium companies in testing and validating SteraMist® technology in the food safety and seed industries. In 2022, we made progress in enhancing brand awareness in the food safety industry by promoting and marketing this division. We are receiving an increase in inquiries within the food safety division directly from these efforts.

Every day there are news articles around the world pertaining to the contamination of food supply. Unsafe food containing harmful bacteria, viruses, parasites, or chemical substances causes more than 200 diseases, ranging from diarrhea to cancers. It also creates a vicious cycle of disease and malnutrition, particularly affecting infants, young children, elderly and the sick. With the global population explosion, severe worldwide avian flu pandemics resulting in the unnecessary culling of bird flocks, unusually high number of accidents resulting in the destruction of dozens of storages, packing and processing food plants, in the U.S. alone, we anticipate an increase in the demand for a mechanical way to disinfect our food supply. TOMI has, in cooperation with the USDA, demonstrated that our technology offers a consistent, quick, and effective alternative to the traditional, 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 each of these avenues. With the continued testing and need for the market, coupled with our new .35% label, we believe pursuing these opportunities should be successful. In addition, our solution and process are environmentally friendly, in that the by-products of SteraMist are 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 chemical residue on any surface, therefore we have a very low carbon footprint, if any.

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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 “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 is starting to pick up due to employees returning to work and the increasing number of contagious variants becoming more of a world concern. Our 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 which will always focus on emerging pathogens.

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

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.

The Surface Unit and SteraPak® are popular products 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 our Surface Unit, along with the SteraPak®, will generate customer interest and create sales opportunities. Currently, our customers are purchasing our products in all of our divisions to provide quick disinfection throughout various sites in their facilities.

Business Highlights and Recent Events

Revenues:

Total revenue for the nine months ended September 30, 2023, and 2022, was $5,827,000 and $5,527,000, respectively, representing an increase of $300,000, or 5% compared to the same prior year period. The increase in revenue was attributable to higher SteraMist product and service revenues.

We believe that we possess the best technologies in the world in the disinfection and decontamination space. The COVID-19 pandemic along with the needs of the pharmaceutical and vivarium space has provided us with to the opportunity and experience to implement a clear strategy to develop and manufacture additional products to add to our portfolio. In addition, we continue to move our BIT technology as a standard in disinfection and decontamination globally. This should lead to increased market share, profitability, and capability strength.

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Our products are an environmentally friendly solution, and our processes address the concerns of sustainability. Customers are requesting and discussing the positive results of our product and the environmentally friendly results compared to the caustic and environmentally unfriendly results of many other disinfectants.

SteraMist has established a successful track record in fighting pandemics and outbreaks and implementing SteraMist for emergency preparedness is vital. The COVID-19 pandemic took the world by surprise, and history has shown that other pandemics and viruses are likely to follow. Using a proven and trusted disinfectant for emergency outbreaks and daily for preventative maintenance, such as SteraMist, can alleviate the threat of infections from spreading and could stop a possible outbreak.

2023 Events:

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

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

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

On September 13, 2023, we announced the expansion of our distribution channels with Avantor ® (NYSE: AVTR), a Fortune 500 company and a leading supplier of mission-critical products and services.

On September 13, 2023, we announced that we partnered with Colcom, Inc. to offer SteraMist iHP products as part of Colcom’s life sciences and healthcare portfolio of products.

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

Research Studies and Publications:

TOMI continues to be active in the global market, using registrations to expand sales opportunities. Currently, TOMI is in the registration process for India, and renewal to meet new requirements in the Philippines. Both markets offer excellent potential due to interest in the TOMI suite of disinfection and decontamination solutions.

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In the third quarter of 2023, we completed of a study funded by the USDA and the NIFA which demonstrated SteraMist iHP as an effective treatment of deformed wing virus (DWV) contaminated hive substrates.

The study aimed to determine if the use of cold plasma ionized hydrogen peroxide (iHP) can reduce the infectivity of DWV to naïve honey bee pupae. Deformed wing virus (DWV) is a widespread pathogen of Apis mellifera (Western and European) honey bees and contributes to the collapse of established honey bee colonies. Widespread colony collapse could result in a significant decline in the diversity of fresh produce and substantially impact human nutrition on a global scale. Honey bees become infected by interacting with DWV-contaminated beeswax in the hive and it is of critical importance for the USDA and NIFA to identify a non-toxic, quick, and effective disinfection system capable of deactivating latent DWV on hive substrates.

The study utilized a SteraMist Environment System along with TOMI’s Binary Ionization Technology (BIT^TM) solution which was passed through a nozzle that generated an ultra-fine 0.05 – 3-micron particle mist. The mist was then ionized by cold plasma generated between two pin electrodes for a 15-minute application time on aliquots or sub-sample of a larger whole of phosphate-buffered saline solution either with or without deformed wing virus (DWV). The aliquots were then injected into naïve honey bee pupae, which were allowed to progress for three days prior to DWV content analysis.

The findings confirmed the efficacy of iHP as a fast and effective method for pathogen decontamination of deformed wing virus in honey bee substrate. The development of infection in honey bees injected with DWV-positive aliquots treated with ionized hydrogen peroxide (iHP) was statistically significantly reduced compared to the infection levels in honey bees injected with the DWV-positive aliquots without SteraMist treatment. Additionally, iHP treatment was found to achieve higher levels of DWV inactivation at a substantially shorter treatment duration when compared to ethylene oxide treatment or gamma irradiation. SteraMist’s non-toxic properties provide further environmental advantages as ethylene oxide and gamma irradiation have potential risks, including toxicity to users and harmful byproducts. Treatment of DWV-contaminated hive substrates with iHP, even with honeybees present, may be an effective way to decrease the impacts of DWV infection on honey bees.

TOMI is in the annual process of self-audit, where all SOPs are reviewed and updated as needed, and all compliments and requests for changes and new equipment are evaluated.

TOMI has successfully completed a second 24-month storage stability, this one to meet EPA requirements (first one was for EU BPR submission and had different methods/requirements). With the patented 7.8% product, Binary Ionization Technology Solution is safe to ship by air and store under normal ambient conditions around the world. The study will be submitted for EPA review, and expiration date extended going forward upon the EPA’s approval.

The EPA has registered our 0.35% hydrogen peroxide product (90150-3) for the use in greenhouses, pre harvests and post harvests. TOMI is conducting internal studies with the 0.35% on common pathogens in the food safety market to enhance protocols. TOMI has begun the process of registering the 0.35% BIT Solution with individual states in the United States in preparation of growth in the cannabis market.

We continue to pursue acceptance of the additional 1% hydrogen peroxide label with the EPA for direct food application. While TOMI continues to pursue the market for these two EPA registrations, we have partnered and conducted other food safety trials which have shown success in the market.

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Recent SteraMist food safety customers and partners are conducting further studies to prove SteraMist in the industry. Soli Organic Inc., one of the nation’s largest commercial indoor organic growing companies, obtained multiple SteraMist systems to protect their controlled indoor growing food process from costly fungus, Botrytis. The combination of all SteraMist systems purchased will be used daily, on a continuous cycle, to disinfect everything from seed trays that the soil and plants sit in to the plants themselves.

SteraMist is also working with a few partners in the cannabis industry. Enviro-Mist has been testing cannabis flower incubated with Aspergillus flavus, Aspergillus fumigatus, Aspergillus niger, Aspergillus terreus, Escherichia Coli, Shigella Spp, Salmonella, Staphylococcus aureus, yeasts and molds and subsequently treated using ionized Hydrogen Peroxide (iHP) to the dried material. Potency results of the cannabis plant were not affected, and no additional residual solvents were found. The process was successful in complete remediation of all microbial contaminants. Another partner TOMI is working with has proven that SteraMist has reduced microbial count on cannabis flower from 400cfu/g to non-detectable without affecting the level of THC. SteraMist continues to penetrate the market with additional studies and bringing on premier clients.

Registrations & Intellectual Property (IP):

Our success depends in part upon our ability to obtain and maintain proprietary protection for our products and technologies. We protect our technology and products by, among other means, obtaining United States and foreign patents. There can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service or process it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets, technical know-how, and continuing technological innovation to develop and maintain our competitive position.

As part of our intellectual property protection strategy, we have registered our BIT™ solution with the EPA, all fifty (50) states in the United States, and multiple countries worldwide. We have received or are in the process of receiving Conformité Européene (“CE”) marks in the European Economic Area (“EEA”) and are approved by Underwriters Laboratory (“UL”).

Our portfolio includes more than twenty-four (24) Utility or Design Patents worldwide which expire at various dates through the year 2038 for both method and system claims on SteraMist® BIT™, as well as design of devices. We continue to pursue further claims to additional capabilities in on-going United States and worldwide patent applications. We have obtained three related United States utility patents, giving us protection of our technology until the year 2038. We have obtained utility patents for our technologies in diverse countries such as Brazil, Japan, Korea, Israel, Australia, Taiwan, Canada, Mexico, Europe, Singapore, New Zealand, and, currently pending, in the UK, and continue to pursue protections all over the world.

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We have submitted utility patent applications in multiple countries, including Europe, China, Brazil, Korea and Australia for further additional applications of SteraMist BIT, and a related application has already been determined novel and inventive in Taiwan, Japan, Israel, New Zealand, Australia and Singapore. We have recently filed new patent pending applications on novel uses and enhancements of our technology in the United States. We have been awarded a design patent on 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 also pursuing IP protection for further applications of our SteraMist BIT in diverse fields in multiple jurisdictions, such as food decontamination and, in installed systems for the application of iHP for the protection of buildings post outbreak or after a biological attack. With worldwide attention on the etiology of SARs CoV2 coming from a lab leak, attention on the prevention and control of a leak or mishap should be on the mind of all the biological labs managers around the world. The fact that iHP and our BIT platform can be incorporated in a new or existing buildings to create an “immune building” should assist in further lab applications of SteraMist in the biosecurity industry in the future. In particular, our current patents with claims to systems already serve to provide protection for our technology in this area and our on-going pending applications will further enhance the scope of our intellectual property.

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 today, we have over two hundred trademarks or trademark applications, (word and/or 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. Recently, we have expanded our trademark protection into India.

Financial Operations Overview

Our financial position as of September 30, 2023 and December 31, 2022, respectively, was as follows:

	September 30, 2023 Unaudited		December 31, 2022
Total shareholders’ equity	$	9,481,000	$	11,448,000
Cash and cash equivalents	$	1,411,000	$	3,867,000
Deferred Revenue	$	-	$	700,000
Accounts receivable, net	$	2,368,000	$	2,772,000
Inventories	$	4,482,000	$	4,496,000
Prepaid expenses	$	442,000	$	338,000
Vendor Deposits	$	90,000	$	447,000
Other Receivables	$	164,000	$	164,000
Current liabilities – Excluding Deferred Revenue	$	2,036,000	$	2,591,000
Long-term liabilities	$	673,000	$	761,000
Working Capital	$	6,921,000	$	8,844,000

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During the nine months ended September 30, 2023, our debt and liquidity positions were affected by the following:

	For The Three Months Ended September 30,						Change			For The Nine Months Ended September 30,						Change
	2023			2022			$			2023			2022			$
Revenue, Net	$	1,470,000		$	1,760,000		$	(290,000	)	$	5,827,000		$	5,527,000		$	300,000
Gross Profit		809,000			1,071,000			(262,000	)		3,450,000			3,413,000			37,000
Total Operating Expenses⁽¹⁾		1,710,000			1,725,000			(15,000	)		5,629,000			5,589,000			40,000
Income (Loss) from Operations		(901,000	)		(654,000	)		(247,000	)		(2,179,000	)		(2,176,000	)		(3,000	)
Total Other Income (Expense)		-			-			-			1,000			1,000			-
Provision for (benefit from) Income Taxes		-			-			-			-			-			-
Net Income (Loss)	$	(901,000	)	$	(654,000	)		(247,000	)	$	(2,178,000	)	$	(2,175,000	)		(3,000	)
Basic Net Income (Loss) per share	$	(0.05	)	$	(0.03	)	$	(0.01	)	$	(0.11	)	$	(0.11	)	$	0.00
Diluted Net Income (Loss) per share	$	(0.05	)	$	(0.03	)	$	(0.01	)	$	(0.11	)	$	(0.11	)	$	0.00

· Net cash used in operations of approximately $2,362,000.

Results of Operations for the Three and Nine Months Ended September 30, 2023 Compared to the Three and Nine Months Ended September 30, 2022:

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Sales, net

1,470,000

1,760,000

(290,000

)

5,827,000

5,527,000

300,000

Revenue

Total revenue for the three months ended September 30, 2023 and 2022, was $1,470,000 and $1,760,000, respectively, representing a decrease of $290,000 compared to the same prior year period. For the nine months ended September 30, 2023 and 2022, our total revenue was $5,827,000 and $5,527,000, respectively, representing an increase of $300,000, compared to the same prior year period.

As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic has ended, we are implementing new strategies to generate demand for our products and services to address the post COVID-19 pandemic market opportunities.

Product and Service Revenue

	For The Three Months Ended September 30,				Change			For The Nine Months Ended September 30,				Change
	2023		2022		$			2023		2022		$
SteraMist Product	$	953,000	$	1,435,000	$	(482,000	)	$	4,501,000	$	4,448,000	$	53,000
Service and Training		517,000		325,000		192,000			1,326,000		1,079,000		247,000
Total	$	1,470,000	$	1,760,000	$	(290,000	)	$	5,827,000	$	5,527,000	$	300,000

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SteraMist Product-based revenues for the three months ended September 30, 2023 and 2022, were $953,000 and $1,435,000, representing a decrease of $482,000 when compared to the same prior year period. The decline in revenue was attributable to the lower equipment revenue in the current year period as a result of the timing of customer orders and the related revenue recognition.

SteraMist Product based revenues for the nine months ended September 30, 2023 and 2022, were $4,501,000 and $4,448,000, representing an increase of $53,000 when compared to the same prior year period. The increase in product-based revenue was attributable to higher equipment sales which were recognized into revenue in the current year period.

Our service-based revenue for the three months ended September 30, 2023 and 2022, was $517,000 and $325,000, respectively, representing an increase of $192,000. For the nine months ended September 30, 2023 and 2022, our service-based revenue was $1,326,000 and $1,079,000, representing an increase of $247,000 when compared to the same prior period in 2022. The increase in service revenue was due to higher demand in the current year period.

Revenue by Geographic Region

	For The Three Months Ended September 30,				Change			For The Nine Months Ended September 30,				Change
	2023		2022		$			2023		2022		$
United States	$	1,271,000	$	1,632,000	$	(361,000	)	$	5,001,000	$	4,436,000	$	565,000
International		199,000		128,000		71,000			826,000		1,191,000		(365,000	)
Total	$	1,470,000	$	1,760,000	$	(290,000	)	$	5,827,000	$	5,627,000	$	200,000

Our domestic revenue for the three months ended September 30, 2023 and 2022 was $1,271,000 and $1,632,000, respectively, a decrease of $361,000, when compared to the same prior year period. For the nine months ended September 30, 2023 and 2022, our domestic revenue was $5,001,000 and $4,436,000, representing an increase of $565,000 when compared to the same prior period in 2022. Our domestic product-based revenue increased due to higher domestic demand for our equipment and iHP services.

Internationally, our revenue for the three months ended September 30, 2023 and 2022, was approximately $199,000 and $128,000, respectively, representing an increase of $71,000 when compared to the same prior year period. For the nine months ended September 30, 2023 and 2022, our international revenue was $826,000 and $1,191,000, representing a decline of $365,000 when compared to the same prior period in 2022. The decline in international sales is due to the timing of orders placed by distributors and the timing and onboarding of new foreign distributors.

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Cost of Sales

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Cost of Sales

661,000

689,000

(28,000

)

2,376,000

2,114,000

262,000

Cost of sales was $661,000 and $689,000 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $28,000, compared to the prior year. The decrease in cost of sales was primarily due to the lower sales. Our gross profit as a percentage of sales for the three months ended September 30, 2023 was 55% compared to 61% in the same prior period, respectively. The lower gross profit is attributable to the product mix in sales.

Cost of sales was $2,736,000 and $2,114,000 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $262,000, compared to the prior year. The primary reason for the increase in cost of sales is attributable to higher revenue in the current period. Our gross profit as a percentage of sales for the nine months ended September 30, 2023 was 59% compared to 62% in the same prior period, respectively. The lower gross profit is attributable to the product mix in sales.

Professional Fees

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Professional Fees

208,000

106,000

102,000

457,000

392,000

65,000

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

Professional fees were $208,000 and $106,000 for the three months ended September 30, 2023 and 2022, respectively, an increase of approximately $102,000, in the current year period. The increase in professional fees was due to the timing of recurring legal fees incurred in connection with our current year proxy and shareholder meeting in the current year period.

Professional fees were $457,000 and $392,000 for the nine months ended September 30, 2023 and 2022, respectively, an increase of approximately $65,000, in the current year period. The increase in professional fees was due to the timing of recurring legal fees incurred in connection with our current year proxy and shareholder meeting in the current year period.

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Depreciation and Amortization

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Depreciation and Amortization

94,000

83,000

11,000

273,000

248,000

25,000

Depreciation and amortization were approximately $94,000 and $83,000 for the three months ended September 30, 2023 and 2022, respectively, representing an increase of $11,000.

Depreciation and amortization were approximately $273,000 and $248,000 for the nine months ended September 30, 2023 and 2022, respectively, representing an increase of $25,000.

The increase in depreciation expense is due to a higher amount of fixed assets being depreciated in the current year periods when compared to the same prior year periods.

Selling Expenses

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Selling Expenses

283,000

365,000

(82,000

)

1,161,000

1,272,000

(111,000

)

Selling expenses for the three months ended September 30, 2023 were approximately $283,000, as compared to $365,000 for the quarter ended September 30, 2022, representing a decrease of approximately $82,000. The decline in selling expenses is due to lower sales commission incurred in the current year period due to less sales generated by third party representatives and lower tradeshow costs incurred in the current year period.

Selling expenses for the nine months ended September 30, 2023 were approximately $1,161,000, as compared to $1,272,000 for the quarter ended September 30, 2022, representing a decrease of approximately $111,000. The decline in selling expenses is due to lower sales commission incurred in the current year period due to less sales generated by third party representatives.

Research and Development

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Research and Development

76,000

118,000

(42,000

)

221,000

255,000

(34,000

)

Research and development expenses for the three months ended September 30, 2023 were approximately $76,000, as compared to $118,000 for the quarter ended September 30, 2022, representing a decrease of approximately $42,000. The decline in research and development expenses is due to the timing projects that occurred in the prior period which did not recur in the same current year period.

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Research and development expenses for the nine months ended September 30, 2023 were approximately $221,000, as compared to $255,000 for the quarter ended September 30, 2022, representing a decrease of approximately $34,000. The decline in research and development expenses is due to the timing projects that occurred in the prior period which did not recur in the same current year period.

Consulting Fees

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

Consulting Fees

44,000

43,000

1,000

189,000

146,000

43,000

Consulting fees were $44,000 and $43,000 for the three months ended September 30, 2023 and 2022, respectively, representing an increase of $1,000, in the current quarter period.

Consulting fees were $189,000 and $146,000 for the nine months ended September 30, 2023 and 2022, respectively, representing an increase of $43,000, in the current quarter period. The increase is due to the timing of certain projects and consulting engagements that occurred in the current year that did not occur in the same prior year period.

General and Administrative Expense

For The Three Months Ended

September 30,

Change

For The Nine Months Ended

September 30,

Change

2023

2022

2023

2022

General and Administrative

1,005,000

1,009,000

(4,000

)

3,329,000

3,277,000

52,000

General and administrative expenses include salaries and payroll taxes, rent, insurance expense, utilities, office expense, product registration costs, equity compensation and bad debt expense.

General and administrative expenses were $1,005,000 and $1,009,000 for the three months ended September 30, 2023 and 2022, respectively, a decrease of $4,000 in the current period.

General and administrative expense was $3,329,000 and $3,277,000 for the nine months ended September 30, 2023 and 2022, respectively, an increase of $52,000 in the current period. The increase in general and administrative expenses was attributable to higher headcount and the related wage and employment expenses.

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Liquidity and Capital Resources

As of September 30, 2023, we had cash and cash equivalents of approximately $1,411,000 and working capital of $6,921,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of compliance with 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.

On November 7, 2023, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (collectively, the “Investors”) pursuant to which we agreed to sell and issue to the Investors in a private placement transaction (the “Private Placement”) in one or more closings up to an aggregate principal amount of $5,000,000 (the “Notes”). As of November 7, 2023, we issued and sold an aggregate of $2,600,000 of Notes to certain Investors pursuant to the SPA.

The gross proceeds from the transaction are approximately $2,600,000, before deducting the placement agent’s fees and other estimated offering expenses. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. The initial closing of the Private Placement occurred on November 7, 2023.

For the nine months ended September 30, 2023 and 2022, we incurred losses from operations of ($2,178,000) and ($2,176,000), respectively. Cash used in operations for the nine months ended September 30, 2023 and 2022 was ($2,362,000) and ($929,000), respectively.

A breakdown of our statement of cash flows for the nine months ended September 30, 2023 and 2022 is provided below:

	For the nine months ended September 30,
	2023			2022
Net Cash Provided By (Used) in Operating Activities	$	(2,362,000	)	$	(929,000	)
Net Cash Used in Investing Activities	$	(94,000	)	$	(78,000	)
Net Cash Provided by Financing Activities:	$	-		$	25,000

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Operating Activities

Cash used in operations for the nine months ended September 30, 2023 and 2022 was $2,362,000 and $929,000, respectively. The increase was attributable to the lower accounts payable due to the timing of payments to vendors and a decline in deferred revenue in the current year period.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2023 and 2022 was $94,000 and 78,000, respectively. The increase was attributable to increased equipment, computer and software purchased in the current year period.

Financing Activities

Cash provided by financing activities for nine months ended September 30, 2023 and 2022 was $0 and $25,000, respectively.

Liquidity

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

	·	ramp up and expansion of our internal sales force and manufacturer’s representatives;
	·	length of our sales cycle;
	·	global and regional response to the outbreak of infectious diseases;
	·	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, sales expense as we continue to grow our sales teams, inventory as we continue to ensure we have products needed 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.

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.

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During 2022, we experienced increased demand for our CES where we collect deposits upon the execution of the contract. The deposits we receive fund the production for the CES and improve our overall liquidity through the duration of the project. We believe our sales for our CES will continue to grow in 2023 and improve our financial results from a liquidity perspective as well as improve our operating margins due to the higher recurring solution sales we see for our CES system.

We expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations.

We believe that our existing balance of cash and cash equivalents and amounts expected to be provided by operations will provide us with sufficient financial resources to meet our cash requirements for operations, working capital and capital expenditures over the next twelve months. We may consider financing transactions to fund our operations if opportunities arise. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures. Debt financing would also result in fixed payment obligations.

We believe strongly that the current and historical trading prices of our Common Stock do not reflect the actual valuation of the Company, and that our declining trading price was the result of active short selling by certain investors in the market that is outside the control of the Company. While short selling may be permitted in some cases under applicable laws, we believe that certain investors, particularly those investing in small and microcap companies like TOMI, may be circumventing regulatory requirements and conducting aggressive short selling that is designed to drive down the trading price of our Common Stock, including naked short selling tactics. These activities have not only depressed our stock price, but also reduced the trading liquidity of our stock and caused damage to our reputation, while making it more difficult for us to secure financing to fund our operations and comply with NASDAQ’s minimum bid price requirements. We believe that the regulatory authorities, such as the SEC and FINRA, should take more aggressive enforcement actions against short selling traders who are undermining the values of microcap companies, and we will continue our various efforts and strategies to ensure that trading price of our stock reflects the true value of TOMI and generates positive returns for our shareholders.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 estimates as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following estimates to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows.

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Revenue Recognition

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.

Costs to Obtain a Contract with a Customer

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Contract Balances

As of September 30, 2023, and December 31, 2022 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Arrangements with Multiple Performance Obligations

Significant Judgments

Use of Estimates

The preparation of 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 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

	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.

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Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. All these items were determined to be Level 1 fair value measurements.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments.

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.

Leases

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Long-Lived Assets Including Acquired Intangible Assets

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

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 for the fiscal year ended December 31, 2022, as filed with the SEC on March 16, 2023. Except as set forth below, there have been no material changes to the risk factors we previously disclosed in our filings with the SEC, including the Annual Report. 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, Use of Proceeds, and Issuer Purchases of Equity Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

To the best of the Company’s knowledge during the fiscal quarter ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) of the Securities Exchange Act) of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements.

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 14, 2023	By:	/s/ Halden S. Shane
		Halden S. Shane
		Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2023	By:	/s/ Nick Jennings
		Nick Jennings
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number

Description of Exhibit

Form

File No.

Date

Exhibit

Filed Herewith

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1#

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2#

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

# 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.