UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

~~[X]~~☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2017~~March 31, 2018

~~[ ]~~☐ 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~~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)		(IRS Employer Identification No.)
~~incorporation or organization)~~

9454 Wilshire Blvd., Penthouse, Beverly Hills, CA 90212
(Address of principal executive offices) (Zip Code)

(800) 525-1698
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 ~~[X]~~☑ No ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ~~[X]~~☑ 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 ~~[ ]~~☐ (Do not check if a smaller reporting company)	Smaller reporting company ~~[X]~~☑
	Emerging growth company ~~[ ]~~☐

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

As of ~~August 9, 2017,~~May 7, 2018, the registrant had ~~121,043,958~~122,412,458 shares of common stock outstanding.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

~~QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017~~

~~TABLE OF CONTENTS~~

	Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	2

PART I -	FINANCIAL INFORMATION

Item 1	Financial Statements.	43

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2321

Item 3	Quantitative and Qualitative Disclosures About Market Risk.	3530

Item 4	Controls and Procedures.	3530

PART II -	OTHER INFORMATION

Item 1	Legal Proceedings.	3732

Item 1A	Risk Factors.	3732

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds.	3732

Item 3	Defaults Upon Senior Securities.	3732

Item 4	Mine Safety Disclosures.	3732

Item 5	Other Information.	3732

Item 6	Exhibits.	3732

SIGNATURES	38 33

EXHIBIT INDEX	39 34

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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,” “estimate,” “assume,” “can,” “could,” “plan,” “predict,” “should” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

ASSETS

Current Assets:

June 30, 2017 (Unaudited)

December 31, 2016

Cash and Cash Equivalents
$5,467,521
$948,324
Accounts Receivable - net
  1,723,469
  1,521,378
Inventories (Note 3)
  4,064,120
  4,047,310
Deposits on Merchandise (Note 10)
  79,119
  147,010
Prepaid Expenses
  210,895
  104,448
       Total Current Assets
  11,545,123
  6,768,469



Property and Equipment - net (Note 4)
  494,940
  611,807



Other Assets:


Intangible Assets - net (Note 5)
  1,733,286
  1,918,040
Security Deposits
  4,700
  4,700
     Total Other Assets
  1,737,986
  1,922,740
Total Assets
$13,778,049
$9,303,016
LIABILITIES AND SHAREHOLDERS’ EQUITY


Current Liabilities:


  Accounts Payable
$741,203
$735,879
  Accrued Expenses and Other Current Liabilities (Note 11)
  285,499
  278,413
  Accrued Interest (Note 6)
  71,256
  -
  Customer Deposits
  7,487
  30,120
  Deferred Rent
  4,661
  8,541
     Total Current Liabilities
  1,110,105
  1,052,953



  Convertible Notes Payable, net of discount of $61,010 at June 30, 2017 (Note 6)
  5,938,990
  -
     Total Long-term Liabilities
  5,938,990
  -
     Total Liabilities
  7,049,096
  1,052,953



Commitments and Contingencies
  -
  -



Shareholders’ Equity:


Cumulative Convertible Series A Preferred Stock;


    par value $0.01, 1,000,000 shares authorized; 510,000 shares issued


and outstanding at June 30, 2017 and December 31, 2016
  5,100
  5,100
    Cumulative Convertible Series B Preferred Stock; $1,000 stated value;


    7.5% Cumulative dividend; 4,000 shares authorized; none issued


    and outstanding at June 30, 2017 and December 31, 2016
  -
  -
    Common stock; par value $0.01, 200,000,000 shares authorized;


121,043,958 and 120,825,134 shares issued and outstanding


at June 30, 2017 and December 31, 2016, respectively.
  1,210,439
  1,208,251
Additional Paid-In Capital
  41,683,635
  41,367,946
Accumulated Deficit
  (36,170,220)
  (34,331,234)
Total Shareholders’ Equity
  6,728,954
  8,250,063
Total Liabilities and Shareholders’ Equity
$13,778,049
$9,303,016



The accompanying notes are an integral part of the condensed consolidated financial statements.
TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

For The Three Months Ended

For The Six Months Ended

June 30,

June 30,

2017

2016

2017

2016

   Sales, net
$1,379,769
$1,728,533
$2,478,653
$3,435,508
   Cost of Sales
  512,494
  706,760
  928,851
  1,454,572
   Gross Profit
  867,275
  1,021,773
  1,549,801
  1,980,936





Operating Expenses:




   Professional Fees
  394,710
  95,521
  666,721
  273,181
   Depreciation and Amortization
  148,923
  145,763
  308,074
  279,030
   Selling Expenses
  371,095
  517,486
  550,480
  869,662
   Research and Development
  18,119
  18,718
  48,765
  27,498
   Equity Compensation Expense (Note 7)
  232,345
  118,340
  243,897
  456,969
   Consulting Fees
  86,060
  101,435
  117,112
  231,061
   General and Administrative
  771,869
  814,117
  1,382,224
  1,671,585
Total Operating Expenses
  2,023,121
  1,811,379
  3,317,274
  3,808,986
Loss from Operations
  (1,155,845)
  (789,606)
  (1,767,472)
  (1,828,050)





Other Income (Expense):




   Amortization of Debt Discounts
  (757)
  -
  (894)
  -
   Gain on Disposition of Property and Equipment
  -
  12,000
  -
  12,000
   Grant
  -
  202,451
  -
  202,451
   Interest Income
  636
  -
  636
  -
   Interest Expense
  (57,123)
  -
  (71,256)
  -
Total Other Income (Expense)
  (57,244)
  214,451
  (71,514)
  214,451





Net Loss
$(1,213,089)
$(575,155)
$(1,838,986)
$(1,613,599)





Loss Per Common Share




   Basic and Diluted
$(0.01)
$(0.00)
$(0.02)
$(0.01)










Basic and Diluted Weighted Average Common Shares Outstanding
  121,032,400
  120,457,277
  120,929,340
  120,317,306

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

~~TOMI ENVIRONMENTAL SOLUTIONS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY~~

~~FOR THE SIX MONTHS ENDED JUNE 30, 2017~~

~~(UNAUDITED)~~

Series A Preferred

Common Stock

Shares

Amount

Shares

Amount

Additional Paid
in Capital

Accumulated
Deficit

Total Shareholders’
Equity

Balance at December 31, 2016
  510,000
$5,100
  120,825,134
$1,208,252
$41,367,946
$(34,331,234)
$8,250,064








Equity based compensation




  220,973

  220,973
Common stock issued for services provided


  218,824
  2,188
  32,812

  35,000
Warrants issued as part of debt private placement




  61,904

  61,904
Net Loss for the six months ended June 30, 2017





  (1,838,986)
  (1,838,986)
Balance at June 30, 2017
  510,000
$5,100
  121,043,958
$1,210,440
$41,683,635
$(36,170,221)
$6,728,954








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

~~TOMI ENVIRONMENTAL SOLUTIONS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS~~

~~(UNAUDITED)~~

    For the

    Six Months Ended

   June 30,

2017

2016

Cash Flow From Operating Activities:

  Net Loss
$(1,838,986)
$(1,613,599)
  Adjustments to Reconcile Net Loss to


     Net Cash Used In Operating Activities:


      Depreciation and Amortization
  308,074
  279,030
      Amortization of Debt Discount
  894
  -
      Equity Based Compensation
  220,973
  456,969
      Value of Equity Issued for Services
  35,000
  221,694
      Reserve for Bad Debts
  50,000
  105,000
      Gain on Disposition of Property and Equipment
  -
  (12,000)
Changes in Operating Assets and Liabilities:


      Decrease (Increase) in:


         Accounts Receivable
  (252,091)
  (716,860)
         Inventory
  (16,809)
  (2,844,182)
         Prepaid Expenses
  (106,447)
  (100,599)
         Deposits on Merchandise
  67,890
  231,211
      Increase (Decrease) in:


         Accounts Payable
  5,323
  810,943
         Accrued Expenses
  7,085
  304,649
         Accrued Interest
  71,256
  -
         Accrued Officers Compensation
  -
  36,542
         Deferred Rent
  (3,880)
  (3,102)
         Advances on Grant
  -
  (210,503)
         Customer Deposits
  (22,632)
  14,484
Net Cash Used in Operating Activities
  (1,474,350)
  (3,040,323)



Cash Flow From Investing Activities:


   Purchase of Property and Equipment
  (6,453)
  (459,793)
   Proceeds on Disposition of Property and Equipment
  -
  12,000
Net Cash Used in Investing Activities
  (6,453)
  (447,793)

ASSETS
Current Assets:
	March 31, 2018	December 31, 2017
	(Unaudited)
Cash and Cash Equivalents	$3,867,420	$4,550,003
Accounts Receivable, net	2,230,402	1,835,949
Inventories (Note 3)	3,273,613	3,518,884
Deposits on Merchandise (Note 9)	15,714	-
Prepaid Expenses	276,685	270,419
Total Current Assets	9,663,834	10,175,255

Property and Equipment, net (Note 4)	642,461	712,822

Other Assets:
Intangible Assets, net (Note 5)	1,456,155	1,548,532
Security Deposits	4,700	4,700
Total Other Assets	1,460,855	1,553,232
Total Assets	$11,767,150	$12,441,309

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts Payable	$634,803	$751,730
Accrued Expenses and Other Current Liabilities (Note 10)	287,861	267,136
Accrued Interest (Note 6)	16,000	80,000
Customer Deposits	1,578	3,062
Deferred Rent	-	781
Total Current Liabilities	940,242	1,102,709

Convertible Notes Payable, net of discount of $47,588 and 55,625
at March 31, 2018 and December 31, 2017, respectively (Note 6)	5,952,412	5,944,375
Total Long-Term Liabilities	5,952,412	5,944,375
Total Liabilities	6,892,654	7,047,084

Commitments and Contingencies	-	-

Shareholders’ Equity:
Cumulative Convertible Series A Preferred Stock;
par value $0.01 per share, 1,000,000 shares authorized; 510,000 shares issued
and outstanding at March 31, 2018 and December 31, 2017	5,100	5,100
Cumulative Convertible Series B Preferred Stock; $1,000 stated value;
7.5% cumulative dividend; 4,000 shares authorized; none issued
and outstanding at March 31, 2018 and December 31, 2017	-	-
Common Stock; par value $0.01 per share, 200,000,000 shares authorized;
122,349,958 and 122,049,958 shares issued and outstanding
at March 31, 2018 and December 31, 2017, respectively	1,223,499	1,220,499
Additional Paid-In Capital	42,180,265	42,139,675
Accumulated Deficit	(38,534,368)	(37,971,049)
Total Shareholders’ Equity	4,874,496	5,394,225
Total Liabilities and Shareholders’ Equity	$11,767,150	$12,441,309

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

~~TOMI ENVIRONMENTAL SOLUTIONS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED~~TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

   For the

   Six Months Ended

   June 30,

2017

2016

Cash Flow From Financing Activities:

    Proceeds from Convertible Notes
  6,000,000
  -
    Net Cash Provided by Financing Activities
  6,000,000
  -
Increase (Decrease) In Cash and Cash Equivalents
  4,519,197
  (3,488,116)
Cash and Cash Equivalents - Beginning
  948,324
  5,916,068
Cash and Cash Equivalents – Ending
$5,467,521
$2,427,952



Supplemental Cash Flow Information:


   Cash Paid For Interest
$-
$-
   Cash Paid for Income Taxes
$800
$800



Non-Cash Investing and Financing Activities :


     Establishment of discount on convertible debt
$61,904
$-



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

	For the Three Months Ended
	March 31,
	2018	2017

Sales, net	$1,312,466	$1,098,883
Cost of Sales	491,659	416,357
Gross Profit	820,807	682,526

Operating Expenses:
Professional Fees	106,458	272,011
Depreciation and Amortization	162,738	159,151
Selling Expenses	204,005	179,384
Research and Development	132,487	30,647
Equity Compensation Expense (Note 7)	12,685	11,553
Consulting Fees	35,026	31,052
General and Administrative	663,887	610,355
Total Operating Expenses	1,317,287	1,294,153
Loss from Operations	(496,480)	(611,627)

Other Income (Expense):
Amortization of Debt Discount	(8,037)	(137)
Interest Income	1,198	-
Interest Expense	(60,000)	(14,133)
Total Other Income (Expense)	(66,839)	(14,270)

Net Loss	$(563,319)	$(625,897)

Net Loss Per Common Share
Basic and Diluted	$(0.00)	$(0.01)


Basic and Diluted Weighted Average Common Shares Outstanding	122,229,959	120,825,134

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

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(UNAUDITED)

	Series A Preferred		Common Stock
	Shares	Amount	Shares	Amount	Additional Paid in Capital	Accumulated Deficit	Total Shareholders’ Equity
Balance at December 31, 2017	510,000	$5,100	122,049,958	$1,220,499	$42,139,675	$(37,971,049)	$5,394,225

Equity Based Compensation					13,590		13,590
Common Stock Issued for Services Provided			300,000	3,000	27,000		30,000
Net Loss for the Three Months Ended March 31, 2018						(563,319)	(563,319)
Balance at March 31, 2018	510,000	$5,100	122,349,958	$1,223,499	$42,180,265	$(38,534,368)	$4,874,496

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

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	March 31,
	2018	2017
Cash Flow From Operating Activities:
Net Loss	$(563,319)	$(625,897)
Adjustments to Reconcile Net Loss to
Net Cash Used In Operating Activities:
Depreciation and Amortization	162,738	159,151
Amortization of Debt Discount	8,037	137
Equity Based Compensation	13,590	11,553
Value of Equity Issued for Services	30,000	-
Changes in Operating Assets and Liabilities:
Decrease (Increase) in:
Accounts Receivable	(394,453)	110,250
Inventory	245,271	(453,144)
Prepaid Expenses	(6,266)	(18,951)
Deposits on Merchandise	(15,714)	67,890
Increase (Decrease) in:
Accounts Payable	(116,927)	541,012
Accrued Expenses	20,725	(49,024)
Accrued Interest	(64,000)	14,133
Deferred Rent	(781)	(1,940)
Customer Deposits	(1,484)	(2,695)
Net Cash Used in Operating Activities	(682,583)	(247,525)

Cash Flow From Investing Activities:
Purchase of Property and Equipment	-	(4,768)
Net Cash Used in Investing Activities	-	(4,768)

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

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED

(UNAUDITED)

	Three Months Ended
	March 31,
	2018	2017
Cash Flow From Financing Activities:
Proceeds from Convertible Notes	-	5,300,000
Net Cash Provided by Financing Activities	-	5,300,000
Increase (Decrease) In Cash and Cash Equivalents	(682,583)	5,047,707
Cash and Cash Equivalents - Beginning	4,550,003	948,324
Cash and Cash Equivalents – Ending	$3,867,420	$5,996,031

Supplemental Cash Flow Information:
Cash Paid For Interest	$124,000	$-
Cash Paid for Income Taxes	$800	$800
Non-Cash Investing and Financing Activities :
Establishment of Discount on Convertible Debt	$-	$57,106

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

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS

TOMITM Environmental Solutions, Inc. (“TOMI”, the ~~��Company”~~“Company”, “we”, “our” and “us”) is a global ~~provider of~~decontamination and infection prevention ~~and decontamination products and services, focused primarily on life sciences including healthcare, bio-safety, pharmaceutical, clean-room and research.~~

~~TOMI provides~~company, providing environmental solutions for indoor surface and ~~outdoor surface decontamination~~air disinfection through ~~the sale of equipment, services~~manufacturing, sales and licensing of its ~~SteraMist~~™premier Binary Ionization ~~Technology® (“BIT~~Technology® (BIT™”)~~, which is~~ platform. Invented under a ~~hydrogen peroxide-based mist and fog~~defense grant in association with the Defense Advanced Research Projects Agency (DARPA) of the U.S. Department of Defense, BIT™ is registered with the U.S. Environmental Protection Agency (“EPA”) and uses a low percentage Hydrogen Peroxide as its only active ingredient to produce a fog composed mostly of a hydroxyl radical (.OH ion), known as ionized Hydrogen Peroxide, iHP™. ~~TOMI’s~~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, universities and research facilities, vivarium labs, all service industries including cruise ships, office buildings, hotel and motel rooms, schools, restaurants, meat and produce processing facilities, military barracks, police and fire departments, and athletic facilities. TOMI products are also used in single-family homes and multi-unit residences.

Our mission is to help its customers create a healthier world through its product line in our divisions (Healthcare, Life Sciences, TSN or TOMI Service Network and ~~its~~Food Safety) our motto is “innovating for a safer world” for healthcare and life.

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 the Company, 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 the Company believes 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 the audited financial statements of the Company for the year ended December 31, ~~2016~~2017 and notes thereto which are included in the Annual Report on Form 10-K previously filed with the SEC on March 29, ~~2017.~~2018. The Company follows the same accounting policies in the preparation of interim reports. The results of operations for the interim periods covered by this Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of TOMI and its wholly-owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. ~~The Company’s 55% owned subsidiary, TOMI Environmental-China, has been dormant since its formation in April 2011.~~ All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassification of Accounts

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

Use of Estimates

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

Fair Value Measurements

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

~~Level 1:~~	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 or 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.
~~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 or 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.~~

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

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. The recorded value of convertible debt approximates its fair value as the terms and rates approximate market rates (See Note 6).

Cash and Cash Equivalents

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

Accounts Receivable

Our accounts receivable are typically from credit worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Bad debt expense for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 was ~~approximately $60,000 and $60,000, respectively. Bad debt expense for the three and six months ended June 30, 2016 was $75,000 and $105,000, respectively.~~$0.

At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the allowance for doubtful accounts was ~~$350,000 and $300,000, respectively.~~$500,000.

~~As of June 30, 2017, one customer accounted for 11% of accounts receivable. Two~~Three customers accounted for ~~26%~~33% of net ~~revenues~~revenue for the three months ended ~~June 30,~~March 31, 2018 and three customers accounted for 43% of net revenue for the three months ended March 31, 2017.

At March 31, 2018 and December 31, 2017, ~~and~~ two customers accounted for 25% and 24% of ~~net revenues for the six months ended June 30, 2017.~~

~~As of December 31, 2016, one customer accounted for 10% of~~ accounts ~~receivable. Three customers accounted for 32% of net revenues for the three months ended June 30, 2016 and two customers accounted for 31% of net revenues for the six months ended June 30, 2016~~. receivable, respectively.

Inventories

Inventories are valued at the lower of cost or market using the first-in, first-out ~~(“FIFO”)~~(FIFO) method. Inventories consist primarily of finished goods ~~and raw materials~~. At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we did not have a reserve for slow-moving or obsolete inventory.

Deposits on Merchandise

Deposits on merchandise primarily consist of amounts paid in advance of the receipt of inventory (see Note ~~10)~~9).

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.

Accounts Payable

As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016, two vendors~~2017, one vendor accounted for approximately ~~61%~~35% and ~~49%~~45% of total accounts payable, respectively.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, one vendor accounted for 70% and ~~68% of cost of goods sold, respectively. For the three and six months ended June 30, 2016, one vendor accounted for 84% and 80%~~67% of cost of goods sold, respectively.

Accrued Warranties

Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We make an estimate of expected costs that will be incurred by us during the warranty period and charge that expense to the consolidated statement of operations at the date of sale. Our manufacturer assumes the warranty against product defects for one year 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 ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016, the Company did not establish a~~2017, our warranty ~~reserve.~~reserve was $5,000.

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 ~~which~~that are, on a more likely than not basis, not expected to be realized in accordance with ~~ASC~~Accounting Standards Codification (“ASC”) guidance for income taxes. Net deferred tax benefits have been fully reserved at ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

Net Loss Per Share

Basic net loss per share is computed by dividing the Company’s net loss by the weighted average number of shares of common stock outstanding during the period presented. Diluted 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 ~~June 30, 2017~~March 31, 2018 consisted of 11,111,100 shares of common stock from convertible debentures, ~~38,091,411~~35,251,411 shares of common stock issuable upon exercise of outstanding warrants, ~~200,000~~320,000 shares of common stock issuable upon outstanding options and 510,000 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

Potentially dilutive securities as of ~~June 30, 2016,~~March 31, 2017 consisted of ~~36,576,413~~9,814,805 shares of common stock from convertible debentures, 37,959,745 shares of common stock issuable upon exercise of outstanding warrants, 200,000 shares of common stock ~~from~~issuable upon outstanding options and 510,000 shares of common stock ~~from~~issuable upon conversion of outstanding shares of Convertible Series A Preferred Stock. Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

~~Basic loss per share is computed by dividing~~Diluted net ~~loss attributable to common shareholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted~~ loss per share is computed similarly to basic net loss per share except that the denominator is increased to include the number of additional shares of common ~~shares~~stock that would have been outstanding if the potential shares of common stock had been issued and if ~~the~~such additional ~~common~~ shares were dilutive. Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately ~~49.9~~47.2 million and ~~37.2~~48.5 shares of common stock were outstanding at ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively, but were excluded from the computation of diluted net loss per share due to the anti-dilutive effect on net loss per share.

Three Months Ended June 30,

2017

2016

Net loss
$(1,213,089)
$(575,155)
Adjustments for convertible debt - as converted


Interest on convertible debt
  57,123
  -
Amortization of debt discount on convertible debt
  757
  -
Net loss attributable to common shareholders
$(1,155,209)
$(575,155)
Weighted average number of common shares outstanding:


Basic and diluted
  121,032,400
  120,457,277
Net loss attributable to common shareholders per share:


Basic and diluted
$(0.01)
$(0.00)

	Six Months Ended June 30,		Three Months Ended March 31,
	2017	2016	2018 (Unaudited)	2017

Net loss	$(1,838,986)	$(1,613,599)	$(563,319)	$(625,897)
Adjustments for convertible debt - as converted
Interest on convertible debt	71,256	-	60,000	14,133
Amortization of debt discount on convertible debt	894	-	8,037	137
Net loss attributable to common shareholders	$(1,766,836)	$(1,613,599)	$(495,282)	$(611,627)
Weighted average number of common shares outstanding:
Basic and diluted	120,929,340	120,317,306	122,229,959	120,825,134
Net loss attributable to common shareholders per share:
Basic and diluted	$(0.01)		$(0.00)	$(0.01)

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue Recognition,” when there is persuasive evidence that an arrangement exists, title and risk of loss have passed, delivery has occurred, or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment.

Disaggregation of Revenue

The following table presents our revenues disaggregated by revenue source.

Net Revenue

Product and Service Revenue

	Three Months Ended March 31, (Unaudited)
	2018	2017
SteraMist Product	$1,092,000	$821,000
Service and Training	220,000	278,000
Total	$1,312,000	$1,099,000

Revenue by Geographic Region

	Three Months Ended March 31, (Unaudited)
	2018	2017
United States	$945,000	$848,000
International	367,000	251,000
Total	$1,312,000	$1,099,000

Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized ~~when: (1) persuasive evidence~~upon transfer of control of promised products to customers in an ~~arrangement exists; (2)~~amount that reflects the consideration we expect to receive in exchange for those products or services.

Service and training revenue includes sales from our high-level decontamination and service ~~has~~engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services.

Costs to Obtain a Contract with a Customer

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been ~~rendered~~one year or ~~delivery has occurred; (3)~~less. We generally expense sales commissions when incurred because the ~~selling price~~amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is ~~fixed~~commensurate with annual sales activities.

Contract Balances

As of March 31, 2018 and ~~determinable;~~December 31, 2017 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and ~~(4) collectability is reasonably assured. Determination~~(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 ~~criteria (3)~~products and ~~(4)~~services, which are ~~based on management’s judgment regarding~~primarily distinct and accounted for as separate performance obligations.

Significant Judgments

Our contracts with customers for products and services often dictate the ~~fixed nature~~terms and conditions of when the control of the ~~selling prices of~~promised products or services is transferred to the ~~services rendered or products delivered~~customer and the ~~collectability~~amount of ~~those amounts. Provisions~~consideration to be received in exchange for ~~discounts to customers,~~the products and ~~allowance, and other adjustments will be provided for in the same period the related sales are recorded.~~services.

Stock-Based Compensation

We account for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”), ~~ASC~~Accounting Standards Codification (“ASC”) 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period.

On ~~January 29, 2016,~~July 7, 2017, our ~~board of directors adopted~~shareholders approved the 2016 Equity ~~Compensation~~Incentive Plan (the “2016 Plan”)~~, subject to approval by our shareholders.~~. The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 5,000,000 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. Stock-based compensation 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 the Company at the time of the award; awards under the 2016 Plan are expressly conditioned upon such agreements. For the year ended December 31, ~~2016,~~2017, the Company issued ~~options to purchase 100,000~~200,000 shares of common stock out of the 2016 Plan. ~~On July 7, 2017, our shareholders approved~~In addition, for the three months ended March 31, 2018, we issued 300,000 shares of common stock out of the 2016 ~~Plan at our 2017 Annual Meeting of Shareholders (See Note 13).~~Plan.

Concentrations of Credit Risk

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

Long-Lived Assets Including Acquired Intangible Assets

We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three ~~and six~~ months ended ~~June 30, 2017~~March 31, 2018 and ~~2016.~~2017.

Advertising and Promotional Expenses

We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 were approximately ~~$19,000~~$54,000 and ~~$28,000,~~$9,000, respectively. ~~Advertising and promotional expenses for the three and six months ended June 30, 2016, were approximately $46,000 and $87,000, respectively~~

Research and Development Expenses

We expense research and development expenses in the period in which they are incurred. For the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, research and development expenses were approximately ~~$18,000~~$132,000 and ~~$49,000,~~$31,000, respectively. ~~For the three and six months ended June 30, 2016, research and development expenses were approximately $19,000 and $27,000, respectively.~~

Shipping and Handling Costs

We include shipping and handling costs relating to the delivery of products directly from vendors to the Company in cost of sales. Other shipping and handling costs, including third-party delivery costs relating to the delivery of products to customers, are classified as a general and administrative expense.Shipping and handling costs included in general and administrative expense were approximately ~~$32,000~~$51,000 and ~~$53,000~~$21,000 for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, respectively. ~~Shipping and handling costs included in general and administrative expense were approximately $41,000 and $72,000 for the three and six months ended June 30, 2016, 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 ~~shown below:~~

~~Net Revenue~~

~~Product and Service Revenue~~

Three Months Ended June 30,
(Unaudited)

2017

2016

SteraMist Product
$1,099,000
$1,630,000
Service & Training
281,000
99,000
Total
$1,380,000
$1,729,000

Six Months Ended June 30,
(Unaudited)

2017

2016

SteraMist Product
$1,921,000
$3,134,000
Service & Training
558,000
301,000
Total
$2,479,000
$3,435,000

~~Revenue by Geographic Region~~

Three Months Ended June 30,
(Unaudited)

2017

2016

United States
$1,002,000
$1,286,000
International
378,000
443,000
Total
$1,380,000
$1,729,000

Six Months Ended June 30,
(Unaudited)

2017

2016

United States
$1,831,000
$2,263,000
International
648,000
1,172,000
Total
$2,479,000
$3,435,000
presented in “Revenue Recognition” in Note 2 above.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, ~~(ASU 2014-09) “Revenue~~Revenue from Contracts with Customers ~~(Topic 606).” ASU 2014-09 supersedes~~, to replace the existing revenue recognition ~~requirements in “Revenue Recognition (Topic 605)”~~criteria for contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 to interim and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual ~~reporting~~ periods beginning after December 15, ~~2016, including interim periods within that reporting period.~~2017. We adopted ASUs No. 2014-09 and 2015-14 on January 1, 2018 on a modified retrospective basis, which did not impact our beginning accumulated deficit and additional paid-in capital.

In February 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-02, ~~(ASU 2016-02) “Leases (Topic 842).”~~Leases, which requires lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. ASU No. 2016-02 ~~provides new lease accounting guidance.~~also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. ASU No. 2016-02 is effective for interim and annual ~~reporting~~ periods beginning after December 15, 2018, ~~including interim periods within that reporting period. Early~~with early adoption is permitted. We currently expect to adopt ASU No. 2016-02 on January 1, 2019. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We intend to elect the available practical expedients upon adoption. Upon adoption, we expect the consolidated balance sheet to include a right of use asset and liability related to substantially all of our lease arrangements. We are ~~currently in the process of evaluating~~continuing to assess the impact of adopting ASU No. 2016-02 on our financial position, results of operations and related disclosures and have not yet concluded whether the ~~adoption of ASU 2016-02~~effect on our consolidated financial ~~statements.~~statements will be material.

In March 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-09, ~~(ASU 2016-09) “Compensation – Stock Compensation (Topic 718).”~~Improvements to Employee Share-Based Payment Accounting, to simplify the accounting for the income tax effects from share-based compensation, the accounting for forfeitures and the accounting for statutory income tax withholding, among others. In particular, ASU No. 2016-09 ~~provides improvements~~requires all income tax effects from share-based compensation to ~~employee share-based payment~~be recognized in the consolidated statement of operations when the awards vest or are settled, permits accounting for forfeitures as they occur, and permits a higher level of statutory income tax withholding without triggering liability accounting. Adoption of ASU No. 2016-09 is ~~effective for annual reporting periods~~modified retrospective, retrospective and prospective, depending on the specific provision being adopted. We adopted ASU No. 2016-09 on January 1, 2017, which did not impact our beginning ~~after December 15, 2016, including interim periods within that reporting period.~~accumulated deficit and additional paid-in capital.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, to simplify the test for goodwill impairment by removing Step 2. An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ~~The~~ ASU No. 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Adoption of ~~the~~ ASU No. 2017-04 is prospective. We have not yet selected an adoption date, and ~~the~~ ASU No. 2017-04 will have a currently undetermined impact on ~~the~~our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Scope Ofof Modification Accounting, to provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ~~The~~ ASU No. 2017-09 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of ~~the~~ ASU No. 2017-09 is prospective. We ~~are currently obtaining an understanding of the~~adopted ASU ~~and plan to adopt the ASU~~No. 2017-09 on January 1, ~~2018.~~2018, which did not impact our consolidated financial statements upon adoption.

NOTE 3. INVENTORIES

             Inventories consist of the following at:

June 30,

2017
(Unaudited)

December 31,
2016
Raw materials
$11,031
$13,031
Finished goods
  4,053,089
  4,034,279

$4,064,120
$4,047,310
Inventories consist of the following:

	March 31,
	2018 (Unaudited)	December 31, 2017
Raw materials	$-	$-
Finished goods	3,273,613	3,518,884
	$3,273,613	$3,518,884

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consists of the ~~following:~~following at:

	June 30,		March 31,
	2017 (Unaudited)	December 31, 2016	2018 (Unaudited)	December 31, 2017
Furniture and fixtures	$91,216	$91,216	$91,216
Equipment	933,432	926,979	1,192,293
Vehicles	56,410		56,410
Software	39,999
Leasehold improvements	15,554
Computer and Software			113,319
Leasehold Improvements			15,554
	1,136,611	1,130,158	1,468,792
Less: Accumulated depreciation	641,671	518,350	826,331	755,969
	$494,940	$611,808	$642,461	$712,822

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, depreciation was ~~$56,545~~$70,361 and ~~$123,320, respectively. For the three and six months ended June 30, 2016, depreciation was $53,386 and $94,276~~$66,775, respectively.

NOTE 5. 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 $92,377 and ~~$184,754~~$92,377 for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively.

Definite life intangible assets consist of the following:

	March 31, 2018 (Unaudited)	December 31, 2017

Intellectual Property and Patents	$2,848,300	$2,848,300
Less: Accumulated Amortization	1,832,145	1,739,768
Intangible Assets, net	$1,016,155	$1,108,532

June 30,
2017
(Unaudited)

December 31,
2016

Intellectual Property and Patents
$2,848,300
$2,848,300
Less: Accumulated Amortization
1,555,014
1,370,260
Intangible Assets, net
$1,293,286
$1,478,040

Indefinite life intangible assets consist of the following:

~~Trademarks~~

$~~440,000~~

~~Total Intangible Assets, net~~

$~~1,733,286~~

$~~1,918,040~~

Trademarks	$440,000	$440,000

Total Intangible Assets, net	$1,456,155	$1,548,532

Approximate amortization over the next five years is as follows:

Twelve Month Period Ending June 30,	Amount
Twelve Month Period Ending March 31,		Amount

2018	$370,000
2019	370,000	$370,000
2020	370,000	370,000
2021	183,000	276,000
2022	-	-
2023		-
	$1,293,000	$1,016,000

NOTE 6. CONVERTIBLE DEBT

In March and May 2017, the Company closed a private placement transaction in which it issued to certain accredited investors unregistered senior callable convertible promissory notes (the “Notes”) and three-year warrants to purchase an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share in exchange for aggregate gross proceeds of $6,000,000. The Notes bear interest at a rate of 4% per annum. $5,300,000 in principal ~~matures~~was originally scheduled to mature on August 31, 2018 and $700,000 in principal ~~matures~~was originally scheduled to mature on November 8, 2018, unless earlier redeemed, repurchased or converted. The Notes are convertible at the option of the holder into common stock at a conversion price of $0.54 per share. ~~For the notes amounting $5,300,000 in principal, subsequent~~Subsequent to September 1, 2017, we may redeem the Notes that are scheduled to mature on August 31, 2018 at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. ~~For the notes amounting $700,000 in principal, before~~Prior to November 8, 2018, we may redeem the Notes that are scheduled to mature on such date at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. Interest on the Notes is payable semi-annually in cash on February 28 and August 31 of each year, beginning on August 31, 2017. Interest expense related to the Notes for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 was ~~$57,123~~$60,000 and ~~$71,256,~~$14,133, respectively.

The warrants were valued at $62,559 using the Black-Scholes pricing model with the following assumptions: expected volatility: 104.06% ~~-111.54%~~–111.54%; expected dividend: $0; expected term: 3 years; and ~~risk free~~risk-free rate: 1.49% - –1.59%. ~~The estimated fair value of the warrants was calculated using the Black-Scholes valuation model.~~ The Company recorded the warrants’ relative fair value of $61,904 as an increase to additional paid-in capital and a discount against the related ~~debt.~~Notes.

The debt discount is being amortized over the life of the Notes using the effective interest method. Amortization expense for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 was ~~$757~~$8,037 and ~~$894,~~$137, respectively.

In February and March 2018, we extended the maturity date of the Notes—we extended the maturity dates for $5,300,000 of principal on the Notes to April 1, 2019 and $700,000 in principal of the Notes to June 8, 2019. No additional consideration was paid or accrued by the Company. The stated rate of the Notes was unchanged and the estimated fair value of the new debt approximates its carrying amount (principal plus accrued interest at the date of the modification). We determined that the modification of these Notes is not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments”.

Convertible notes consist of the following ~~at June 30, 2017:~~at:

	~~June 30,~~ ~~2017~~ ~~(Unaudited)~~

~~Convertible notes~~	$~~6,000,000~~
~~Initial discount~~	~~(61,904~~)
~~Accumulated amortization~~	~~894~~
~~Convertible notes, net~~	$~~5,938,990~~

	March 31,
	2018	December 31,
	(Unaudited)	2017
Convertible notes	$6,000,000	$6,000,000
Initial discount	(61,904)	(61,904)
Accumulated amortization	14,316	6,279
Convertible notes, net	$5,952,412	$5,944,375

NOTE 7. SHAREHOLDERS’ EQUITY

Our board of directors 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 of the Company before any payment is made to the holders of our common stock. Furthermore, the board of directors 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 ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, there were 510,000 shares issued and ~~outstanding, respectively.~~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~~cumulative dividend, consists of 4,000 shares. At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, 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

During the ~~six~~three months ended ~~June 30, 2016,~~March 31, 2017, we did not issue any shares of common stock.

During the ~~Company~~three months ended March 31, 2018, we issued ~~425,416~~300,000 shares of common stock valued at ~~$221,694 for professional services rendered.~~

~~During the six months ended June 30, 2017, the Company issued 218,824 shares~~$30,000 to members of ~~common stock valued at $35,000 for professional services rendered, of which 200,000 shares were valued at $32,000, and issued to~~ our board of directors ~~(See~~(see Note ~~10)~~9).

Stock Options

In ~~February 2016,~~January 2018, we issued options to purchase an aggregate of 100,000 shares of common stock to ~~four directors,~~our Chief Operating Officer, valued at ~~$54,980 in total.~~$11,780. The options have an exercise price of ~~$0.55~~$0.12 per share and expire in ~~February 2026.~~January 2023. The options were valued using the Black-Scholes model using the following assumptions: volatility: ~~224%~~146%; dividend yield: 0%; zero coupon rate: ~~1.47%~~2.27%; and a life of 5 years.

In January 2018, we issued options to purchase an aggregate of 20,000 shares of common stock to our scientific advisory board members, valued at $1,810 in total. The options have an exercise price of $0.10 per share and expire in January 2028. The options were valued using the Black-Scholes model using the following assumptions: volatility: 147%; dividend yield: 0%; zero coupon rate: 2.41%; and a life of 10 years.

The following table summarizes stock options outstanding as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

June 30, 2017 (Unaudited)

December 31, 2016

Number of Options

Weighted Average Exercise Price

Number of Options

Weighted Average Exercise Price

Outstanding, beginning of period
  200,000
$0.76
  100,000
$0.96
Granted
  —
  —
  100,000
  0.55
Exercised
  —
  —
  —
  —
Outstanding, end of period
  200,000
$0.76
  200,000
$0.76

	March 31, 2018 (Unaudited)		December 31, 2017
	Number of Options	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
Outstanding, beginning of period	200,000	$0.76	200,000	$0.76
Granted	120,000	$0.12	—	—
Exercised	—	—	—	—
Outstanding, end of period	320,000	$0.52	200,000	$0.76

Options outstanding and exercisable by price range as of ~~June 30, 2017~~March 31, 2018 were as follows:

Outstanding Options	Outstanding Options	Average Weighted	Exercisable Options		Outstanding Options	Average Weighted	Exercisable Options
Range	Number	Remaining Contractual Life in Years	Number	Weighted Average Exercise Price	Number	Remaining Contractual Life in Years	Number	Weighted Average Exercise Price

$2.10	40,000	2.51	40,000	$2.10
$0.05	20,000	3.52	20,000	$0.05	20,000	2.78	20,000	$0.05
$0.10					20,000	9.83	20,000	$0.10
$0.12					100,000	4.77	100,000	$0.12
$0.27	40,000	7.51	40,000	$0.27	40,000	6.76	40,000	$0.27
$0.55	100,000	8.60	100,000	$0.55	100,000	7.85	100,000	$0.55
$2.10					40,000	1.76	40,000	$2.10
	200,000	6.66	200,000	$0.76	320,000	5.80	320,000	$0.52

Stock Warrants

For the ~~six~~three months ended June 30, 2016, we recognized total equity based compensation of approximately $267,000 on warrants issued to the CEO in connection with his current and previous employment agreements. For the six months ended June 30, 2016, we recognized $39,000 in stock compensation expense for the warrants issued to the CEO in February 2014 that vested in February 2016. In addition, on March 31, 2016, we issued a warrant to purchase up to 250,000 shares of common stock to the CEO at an exercise price of $0.50 per share with a term of five years, which vested upon issuance. We utilized the Black-Scholes method to fair value the warrants to purchase up to 250,000 shares of common stock received by the CEO totaling approximately $129,000 with the following assumptions: volatility, 162%; expected dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.51. On June 30, 2016, we issued a warrant to purchase up to 250,000 shares of common stock at an exercise price of $0.42 per share to the CEO with a term of five years, which vested upon issuance. We utilized the Black-Scholes method to fair value the warrant at approximately $99,000 with the following assumptions: volatility, 157%; expected dividend yield, 0%; risk free interest rate, 1.17%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.40.

For the six months ended June 30, 2016, we recognized total equity based compensation of approximately $65,000 on warrants issued to the CFO in connection with his current and previous employment agreements. For the six months ended June 30, 2016, we recognized $14,000 in stock compensation expense for the accrued but not vested portion of the warrants issued to the CFO under his previous agreement with the Company. In addition, on January 26, 2016, we issued a warrant to purchase up to 100,000 shares of common stock at an exercise price of $0.55 per share to the CFO with a term of five years, which vested upon issuance. We utilized the Black-Scholes method to fair value the warrant at approximately $51,000 with the following assumptions: volatility, 164%; expected dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.51.

For the six months ended June 30, 2016, we recognized equity compensation expense of approximately $69,000 related to the vested and accrual of an unvested warrant contracted to an employee pursuant to his employment agreement that were issued in April 2016. We utilized the Black-Scholes method to fair value the warrant to purchase 300,000 shares of common stock received by the employee with the following assumptions: volatility, 159%; expected dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.46.

On June 30, 2017, we issued warrants to purchase up to 15,000 shares of common stock at an exercise price of $0.10 per share to the members of the Scientific Advisory Board with a term of five years, which vested upon issuance. The Company utilized the Black-Scholes method to fair value the warrants received by the members of the Scientific Advisory Board at $1,400 with the following assumptions: volatility, 150%; expected dividend yield, 0%; risk free interest rate, 1.83%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.09.

~~For the three and six months ended June 30,~~ 2017, we recognized approximately $12,000 ~~and $24,000~~ in equity compensation expense for the accrued but unvested portion of ~~the~~certain warrants issued to ana former employee pursuant to his agreement with the Company.

In June 2017, we modified the terms of 4,000,000 outstanding warrants. Pursuant to a settlement agreement, the term of the warrants was increased by 2 years and the exercise price was modified to $0.12 per share (decrease of $0.03 per share). Pursuant to ASC 718, the modified terms of the warrants resulted in approximately $196,000 in incremental equity compensation expense for the six months ended June 30, 2017. We utilized the Black-Scholes method to fair value the warrants under the original and modified terms with the following range of assumptions: volatility, 81%-97%; expected dividend yield, 0%; risk free interest rate, 1.28%; and a life of 0.33 - 2.33 years, respectively. The grant date fair value of each share underlying the warrant was $0.01 and $0.06, respectively.

As of June 30, 2017, the Company accrued for and expensed approximately $23,000 in equity compensation expense in connection with the issuance of a warrant to purchase 250,000 shares of common stock at an exercise price of $0.10 per share, which it issued to the CEO in connection with his employment agreement. The warrant has a term of 5 years. We utilized the Black-Scholes method to fair value the warrant received by the CEO with the following assumptions: volatility, 153%; expected dividend yield, 0%; risk free interest rate, 1.90%; and a life of 5 years. The grant date fair value of each share underlying the warrant was $0.09. The warrants were issued in July 2017.

In March and May of 2017, in connection with the issuance of the Notes, we issued three-year warrants to purchase up to an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share (see Note 6).

We did not issue any warrants during the three months ended March 31, 2018.

The following table summarizes the outstanding common stock warrants as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

	June 30, 2017 (Unaudited)		December 31, 2016		March 31, 2018 (Unaudited)		December 31, 2017
	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price
Outstanding, beginning of period	37,076,413	$0.31	35,676,413	$0.30	35,501,411	$0.33	37,076,413	$0.31
Granted	1,014,998	0.68	1,400,000	0.42	-		4,774,998	0.24
Exercised					-		(975,000)	0.05
Expired	—				(250,000)	(0.15)	(5,375,000)	0.13
Outstanding, end of period	�� 38,091,411	$0.32	37,076,413	$0.31	35,251,411	$0.33	35,501,411	$0.33

Warrants outstanding and exercisable by price range as of ~~June 30, 2017~~March 31, 2018 were as follows:

Outstanding Warrants	Outstanding Warrants		Exercisable Warrants		Outstanding Warrants		Exercisable Warrants
Range	Number	Average Weighted Remaining Contractual Life in Years	Number	Weighted Average Exercise Price
$0.01	1,575,000	0.03	1,575,000	$0.01
$0.05	*975,000	0.50	*975,000	$0.05
Exercise Price					Number	Average Weighted Remaining Contractual Life in Years	Number	Weighted Average Exercise Price
$0.10	15,000	5.00	15,000	$0.10	265,000	4.29	265,000	$0.10
$0.12	4,000,000	2.29	4,000,000	$0.12	7,500,000	3.03	7,500,000	$0.12
$0.15	3,750,000	0.30	3,750,000	$0.15
$0.17					10,000	4.57	10,000	$0.17
$0.26	100,000	0.99	100,000	$0.26	100,000	0.24	100,000	$0.26
$0.27	250,000	4.50	250,000	$0.27	250,000	3.75	250,000	$0.27
$0.29	10,125,613	3.31	10,125,613	$0.29	10,125,613	2.55	10,125,613	$0.29
$0.30	11,925,800	1.25	11,925,800	$0.30	11,925,800	0.50	11,925,800	$0.30
$0.32	250,000	4.25	250,000	$0.32	250,000	3.50	250,000	$0.32
$0.33	75,000	1.25	75,000	$0.33	75,000	0.50	75,000	$0.33
$0.42	250,000	4.00	250,000	$0.42	250,000	3.25	250,000	$0.42
$0.50	625,000	3.43	525,000	$0.50	325,000	2.32	325,000	$0.50
$0.55	100,000	3.58	100,000	$0.55	100,000	2.83	100,000	$0.55
$0.62	75,000	1.05	75,000	$0.62	75,000	0.30	75,000	$0.62
$0.69	999,998	2.71	999,998	$0.69	999,998	1.96	999,998	$0.69
$1.00	3,000,000	2.84	3,000,000	$1.00	3,000,000	2.09	3,000,000	$1.00
	38,091,411	2.01	37,991,411	$0.32	35,251,411	1.99	35,251,411	$0.33

* See Note 13

~~Unvested~~There were no unvested warrants outstanding as of ~~June 30, 2017 were as follows:~~March 31, 2018.

Unvested Warrants

Weighted
Average
Exercise Price

Number

Average
Weighted
Remaining
Contractual
Life in Years

$0.50
100,000
5.00

~~NOTE 8. RELATED PARTY TRANSACTIONS~~

For each of the three and six months ended June 30, 2017 and 2016, we incurred fees for legal services rendered by Harold Paul in the amount of $15,000 and $30,000, respectively. Mr. Paul is also a director of the Company.

In January 2016, we entered into a distributor agreement with TOMI Asia to facilitate growth in Asia. Wee Ah Kee, one of our significant shareholders, is the Chief Executive Officer of TOMI Asia. We amended the distributor agreement in August 2016, at which time TOMI Asia changed its name to SteraMist Asia. The initial term of our new agreement is three years and the agreement sets revenue targets of $5.5 million, $8.5 million and $12 million of our products during 2016, 2017 and 2018, respectively. Our new agreement includes mainland China and Indochina and excludes South Korea, Japan, Australia and New Zealand. Approximately $6,000 and $7,000 in sales were made under the distributor agreement for the three and six months ended June 30, 2017 respectfully. No sales were made under the distributor agreement for the three and six months ended June 30, 2016.

NOTE 9.8. COMMITMENTS AND CONTINGENCIES

Lease Commitments

In September 2014, we entered into a lease agreement for office and warehouse space in Frederick, Maryland. As part of the lease agreement, we received a rent holiday in the first 5 months of the lease. The lease also ~~provides~~provided for an escalation clause pursuant to which the Company ~~will be~~was subject to an annual rent increase of 3%, year over year. The term of the lease ~~expires~~expired on January 31, ~~2018. The Company accounts~~2018 and has been extended on a month-to-month basis. We account for the lease using the straight line method and recorded ~~$11,427~~$12,927 and ~~$22,854~~$11,427 in rent expense for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016, respectively. Approximate minimum annual rents under the lease are as follows:~~

Period Ending January 31,

Amount

2018
$31,000

$31,000
respectively

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 ~~June 30, 2017~~March 31, 2018, and December 31, ~~2016,~~2017, there were no claims against us for product liability.

NOTE ~~10.~~9. CONTRACTS AND AGREEMENTS

Manufacturing Agreement

In November 2016, we entered into a ~~new~~ manufacturing and development agreement with RG Group Inc. The agreement does not provide for any minimum purchase commitments and is for a term of two years with provisions to extend. The agreement also provides for a warranty against product defects for one year.

As of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, balances due to RG Group, Inc. accounted for approximately ~~0.5%~~35% and ~~31%~~45% of total accounts payable, respectively. At ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we maintained required deposits with RG Group, Inc. in the amounts of ~~$79,119~~$15,714 and ~~$147,010,~~$0, respectively. For the three ~~and six~~ months ended ~~June 30,~~March31, 2018 and 2017, RG Group, Inc. accounted for 70% and ~~68% of cost of goods sold, respectively. For the three and six months ended June 30, 2016, RG Group, Inc. accounted for 84% and 80%~~67% of cost of goods sold, respectively.

Agreements with Directors

In ~~March~~December 2017, we increased the annual board fee to directors to ~~$30,000,~~$40,000, to be paid in cash on a quarterly basis, with the exception of the audit committee chairperson, whose annual fee we increased to ~~$35,000,~~$45,000, also to be paid in cash on a quarterly basis. ~~In addition, we issued to each~~The board fee also includes the issuance of ~~our four board members 50,000~~75,000 shares of common stock ~~in April 2017. The 200,000~~on an annual basis. For the three months ended March 31, 2018, we issued an aggregate of 300,000 shares of common stock that were valued at ~~$32,000 for the six months ended June 30, 2017.~~$30,000 to members of our board of directors.

Other Agreements

In June 2015, we launched the TOMI Service Network (“TSN”). The TSN is a national service network composed of existing full service restoration industry specialists that have entered into licensing agreements with us to become Primary Service Providers (“PSP’s”). The licensing agreements grant protected territories to PSP’s to perform services using our SteraMist™ platform of products and also provide for potential job referrals to PSP’s whereby we are entitled to referral fees. Additionally, the agreement provides for commissions due to PSP’s for equipment and solution sales they facilitate to other service providers in their respective territories. As part of these agreements, we are obligated to provide to the PSP’s various training, ongoing support and facilitate a referral network call center. As of ~~June 30, 2017,~~March 31, 2018, we had entered into 6471 licensing agreements in connection with the launch of the TSN. The licensing agreements contain fixed price minimum equipment and solution orders based on the population of the territories granted pursuant to the licensing agreements. The nature and terms of our TSN agreements may represent multiple deliverable arrangements. Each of the deliverables in these arrangements typically represent a separate unit of accounting.

In May 2017, we entered into an agreement with 41 North International LLC to provide consulting services in the areas of sales management and business development. The term of the agreement is for 6 months and provides for automatic monthly renewals. Either party can terminate the agreement after 6 months with 30 days written notice. The agreement provides for a $20,000 monthly fee as an advance against commissions (See Note 13).

NOTE ~~11.~~10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

June 30,



2017
(unaudited)

December 31,
2016

Commissions
$139,128
$172,735
Payroll and related costs
  57,188
  40,264
Director fees
  23,750
  19,000
Other accrued expenses
  65,433
  46,414
Total
$285,499
$278,413
Accrued expenses and other current liabilities consisted of the following at:

	March 31, 2018 (Unaudited)	December 31, 2017
Commissions	$109,770	$115,506
Payroll and related costs	62,484	43,484
Director fees	55,250	27,750
Accrued warranty	5,000	5,000
Other accrued expenses	55,356	75,396
Total	$287,861	$267,136

NOTE 11. ACCRUED WARRANTY

Our manufacturer assumes warranty against product defects for one year from the sale to customers, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. The warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate warranty costs based on historical warranty claim experience.

The following table presents warranty reserve activities at:

	March 31, 2018 (Unaudited)	December 31, 2017
Beginning accrued warranty costs	$5,000	$-
Cost of warranty claims	1,644	5,731
Settlement of warranty claims	(1,644)	(5,731)
Provision for product warranty costs	-	5,000
Ending accrued warranty costs	$5,000	$5,000

NOTE 12. CUSTOMER CONCENTRATION

The Company had certain customers whose revenue individually represented 10% of more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% of more of the Company’s accounts receivable.

~~Two~~Three customers accounted for ~~26%~~33% of net ~~revenues~~revenue for the three months ended ~~June 30, 2017~~March 31, 2018 and twothree customers accounted for ~~24%~~43% of net ~~revenues~~revenue for the ~~six~~ three months ended ~~June 30,~~March 31, 2017. ~~Three~~

At March 31, 2018 and December 31, 2017, two customers accounted for ~~32% of net revenues for the three months ended June 30, 2016~~25% and t~~wo customers accounted for 31% of net revenues for the six months ended June 30, 2016.~~

~~At June 30, 2017 and December 31, 2016, one customer accounted for 11% and 10%~~24% of accounts receivable, respectively.

NOTE 13. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the SEC.

In ~~July of 2017,~~April 2018, we ~~settled our litigation with Astro Pak Corporation (“Astro Pak”) relating to our patents~~entered into a 10 year lease agreement for a new 9,000 square foot facility that contains office, warehouse, lab and ~~intellectual property rights.~~ ~~Astro Pak has agreed that we are the sole owner of ionized hydrogen peroxide decontamination~~research and ~~sterilization technology, patents,~~development space in Frederick, Maryland. The lease agreement commences on December 1, 2018 and products, which we market under the brands Binary Ionization Technology® (BIT™) and SteraMist™. We sued Astro Pak and its wholly owned subsidiary SixLog Corporation (“SixLog”) in California federal court for infringing our United States Patent Nos. 6,969,487 and 7,008,592 and violating our intellectual property rights by, among other things, indicating that our technology and patents were proprietary to SixLog and marketing our patented equipment with SixLog labels. Astro Pak and SixLog agreed to cease this conduct and pay us a cash settlement. Astro Pak also agreed to assign its iHP mark to us, complementing our existing trademark and trade name protection. Finally, Astro Pak and SixLog agreed to remove from the web or take steps to remove any assertions or suggestions that they own or developed ionized hydrogen peroxide technology or patents, or that they provide any ionized hydrogen peroxide products or services.

~~At our 2017 Annual Meeting of Shareholders, our shareholders elected Mr. Ronald E. Ainsworth to our board of directors, to serve as a Class I director.~~ The term of his service as director commenced on July 7, 2017 and will expire at our 2018 Annual Meeting of Shareholders, unless Mr. Ainsworth sooner resigns or is removed. The agreement between the Company and Mr. Ainsworth provides for annual rent of $143,460, contains an ~~annual fee in~~escalation clause that increases the ~~amount~~rent 3%, year over year and a landlord tenant improvement allowance of ~~$30,000 paid on a quarterly basis and the grant of 50,000 shares of our common stock. Mr. Ainsworth is a principal in 41 North International, LLC (See Note 10).~~$405,000.

In ~~August 2017, 975,000 warrants were exercised which resulted in gross proceeds~~May 2018, one of ~~$48,750.~~the noteholders with a principal balance of $700,000 agreed to convert its Note into shares of common stock at a reduced conversion price of $0.46 per share.

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

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

Overview

We are a global provider of infection prevention and decontamination products, ~~and~~ services ~~focused primarily on life sciences~~, ~~including healthcare, bio-safety, pharmaceutical, clean-room~~ and research. Our operating structure consists of four divisions: Healthcare, Life Sciences, TOMI Service Network and Food Safety. We provide environmental solutions for indoor and outdoor surface decontamination through the sale of equipment, services and licensing of our SteraMist™ BIT™, which is a hydrogen peroxide-based mist and fog registered with the U.S. Environmental Protection Agency (“EPA”). Our mission is to help our customers create a healthier world through our product line and our motto is “innovating for a safer ~~world”~~world™” for healthcare and life. ~~Introduced commercially~~

We introduced our SteraMist™ BIT™ technology platform to the commercial market in June 2013, ~~our~~ ~~current~~ which currently consists of a suite of products ~~incorporates~~that incorporate our BIT™ ~~Solution~~solution and applicators, including the SteraMist™ Surface Unit and the SteraMist™ Environment System. We have expanded our SteraMist™ BIT™ Technology beyond chemical and biological warfare applications to the ~~deactivation~~killing of problem microorganisms (including spores) in a wide variety of commercial settings. SteraMist™ BIT™ ~~provides~~is designed to provide fast-acting biological ~~deactivation~~six-log kill, which is a 99.9999% kill, and ~~works~~work in hard-to-reach areas, while leaving no residue or noxious fumes.

We We currently target both domestic and international markets for the control of microorganisms and the decontamination of large and small indoor space for biological pathogens and chemical agents including infectious diseases in hospital, bio-secure labs, pharmaceutical, biodefense, biosafety ~~including~~(including isolation and transfer chambers), tissue banks, food safety and many other commercial and residential settings.

Under the Federal Insecticide, Fungicide, and Rodenticide Act, we are required to register with the EPA and certain state regulatory authorities as a seller of pesticides. In June 2015, SteraMist™ BIT™ was registered with the EPA as a hospital-healthcare disinfectant for use as a misting/fogging agent. SteraMist™ BIT™ holds EPA registrations both as a hospital-healthcare and general disinfectant (EPA Registration 90150-2) and for mold control and air and surface remediation (EPA Registration 90150-1). In February 2016, we expanded our label with the EPA to include the bacterias ~~C. diff~~ Clostridium difficileand MRSA, as well as the influenza virus h1n1, which we believe has better positioned us to penetrate the hospital-healthcare and other industries. In August 2017, our EPA label was further expanded to include efficacy againstSalmonellaand Norovirus. ~~We currently~~In December 2017, SteraMist™ was included in the EPA’s list K, G, L and M. Currently, we have our EPA-registered label in all 50 ~~states with the addition of California and New York in July and October 2016, respectively.~~states.

SteraMist™ is designed to be easily incorporated into current cleaning procedures; is economical, non-corrosive and easy to apply; ~~leaves~~leave no residues; and ~~requires~~require no wiping. All our SteraMist™ products are fully validated to comply with good manufacturing practice standard, have received Conformité Européene (CE) marks in the European Economic Area and are approved by Underwriters Laboratory. Our solution is manufactured at an EPA-registered solution blender and our product performance is supported by good laboratory practice efficacy data for Staphylococcus aureus, Pseudomonas aeruginosa, mold spores, MRSA, h1n1, Geobacillus stearothermophilus and ~~C. diff~~Clostridium difficile spores. As of January 27, 2017, our BIT™ solution and BIT™ technology is one of 3353 of the EPA’s “Registered Antimicrobial Products Effective against Clostridium difficile Spores”, as published on the EPA’s K List.

In ~~March and May 2017,~~January 2018, we ~~raised through a private placement transaction gross proceeds~~appointed our new Chief Operating Officer, Elissa Shane, who had previously served us in other roles for several years. In addition, in January 2018, we also announced the appointment of ~~$6,000,000. We issued senior callable convertible promissory notes (“~~Dr. Lim Boh Soon to our board of directors.

Our revenue for the ~~Notes”) maturing on August~~three months ended March 31, 2018 and ~~November 8, 2018, unless earlier redeemed, repurchased~~2017 was $1,312,000 and 1,099,000, respectively, an increase of $213,000 or ~~converted. The Notes are convertible at any time by~~19% in the ~~holder into common stock at a conversion price of $0.54 per share. For~~current year period. During the notes amounting $5,300,000 in principal, subsequent to September 1, 2017, we may redeem the Notes at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. For the notes amounting $700,000 in principal, before November 8,three months ended March 31, 2018, we ~~may redeem the Notes at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued~~added 13 new customers and ~~unpaid interest as of the redemption date. Interest on the Notes is payable semi-annually~~noted an increase in cash on February 28 and August 31 of each year, beginning on August 31, 2017, at a rate of 4 percent per annum. In addition, we issued three-year warrants to purchase up to an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share. The proceedsrepeat solution orders from ~~the private placement will be used for research and development, international product registration, expansion of~~ our ~~internal sales force, marketing, public relations, expansions of our EPA label and for working capital and general corporate purposes.~~existing client base.

~~In February~~Domestically, our revenue for the three months ended March 31, 2018 and 2017 ~~we established a Scientific Advisory Board comprised of~~was $945,000 and $848,000, respectively. The increase in the current year period was attributable to large equipment orders from new customers during the three ~~experts in intellectual property, biosafety~~months ended March 31, 2018, and ~~infection prevention. The Scientific Advisory Board will assist management in developing strategies, scientific research and development and monitoring technological and regulatory trends.~~steady repeat solution orders from our existing customer base.

Internationally, our revenue for the three months ended March 31, 2018 and 2017 was $367,000 and $251,000, respectively. The increase in the current year period is attributable to increased orders from existing customers in Europe and Asia. While regulatory and product registrations have slowed our anticipated growth in Asia and Europe, we continue to make strides in the registration process, which we anticipate will position us to generate additional revenue in those regions. In March 2018, SteraMist™BIT™ technology was registered with the Taiwan Environmental Protection Agency.

During the first quarter of 2018, we focused on expanding our internal and external sales force and in April announced the hiring of Steven Grant, a senior leader in both the bio-tech and medical markets, who will serve as our Vice President of Sales. Mr. Grant brings over 30 plus years’ of experience and will direct all sales efforts across all divisions. Among his other previous positions held, he was a Vice President in the Life Science Division/Americas Sales and Marketing for over two years at Bioquell Inc (USA) and has extensive knowledge of hydrogen peroxide products as decontamination methods in a variety of divisions and verticals.

During the first quarter of 2018, we began participating in a large study that compares hospital manual cleans to a SteraMist™ mechanical clean using iHP™ disinfecting technology. The study is being conducted at one of the largest hospitals west of the Mississippi River, LAC-USC Medical Center, in addition to two other Los Angeles public hospitals, UCLA Olive View Medical Center, and Harbor-UCLA Medical Center. Study details and progress will be released as obtained from the study’s lead investigators.

To further expand efforts in our Healthcare division, we recently brought on Bill Flecky and Jeff Hobson who will lead our national sales efforts, and our initiatives are focused on expanding use sites for current SteraMist™ hospital clients, developing new clients, and securing greater penetration in the medical transport industry. Mr. Flecky our Director of Hospital-HealthCare, has years of demonstrated success in accelerating revenue growth and sales channel development in the scientific instruments, medical devices, and healthcare information technology markets. Mr. Hobson our Vice President of Hospital-HealthCare, has over 20 years of director level sales experience and a proven track record of generating revenue and developing business leads in the healthcare market specifically. We anticipate that the addition of these seasoned professionals will improve client penetration in this division.

In August of 2017, we announced the hiring of a new sales director to assist in the development of our business in the life science markets and added 26 additional sales representatives to our Life Sciences division.

In May 2018 we entered a lease for a 9,000 square foot facility in Frederick Maryland, to accommodate our expanding operations. The new space will have ~~continued~~additional office and warehouse space, a dedicated laboratory, larger research and development space and will feature a one-of-a-kind, state-of-the-art built-in decontamination chamber to demonstrate the ease, quickness and effectiveness of our core product “SteraMistTM” while applying it to numerous types of vehicles from neighboring communities. The facility will be located at Riverside Corporate Park in the heart of emerging bio-tech companies and research centers.

In May, 2018. We announced that our U.K. distributor, Westbury Decontaminationcompleted a decontamination service job at one of the facilities of the Metropolitan Police Service. Which is the territorial police force responsible for law enforcement in Greater London, and also has significant national responsibilities, such as coordinating and leading on U.K. wide national counter-terrorism matters and protecting senior members of the British Royal Family, in addition to members of the Cabinet of the United Kingdom and other ministerial members of Her Majesty's Government of the United Kingdom.

During 2018, we intend to continue to build brand awareness through marketing and advertising initiatives, as well as the overall performance of our product. We also increased efforts in our research and development of various testing and studies with a concentration in the hospital-healthcare market. We currently have placed significant resources into a study that focuses on quicker hospital room terminal cleans.

We have recently been featured in many publications, including some that are listed below;

●

In ~~July~~May 2017, we were featured in an article published in the International Journal of Food Microbiology by authors from the Key Laboratory of Food Nutrition and Safety (Tianjin University of Science and Technology), the U.S. Department of Agriculture and the Center for Nanotechnology and Nanotoxicology at the Harvard School of Public Health, which stated that cold plasma-activated hydrogen peroxide aerosol (SteraMist product) rendered samples of Escherichia coli 0157:H7, Salmonella Typhimurium and Listeria innocua inactive, while also maintaining the quality of the produce tested.

●

In June 2017, one of our custom ~~built in~~built-in systems that was designed and installed into a vivarium facility at the Dana Farber Cancer Institute was featured in a publication, ALNmag (Animal Laboratory Magazine) ~~ALNmag~~“Applying Alternative Decontamination Methods in Vivarium Design”.

●

In ~~July~~December 2017, we ~~settled our litigation with Astro Pak Corporation (“Astro Pak”) relating to our patents and intellectual property rights.~~ ~~Astro Pak has agreed that we are~~were included in the ~~sole owner~~article “Review of ~~ionized hydrogen peroxide decontamination and sterilization technology, patents, and products, which we market under~~Necessary Practices for EPA Submission of a Hospital Disinfectant Using Good Laboratory Practice (GLP) Disinfectant Study Summaries of the ~~brands Binary Ionization Technology® (BIT™) and~~ SteraMist™~~. We sued Astro Pak and its wholly owned subsidiary SixLog Corporation (“SixLog”)~~ BIT™ Disinfection System” in California federal court for infringing our United States Patent Nos. 6,969,487 and 7,008,592 and violating our intellectual property rights by, among other things, indicating that our technology and patents were proprietary to SixLog and marketing our patented equipment with SixLog labels. Astro Pak and SixLog agreed to cease this conduct and pay us a cash settlement. Astro Pak also agreed to assign its iHP mark to us, complementing our existing trademark and trade name protection. Finally, Astro Pak and SixLog agreed to remove from the web or take steps to remove any assertions or suggestions that they own or developed ionized hydrogen peroxide technology or patents, or that they provide any ionized hydrogen peroxide products or services.Applied Biosafety: Journal of ABSA International.

~~Domestically, our revenue for~~

●

In February 2018, we were featured in an article that discusses how a hospital in Delaware is managing to control the ~~three and six months ended June 30, 2017 was $1,002,000 and $1,831,000, respectively. We performed various~~spread of the flu virus. Delaware Online, part of the USA Today Network, shared news of record high ~~level decontamination engagements in 6 global pharmaceutical facilities during the six months ended June 30 2017, which contributed to the growth in revenue~~flu cases in the ~~life science market during 2017. We anticipate continued growth~~state and the way in which St. Francis Healthcare, located in Wilmington, Delaware, is managing to address the ~~life science market as we further expand our dedicated sales force in~~need to control this highly infectious and aggressive flu strain through the ~~sector and as a result of the settlement with Astro Pak. In addition, we expanded our customer base in the hospital-healthcare domestic and TOMI Service Network (“TSN”) markets.~~

~~Internationally, our revenue for the three and six months ended June 30, 2017 was $378,000 and $648,000, respectively. We continued to sell SteraMist~~™ ~~equipment and solution into Europe while furthering our product registrations~~use of our SteraMist™ BIT™ technology in 10 key countries throughout the European region. In addition, we continued our growth into international markets during the second quarter by entering into distributor and sales rep agreements in Chile, Brazil and Portugal.technology.

Our sales results for the six months ended June 30, 2016 included revenue from our exclusive distributor of approximately $650,000 based on the contractual minimum purchase requirements. During the first six months of 2017, our exclusive distributor failed to place an order for their annual minimum purchase commitment which contributed to the decline in revenue for 2017 compared to 2016. As a result of the distributor’s failure to meet their contractual minimum purchase requirement, the distributor lost its exclusivity.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

Disaggregation of Revenue

Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized ~~when: (1) persuasive evidence~~upon transfer of ~~an arrangement exists; (2) service has been rendered or delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination~~control of ~~criteria (3) and (4) is based on management’s judgment regarding the fixed nature of the selling prices of the services rendered or~~promised products ~~delivered and the collectability of those amounts. Provisions for discounts~~ to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

Service and ~~allowance,~~training revenue includes sales from our high-level decontamination and ~~other adjustments will be provided~~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 inthose services.

Costs to Obtain a Contract with a Customer

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the ~~same~~amortization period would have been one year or less. We generally expense sales commissions when incurred because the ~~related~~amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

Contract Balances

As of March 31, 2018 and December 31, 2017 we did not 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 ~~recorded.~~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 he 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.

Fair Value Measurement

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 or substantially the full term of the assets or liabilities.

Level 3:

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

The carrying amounts of cash and equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. The recorded value of convertible debt approximates its fair value as the terms and rates approximate market ~~rates~~rates.

Cash and Cash Equivalents

Accounts Receivable

Inventories

Inventories are valued at the lower of cost or market using the first-in, first-out ~~(“FIFO”)~~ method. Inventories consist primarily of finished goods ~~and raw materials~~. At ~~June 30,~~March 31, 2018 and December 31, 2017, ~~and December 31, 2016,~~ we did not have a reserve for slow-moving or obsolete inventory.

Property and Equipment

Accrued Warranties

Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We make an estimate of expected costs that will be incurred by us during the warranty period and charge that expense to the consolidated statement of operations at the date of sale. Our manufacturer assumes warranty against product defects for one year from date of sales, which we extend to our customers. We assume responsibility for product reliability and results.

Income Taxes

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized, in accordance with ASC guidance for income taxes. 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.

Loss Per Share

~~Loss~~Basic loss per share is computed by dividing our net loss by the weighted average number of shares of common stock outstanding during the period presented. Diluted 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 June 30, 2017 consisted of 11,111,100 shares of common stock from convertible debentures, 38,091,411 shares of common stock issuable upon exercise of outstanding warrants, 200,000 shares of common stock issuable upon outstanding options and 510,000 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

Potentially dilutive securities as of June 30, 2016, consisted of 36,576,413 shares of common stock from outstanding warrants, 200,000 shares of common stock from options and 510,000 shares of common stock from Convertible Series A Preferred Stock. Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

Basic loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional common shares were dilutive. Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately 49.9 million and 37.2 shares of common stock were outstanding at June 30, 2017 and 2016, respectively, but were excluded from the computation of diluted loss per share due to the anti-dilutive effect on net loss per share.

Six Months Ended June 30,

2017

2016

Net loss
$(1,838,986)
$(1,613,599)
Adjustments for convertible debt - as converted


Interest on convertible debt
  71,256
  -
Amortization of debt discount on convertible debt
  894
  -
Net loss attributable to common shareholders
$(1,766,836)
$(1,613,599)
Weighted average number of common shares outstanding:


Basic and diluted
  120,929,340
  120,317,306
Net loss attributable to common shareholders per share:


Basic and diluted
$(0.01)
$(0.01)

Stock-Based Compensation

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

Concentrations of Credit Risk

Long-Lived Assets Including Acquired Intangible Assets

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, ~~(ASU 2014-09) “Revenue~~Revenue from Contracts with Customers ~~(Topic 606).” ASU 2014-09 supersedes~~, to replace the existing revenue recognition ~~requirements in “Revenue Recognition (Topic 605)”~~criteria for contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 to interim and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual ~~reporting~~ periods beginning after December 15, ~~2016, including interim periods within that reporting period.~~2017. We adopted ASU Nos. 2014-09 and 2015-14 on January 1, 2018 on a modified retrospective basis, which did not impact our beginning accumulated deficit and additional paid-in capital.

In February 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-02, ~~(ASU 2016-02) “Leases (Topic 842).”~~Leases, which requires lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. ASU 2016-02 ~~provides new lease accounting guidance.~~also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. ASU 2016-02 is effective for interim and annual ~~reporting~~ periods beginning after December 15, 2018, ~~including interim periods within that reporting period. Early~~with early adoption is permitted. We currently expect to adopt ASU 2016-02 on January 1, 2019. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We intend to elect the available practical expedients upon adoption. Upon adoption, we expect the consolidated balance sheet to include a right of use asset and liability related to substantially all of our lease arrangements. We are ~~currently in the process of evaluating~~continuing to assess the impact of ~~the adoption of~~adopting ASU 2016-02 on our financial position, results of operations and related disclosures and have not yet concluded whether the effect on our consolidated financial ~~statements.~~statements will be material.

In March 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-09, ~~(ASU 2016-09) “Compensation – Stock Compensation (Topic 718).”~~Improvements to Employee Share-Based Payment Accounting, to simplify the accounting for the income tax effects from share-based compensation, the accounting for forfeitures and the accounting for statutory income tax withholding, among others. In particular, ASU No. 2016-09 ~~provides improvements~~requires all income tax effects from share-based compensation to ~~employee share-based payment~~be recognized in the consolidated statement of operations when the awards vest or are settled, ASU No. 2016-09 permits accounting for forfeitures as they occur, and ASU No. 2016-09 permits a higher level of statutory income tax withholding without triggering liability accounting. Adoption of ASU No. 2016-09 is ~~effective for annual reporting periods~~modified retrospective, retrospective and prospective, depending on the specific provision being adopted. We adopted ASU No. 2016-09 on January 1, 2017, which did not impact our beginning ~~after December 15, 2016, including interim periods within that reporting period.~~accumulated deficit and additional paid-in capital.

Financial Operations Overview

Our financial position as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017 was as follows:

	June 30, 2017 (Unaudited)	December 31, 2016	March 31, 2018 (Unaudited)	December 31, 2017

Total shareholders’ equity	$6,728,954	$8,250,063	$4,874,000	$5,394,000
Cash and cash equivalents	$5,467,521	$948,324	$3,867,000	$4,550,000
Accounts receivable, net	$1,723,469	$1,521,378	$2,230,000	$1,836,000
Inventories	$4,064,120	$4,047,310	$3,274,000	$3,519,000
Deposits on merchandise	$79,119	$147,010	$16,000	$-
Current liabilities	$1,110,105	$1,052,953	$940,000	$1,103,000
Convertible notes payable, net	$5,938,990	$—
Long-term liabilities			$5,952,000	$5,944,000
Working capital	$10,435,018	$5,715,516	$8,724,000	$9,073,000

During the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, our liquidity positions were affected by the following:

●

~~Gross proceeds from the issuance of the Notes of $6,000,000; and~~

●

Net cash used in operations of approximately ~~$1,474,000.~~$683,000.

Results of Operations for the Three Months Ended ~~June 30, 2017~~March 31, 2018 Compared to the Three Months Ended ~~June 30, 2016~~March 31, 2017

	For the Three Months		Three Months
	Ended June 30, (Unaudited)		Ended March 31, (Unaudited)
	2017	2016	2018	2017
Revenues	$1,380,000	$1,729,000
Revenues, Net			$1,312,000	$1,099,000
Gross Profit	$867,000	$1,022,000	$821,000	$682,000
Total Operating Expenses(1)	$2,023,000	$1,811,00	$1,317,000	$1,294,000
Loss from Operations	$(1,156,000)	$(790,000)	$(496,000)	$(612,000)
Total Other Income (Expense)	$(57,000)	$214,000	$(67,000)	$(14,000)
Net Loss	$(1,213,000)	$(575,000)	$(563,000)	$(626,000)
Basic loss per share	$(0.01)	$(0.00)
Diluted loss per share	$(0.01)	$(0.00)
Basic Net Loss per Share			$(0.00)	$(0.01)
Diluted Net Loss per Share			$(0.00)	$(0.01)

(1)

Includes approximately ~~$232,000~~$13,000 and ~~$118,000~~$12,000 in non-cash equity compensation expense for the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively.

Net Revenue

Sales

During the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ we had net revenue of approximately ~~$1,380,000~~$1,312,000 and ~~$1,729,000,~~$1,099,000, respectively, representing ~~a decrease~~an increase in revenue of ~~$349,000~~$213,000 or ~~20%~~19%.

~~Net Revenue~~

Product and Service Revenue

	Three Months Ended June 30, (Unaudited)		Three Months Ended March 31, (Unaudited)
	2017	2016	2018	2017
SteraMist Product	$1,099,000	$1,630,000	$1,092,000	$821,000
Service & Training	281,000	99,000
Service and Training			220,000	278,000
Total	$1,380,000	$1,729,000	$1,312,000	$1,099,000

Revenue by Geographic Region

	Three Months Ended June 30, (Unaudited)		Three Months Ended March 31, (Unaudited)
	2017	2016	2018	2017
United States	$1,002,000	$1,286,000	$945,000	$848,000
International	378,000	443,000	367,000	251,000
Total	$1,380,000	$1,729,000	$1,312,000	$1,099,000

Cost of Sales

During the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ our cost of sales was approximately ~~$512,000~~$492,000 and ~~$707,000,~~$416,000, respectively, representing ~~a decrease~~an increase of ~~195,000~~$76,000 or ~~27%~~18%. The primary reason for the ~~decrease~~increase in cost of sales is ~~lower~~attributable to the increase in sales during the three months ended ~~June 30, 2017~~March 31, 2018 as compared to the prior ~~year.~~year period. Our gross profit ~~margins~~margin as a percentage of sales for the three months ended ~~June 30, 2017 increased as compared to~~March 31, 2018 was consistent with the ~~prior~~same period ~~as a result of the product mix~~ in ~~sales.~~2017.

Professional Fees

Professional fees for the three months ended ~~June 30, 2017~~March 31, 2018 were approximately ~~$395,000,~~$106,000, as compared to ~~$96,000~~$272,000 during the prior year period, representing ~~an increase~~a decrease of approximately ~~$299,000,~~$166,000 or ~~311%~~61%. The ~~increase~~decrease is attributable to professional fees incurred in the prior year period in connection with our increased efforts to protect and strengthen our intellectual property and ~~the~~our lawsuit with Astro Pak Corporation, which we settled in July 2017. Professional fees are comprised mainly ~~comprised~~ of legal, accounting and financial consulting fees.

Depreciation and Amortization

Depreciation and amortization was approximately ~~$149,000~~$163,000 and ~~$146,000~~$159,000 for the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively, representing an increase of ~~$3,000,~~$4,000 or ~~2%. The increase in depreciation expense for the three months ended June 30, 2017 is attributable to additional fixed assets acquired~~3% in the ~~prior year.~~current year period.

Selling Expenses

Selling expenses for the three months ended ~~June 30, 2017~~March 31, 2018 were approximately ~~$371,000,~~$204,000, as compared to ~~$517,000~~$179,000 in the same period in ~~2016,~~2017, representing ~~a decrease~~an increase of ~~$146,000~~$25,000 or ~~28%~~14%. The ~~decrease~~increase in selling expenses is attributable to ~~lower sales volume~~higher marketing and advertising costs incurred in ~~the three months ended June 30, 2017 and a reduced number of employees as~~2018 compared to the prior ~~year. These~~year period. Selling expenses represent selling salaries and wages, trade show fees, commissions, advertising and marketing expenses.

Research and Development

Research and development expenses for the three months ended ~~June 30, 2017~~March 31, 2018 were approximately ~~$18,000,~~$132,000, as compared to ~~$19,000 in~~$31,000 for the three months ended ~~June 30, 2016.~~March 31, 2017, representing an increase of $102,000 or 332%. The primary reason for the increase is attributable to current and ongoing studies and testing in connection with our product related to a more effective and quicker hospital terminal cleans. Research and development expenses mainly include costs incurred in generating and supporting research on improving, extending and applying our patents in the field of mechanical cleaning and decontamination.

Equity Compensation Expense

Equity compensation expense, which are non-cash charges, for the three months ended March 31, 2018 was approximately $13,000, as compared to $12,000 during the three months ended March 31, 2017, representing an increase of $1,000 or 8%.

Consulting Fees

Consulting fees for the three months ended ~~June 30, 2017~~March 31, 2018 were approximately ~~$86,000,~~$35,000, as compared to ~~$101,000 during the quarter ended June 30, 2016, representing a decrease of approximately $15,000, or 15%.~~

~~Equity Compensation Expen~~se

~~Equity compensation expense represents non-cash charges and for the three months ended June 30, 2017 was approximately $232,000, as compared to $118,000~~$31,000 during the three months ended ~~June 30, 2016,~~March 31, 2017, representing an increase of ~~$114,000,~~approximately $4,000 or ~~96%~~13%. ~~The primary reason for the increase is attributable to equity compensation charges in the second quarter for warrants granted and modified.~~

General and Administrative Expense

General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense and product registration costs. General and administrative expense was approximately ~~$772,000~~$664,000 and ~~$814,000~~$610,000 for the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively, representing ~~a decrease~~an increase of ~~$42,000~~$54,000 or 5%9%. The primary reason for the ~~decrease in general and administrative expense~~increase is attributable ~~mainly~~ to ~~lower~~higher salaries and wages due to ~~a reduced~~an increase in the number of our employees in the three months ended ~~June 30, 2017~~March 31, 2018 as compared to the same period in ~~2016.~~2017.

Other Income and Expense

Amortization of debt discount was ~~$757~~approximately $8,000 and $0$100 during the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, representing~~respectively. Amortization of debt discount in the three months ended March 31, 2018 consisted of the amortization of debt discount on the $6,000,000 principal amount of ~~Notes~~unregistered senior callable convertible promissory notes (the “Notes��) issued in March and May 2017. The debt discount was amortized over the life of the Notes utilizing the effective interest method.

Income recognized from grant for the three months ended June 30, 2016 was $202,000. This represents the amounts advanced to the Company in excess of the costs incurred. The grant was finalized in 2016.

~~Gain on disposition of equipment for the three months ended June 30, 2017 and 2016 amounted to $0 and $12,000, respectively.~~

Interest income for the three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ was approximately ~~$600~~$1,200 and $0, respectively.

Interest expense for the three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ was approximately ~~$57,000~~$60,000 and ~~$0,~~$14,000, respectively. ~~This represented the interest incurred on the $6,000,000 in Notes issued in March and May 2017.~~

~~Net Loss~~

~~Net loss~~Interest expense for the three months ended June 30, 2017 and 2016 was approximately $1,213,000 and $575,000, respectively, representing an increase in the net loss of $638,000 or 111%. The primary reasons for the increase in the net loss can be attributed to:

●

~~Lower revenue and gross profit of approximately $349,000 and $154,000, respectively.~~

●

~~Increased operating expenses of approximately $212,000;~~

●

~~Interest expense of approximately $57,000;~~

●

~~Decrease in other income of $214,000~~

~~Results of Operations for the Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016~~

For the Six Months

Ended June 30,
(Unaudited)

2017

2016

Revenues
$2,479,000
$3,435,000
Gross Profit
$1,550,000
$1,981,000
Total Operating Expenses(1)
$3,317,000
$3,809,000
Loss from Operations
$(1,767,000)
$(1,828,000)
Total Other Income (Expense)
$(72,000)
$214,000
Net Loss
$(1,839,000)
$(1,614,000)
Basic loss per share
$(0.02)
$(0.01)
Diluted loss per share
$(0.02)
$(0.01)

~~(1)~~

~~Includes approximately $244,000 and $457,000 in non-cash equity compensation expense for the six months ended June 30, 2017 and 2016, respectively.~~

~~Sales~~

During the six months ended June 30, 2017 and 2016, we had net revenue of approximately $2,479,000 and $3,435,000, respectively, representing a decrease in revenue of $956,000 or 28%. The decrease in revenue during the six months ended June 30, 2017 ~~is attributable primarily to the fact that a distributor placed a large order in the first quarter of 2016, with no such corresponding transaction during the same period in 2017.~~

~~Net Revenue~~

~~Product and Service Revenue~~

Six Months Ended June 30,
(Unaudited)

2017

2016

SteraMist Product
$1,921,000
$3,134,000
Service & Training
558,000
301,000
Total
$2,479,000
$3,435,000

~~Revenue by Geographic Region~~

Six Months Ended June 30,
(Unaudited)

2017

2016

United States
$1,831,000
$2,263,000
International
648,000
1,172,000
Total
$2,479,000
$3,435,000

~~Cost of Sales~~

During the six months ended June 30, 2017 and 2016, our cost of sales was approximately $929,000 and $1,455,000, respectively, representing a decrease of 526,000 or 36%. The primary reason for the decrease in cost of sales is lower sales during the six months ended June 30, 2017 as compared to the prior year. Our gross profit margins as a percentage of sales for the six months ended June 30, 2017 increased as compared to the prior period as a resultMarch 31, 2018 consisted of the ~~product mix in sales.~~

~~Professional Fees~~

Professional fees for the six months ended June 30, 2017 were approximately $667,000, as compared to $273,000 during the prior year, representing an increase of approximately $394,000, or 144%. The increase is attributable to increased efforts to protect and strengthen our intellectual property and the lawsuit with Astro Pak which we settled in July 2017. Professional fees are mainly comprised of legal, accounting and financial consulting fees.

~~Depreciation and Amortization~~

Depreciation and amortization was approximately $308,000 and $279,000 for the six months ended June 30, 2017 and 2016, respectively, representing an increase of $29,000, or 10%. The increase in depreciation expense for the six months ended June 30, 2017 is attributable to additional fixed assets acquired in the prior year.

~~Selling Expenses~~

Selling expenses for the six months ended June 30, 2017 were approximately $550,000, as compared to $870,000 in the same period in 2016, representing a decrease of $320,000 or 37%. The decrease in selling expenses is attributable to lower sales volume in the six months ended June 30, 2017 and a reduced number of employees as compared to the prior year. These expenses represent selling salaries and wages, trade show fees, commissions and marketing expenses.

~~Research and Development~~

Research and development expenses for the six months ended June 30, 2017 were approximately $49,000, as compared to $27,000 in the six months ended June 30, 2016, representing an increase of $22,000 or 77%. Research and development expenses mainly include costsinterest incurred ~~in generating and supporting research on improving, extending and applying our patents in the field of mechanical cleaning and decontamination.~~

~~Consulting Fees~~

Consulting fees for the six months ended June 30, 2017 were approximately $117,000, as compared to $231,000 during the six months ended June 30, 2016, representing a decrease of approximately $114,000, or 49%. The decrease in consulting fees is primarily due to significant charge incurred in the first quarter of 2016 with no such charge in the current year.

~~Equity Compensation Expen~~se

Equity compensation expense represents non-cash charges and for the six months ended June 30, 2017 was approximately $244,000, as compared to $457,000 during the six months ended June 30, 2016, representing a decrease of $213,000, or 47%. The primary reason for the decrease is attributable to the timing of the issuances of options and warrants during the six months ended June 30, 2017 and 2016.

~~General and Administrative Expense~~

General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense and product registration costs. General and administrative expense was approximately $1,382,000 and $1,672,000 for the six months ended June 30, 2017 and 2016, respectively, representing a decrease of $290,000 or 17%. The primary reason for the decrease in general and administrative expense is attributable mainly to lower salaries and wages due to a reduced number of employees in the six months ended June 30, 2017 as compared to the same period in 2016.

~~Other Income and Expense~~

~~Amortization of debt discount was $894 and $0 during the six months ended June 30, 2017 and 2016, respectively, representing the amortization of debt discount~~ on the $6,000,000 principal amount of Notes issued in March and May 2017. ~~The debt discount was amortized over the life of the Notes utilizing the effective interest method.~~

~~Income recognized from grant for the six months ended June 30, 2016 was $202,000. This represents the amounts advanced to the Company in excess of the costs incurred. The grant was finalized in 2016.~~

~~Gain on disposition of equipment for the six months ended June 30, 2017 and 2016 amounted to $0 and $12,000, respectively.~~

~~Interest income for the six months ended June 30, 2017 and 2016 was approximately $600 and $0, respectively.~~

Interest expense for the six months ended June 30, 2017 and 2016 was approximately $71,000 and $0, respectively. This represented the interest incurred on the $6,000,000 in Notes issued in March and May 2017.

Net Loss

Net loss for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ was approximately ~~$1,839,000~~$563,000 and ~~$1,614,000,~~$626,000, respectively, representing ~~an increase in the net loss~~a decrease of ~~$225,000~~$63,000 or ~~14%~~10%. The primary reasons for the ~~increase~~decrease in the net loss ~~can be attributed~~are attributable to:

●

~~Lower~~Higher revenue and gross profit of approximately ~~$956,000~~$213,000 and ~~$431,000,~~$138,000, respectively,

●

~~Interest expense of approximately $71,000; and~~

●

~~Reduced other income of $214,000,~~ offset by;

●

~~Reduced~~Increased operating expenses of approximately ~~$492,000;~~$23,000, and;

●

Increased Interest expense of approximately $46,000.

Liquidity and Capital Resources

As of ~~June 30, 2017,~~ March 31, 2018, we had cash and cash equivalents of approximately ~~$5,467,000~~$3,867,000 and working capital of ~~$10,435,000.~~$8,724,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of public company filing requirements. We have historically funded our operations through debt and equity financings.

In September 2016, our common stock was uplisted to the OTCQX Best Market. We intend to apply to further uplist our common stock to a national securities ~~exchange.~~exchange in the future. Due to the applicable qualitative and quantitative standards required to successfully list on a national securities exchange, we may need to raise additional capital in order to meet such benchmarks. If we fail to satisfy the applicable listing standards of a national securities exchange, we may be unable to successfully list our common stock on such an exchange.

In March and May 2017, we raised gross proceeds of $6,000,000 through a private placement ~~transaction gross proceeds~~ of ~~$6,000,000.~~the Notes. We issued ~~senior callable convertible promissory notes (“~~the ~~Notes”) maturing~~Notes in tranches of $5,300,000 and $700,000, respectively, which originally were scheduled to mature on August 31, 2018 and November 8, 2018, respectively, unless earlier redeemed, repurchased or converted. The Notes are convertible at any time by the holder into common stock at a conversion price of $0.54 per share. For the notes amounting $5,300,000 in principal, subsequent to September 1, 2017, we may redeem the Notes at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. For the notes amounting $700,000 in principal, before November 8, 2018, weWe may redeem the Notes at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. Interest on the Notes is payable semi-annually in cash on February 28 and August 31 of each year ~~beginning on August 31, 2017,~~ at a rate of 4 percent per annum. In addition, we issued three-year warrants to purchase up to an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share. ~~The~~Currently, we are using the proceeds from the private placement ~~will be used~~ for research and development, international product registration, expansion of our internal sales force, marketing, public relations, expansions of our EPA label and for working capital and general corporate purposes. In February and March 2018, we and the holders of the Notes extended the maturity date of the $5,300,000 principal amount of Notes to April 1, 2019 and the $700,000 principal amount of Notes to June 8, 2019.

In May 2018, one of the noteholders with a principal balance of $700,000 agreed to convert its Note into shares of common stock at a reduced conversion price of $0.46 per share.

For the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ we incurred losses from operations of approximately ~~$1,767,000~~$496,000 and ~~$1,828,000,~~$612,000, respectively. The cash used in operations was approximately ~~$1,474,000~~$683,000 and ~~$3,040,000~~$248,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. We experienced a decline in revenue for the six months ended June 30, 2017 compared to the same period in the prior period which contributed to our loss from operations in the first six months of 2017. The decline in revenue was attributable ~~primarily to the fact that a distributor placed a large order in the first quarter of 2016, with no such corresponding transaction during the same period in 2017.~~

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

●

Ramp up and expansion of our internal sales force and manufacturers’ representatives;

●

~~length~~Length of our sales cycle;

●

Expansion into new territories and markets; and

●

Timing of orders from ~~distributors~~distributors.

We could incur additional operating losses and an increase of costs related to the continuation of product and technology development and administrative activities.

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 ~~salesforce~~sales force and manufacturer representatives in an effort to drive domestic revenue in all hospital-healthcare verticals;

●

Continued expansion of our internal sales force and manufacturer representatives in an effort to drive global revenue in the life science ~~verticals.~~verticals;

●

Expansion of international distributors; and

●

Continued growth of ~~the~~ TSN and new growth in the food safety market including ~~pre~~pre- and ~~post harvest.~~post-harvest.

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. However, in the event of unforeseen circumstances, unfavorable market developments or unfavorable results from operations, there can be no assurance that the above actions will be successfully implemented, and our cash flows may be adversely affected. While we have reduced the length of our sales cycle, it may still exceed 4–6 months and ~~it’s~~it is possible we may not be able to generate sufficient revenue in the next twelve months to cover our operating and compliance costs. We may also need to raise additional debt or equity financing to execute on the commercialization of our planned products. We cannot make any assurances that management’s strategies will be effective or that any additional financing will be completed on a timely basis, on acceptable terms or at all. Our inability to successfully implement our strategies or to complete any other financing may mean that we would have to significantly reduce costs and/or delay projects, which would adversely affect our business, customers and program development, and would adversely impact us.

Operating ~~activities~~Activities

Cash used in operating activities ~~during~~for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ was approximately ~~$1,474,000~~$683,000 and ~~3,040,000,~~$248,000, respectively. Cash used in operating activities ~~decreased $1,566,000 for~~increased in 2018 approximately $435,000 as compared to the ~~six months ended June 30, 2017~~prior year period primarily due to ~~the~~an increase in ~~inventory which occurred during the six months ended June 30, 2016.~~our accounts receivable, a decrease in our accounts payable, offset by a decrease in our inventory.

Investing Activities

Cash used in investing activities ~~during~~for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~ was approximately ~~$6,000~~$0 and $448,000. Cash used in investing activities decreased $442,000 as compared to the six months ended June 30, 2016 primarily due to service equipment purchased in the first half of 2016 with no corresponding purchase in the first half of 2017.$4,800, respectively.

Financing Activities

Cash provided by financing activities ~~during~~for the ~~six~~three months ended ~~June 30,~~March 31, 2018 was $0.

Cash provided by financing activities for the three months ended March 31, 2017 consisted of the ~~$6,000,000~~$5,300,000 in aggregate gross proceeds received from the issuance of the Notes.

~~Cash provided by financing activities~~ ~~during the six months ended June 30, 2016 was $0.~~

~~Contractual Obligations~~

~~Our contractual obligations as of June 30, 2017 are summarized as follows (in thousands):~~

Payments Due by Period

Contractual Obligations

Total

Less than
1 Year

1–3
Years

3–5
Years

More than
5 Years

Operating leases(1)
$31
$31
$-
$—
$—
Convertible Debt(2)
6,000
$-
$6,000
$-
$-

$6,031
$31
$6,000
$—
$—

~~(1)~~

Amounts represent a non-cancelable operating lease for office space in Frederick, Maryland that terminates on January 31, 2018. In addition to base rent, the lease calls for payment of common area maintenance operating expenses.

~~(2)~~

~~Amount represents convertible notes maturing on August 31, 2018 and November 8, 2018.~~

Recently Issued Accounting Pronouncements

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

~~Disclosure About~~ Off-Balance Sheet Arrangements

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

~~Critical Accounting Policies~~

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is a smaller reporting company as defined by Rule 405 under the Securities Act of 1933, as amended, and Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is not required to disclose the information required by this Item 3 pursuant to Item 305(e) of Regulation S-K.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of ~~June 30, 2017,~~March 31, 2018, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

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.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to any material proceedings or threatened proceedings as of the date of this ~~filing.~~Form 10-Q.

Item 1A. Risk Factors.

While, as a smaller reporting company, we are not required to provide the information required by this Item 1A, you should carefully review and consider the risk factors contained in our other reports and periodic filings with the SEC, including without limitation the risk factors contained under the caption “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.

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

~~On April 4, 2017, we issued 50,000 shares of common stock valued at $8,000 to Walter Johnsen. Mr. Johnsen is a director of the Company.~~None.

~~On April 4, 2017, we issued 50,000 shares of common stock valued at $8,000 to Kelly Anderson. Ms. Anderson is a director of the Company.~~

~~On April 4, 2017, we issued 50,000 shares of common stock valued at $8,000 to Harold Paul. Mr. Paul is a director of the Company.~~

~~On April 4, 2017, we issued 50,000 shares of common stock valued at $8,000 to Edward Fred. Mr. Fred is a former director of the Company.~~

~~On April 4, 2017, we issued 10,000 shares of common stock valued at $1,500 to a consultant.~~

~~On April 24, 2017, we issued 8,824 shares of common stock valued at $1,500 to a consultant.~~

No underwriters were involved in the foregoing sales of securities. The securities described in this Item 2 were issued pursuant to written compensatory plans or arrangements in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 701 promulgated under the Securities Act and/or the exemption set forth in Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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: ~~August 14, 2017~~ May 15, 2018	By:	/s/Halden S. Shane
		Halden S. Shane
		~~Halden S. Shane~~ Chief Executive Officer
		~~Chief Executive Officer~~ (Principal Executive Officer)



Date: ~~August 14, 2017~~ May 15, 2018	By:	/s/ Nick Jennings
		Nick Jennings
		~~Nick Jennings~~ Chief Financial Officer
		~~Chief Financial Officer~~ (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Exhibit

Incorporated by Reference

~~Filed~~

~~Herewith~~

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

~~31.1~~

10.1+

Employment Agreement, entered into as of January 5, 2018, by and between the Company and Elissa J. Shane, effective as of January 1, 2018.

8-K

000-09908

10.1

1/8/2018

31.1

Certification of Halden S. Shane, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

~~31.2~~

Certification of Nick Jennings, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1#

~~32.1#~~

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

32.2#

~~32.2#~~

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

101.INS

XBRL Instance Document.

~~101.INS~~101.SCH

XBRL ~~Instance~~Taxonomy Extension Schema Document.

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document.~~

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document.~~

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

~~101.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document.~~

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

~~101.LAB~~

~~XBRL Taxonomy Extension Labels Linkbase Document.~~

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

+ Indicates a management contract or compensatory plan.

# This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (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, as amended (Securities Act), or the Exchange Act.

3934

	For the
	Six Months Ended
	June 30,
	2017	2016
Cash Flow From Operating Activities:
Net Loss	$(1,838,986)	$(1,613,599)
Adjustments to Reconcile Net Loss to
Net Cash Used In Operating Activities:
Depreciation and Amortization	308,074	279,030
Amortization of Debt Discount	894	-
Equity Based Compensation	220,973	456,969
Value of Equity Issued for Services	35,000	221,694
Reserve for Bad Debts	50,000	105,000
Gain on Disposition of Property and Equipment	-	(12,000)
Changes in Operating Assets and Liabilities:
Decrease (Increase) in:
Accounts Receivable	(252,091)	(716,860)
Inventory	(16,809)	(2,844,182)
Prepaid Expenses	(106,447)	(100,599)
Deposits on Merchandise	67,890	231,211
Increase (Decrease) in:
Accounts Payable	5,323	810,943
Accrued Expenses	7,085	304,649
Accrued Interest	71,256	-
Accrued Officers Compensation	-	36,542
Deferred Rent	(3,880)	(3,102)
Advances on Grant	-	(210,503)
Customer Deposits	(22,632)	14,484
Net Cash Used in Operating Activities	(1,474,350)	(3,040,323)

Cash Flow From Investing Activities:
Purchase of Property and Equipment	(6,453)	(459,793)
Proceeds on Disposition of Property and Equipment	-	12,000
Net Cash Used in Investing Activities	(6,453)	(447,793)

	Three Months Ended June 30,
	2017	2016

Net loss	$(1,213,089)	$(575,155)
Adjustments for convertible debt - as converted
Interest on convertible debt	57,123	-
Amortization of debt discount on convertible debt	757	-
Net loss attributable to common shareholders	$(1,155,209)	$(575,155)
Weighted average number of common shares outstanding:
Basic and diluted	121,032,400	120,457,277
Net loss attributable to common shareholders per share:
Basic and diluted	$(0.01)	$(0.00)

	Six Months Ended June 30, (Unaudited)
	2017	2016
SteraMist Product	$1,921,000	$3,134,000
Service & Training	558,000	301,000
Total	$2,479,000	$3,435,000

Unvested Warrants
Weighted Average Exercise Price	Number	Average Weighted Remaining Contractual Life in Years
$0.50	100,000	5.00

	For the Six Months
	Ended June 30, (Unaudited)
	2017	2016
Revenues	$2,479,000	$3,435,000
Gross Profit	$1,550,000	$1,981,000
Total Operating Expenses(1)	$3,317,000	$3,809,000
Loss from Operations	$(1,767,000)	$(1,828,000)
Total Other Income (Expense)	$(72,000)	$214,000
Net Loss	$(1,839,000)	$(1,614,000)
Basic loss per share	$(0.02)	$(0.01)
Diluted loss per share	$(0.02)	$(0.01)

	Payments Due by Period
Contractual Obligations	Total	Less than 1 Year	1–3 Years	3–5 Years	More than 5 Years
Operating leases(1)	$31	$31	$-	$—	$—
Convertible Debt(2)	6,000	$-	$6,000	$-	$-
	$6,031	$31	$6,000	$—	$—