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

~~In February 2018,~~

Until such time, if ever, as we ~~were featured in an article~~can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings. Sufficient funds may not be available to us at all or on attractive terms when needed from these sources. To the extent that ~~discusses how a hospital in Delaware is managing to control~~we raise additional capital through the ~~spread~~future sale of equity or debt, the ~~flu virus. Delaware Online, part~~ownership interests of ~~the USA Today Network, shared news of record high flu cases in the state~~our stockholders will be diluted, and the ~~way in which St. Francis Healthcare, located in Wilmington, Delaware, is managing to address~~terms of these securities may include liquidation or other preferences that adversely affect the ~~need to control this highly infectious and aggressive flu strain through the use~~rights of our existing common stockholders. We may require additional capital beyond our currently anticipated amounts.

Operating Activities

~~SteraMist~~™Cash used in operating activities for the three months ended March 31, 2019 and 2018 was approximately $649,000 and $683,000, respectively. Cash used in operating activities decreased approximately $34,000 compared to the prior year period.

Investing Activities

~~BIT~~™Cash used in investing activities ~~technology.~~for the three months ended March 31, 2019 and 2018 was approximately $160,000 and $0, respectively. Cash used in investing activities increased $160,000 compared to the prior year period primarily due to software development costs.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2019 and 2018 were $0.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards ~~Codification~~Board (“~~ASC”~~FASB”) ~~606, “Revenue Recognition,”~~Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (Topic 606), 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

Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

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

Costs to Obtain a Contract with a Customer

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within ~~sales and marketing~~selling 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~~2019, and December 31, ~~2017~~2018 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 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 hethe 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.

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.

Cash and Cash Equivalents

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

Accounts Receivable

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

Inventories

Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods. ~~At March 31, 2018~~

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

We review inventory on an ongoing basis, considering factors such as deterioration and ~~December~~ ~~31, 2017, we did~~ obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not ~~have a reserve for slow-moving or obsolete inventory.~~be usable.

Property and Equipment

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

Leases

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

Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within other long-term liabilities as long-term operating lease, net of current portion on our condensed consolidated balance sheet as of March 31, 2019.

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

Capitalized Software Development Costs

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

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 ofthe expected costs ~~that will~~to be incurred ~~by us~~ during the warranty period and ~~charge that~~record the 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 ~~sales,~~sale, which we extend to our ~~customers.~~customers upon sale of the product. We assume responsibility for product reliability and results.

Income Taxes

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits ~~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. ~~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

Basic net loss per share is computed by dividing ~~our~~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.

~~Stock-Based~~Equity Compensation Expense

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

On July 7, 2017, our shareholders approved the 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance units/shares. Up to 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~~Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with 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, 2017, the Company issued 200,000 shares of common stock out of the 2016 Plan. In addition, for the three months ended March 31, 2018, we issued 300,000 shares of common stock out of the 2016 Plan.

Concentrations of Credit Risk

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

Long-Lived Assets Including Acquired Intangible Assets

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

Recent Accounting Pronouncements

In ~~May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers, to replace the existing revenue recognition 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 annual periods beginning after December 15, 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 ASU No. 2016-02,~~ ~~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 also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption 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 continuing to assess the impact 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 will be material.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~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 requires all income tax effects from share-based compensation to 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 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 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 byremoving 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 thereporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effectivefor 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 ASU No. 2017-04 is prospective. ~~We have not yet selected an adoption date, and ASU No. 2017-04 will have a currently undetermined impact on our consolidated financial statements~~.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Scope of 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. ASU No. 2017-09 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of ASU No. 2017-09 is prospective. We adopted ASU No. 2017-09 on January 1, 2018, which did not impact our consolidated financial statements upon adoption.

~~Financial Operations Overview~~

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

March 31,
2018
(Unaudited)

December 31,
2017

Total shareholders’ equity
$4,874,000
$5,394,000
Cash and cash equivalents
$3,867,000
$4,550,000
Accounts receivable, net
$2,230,000
$1,836,000
Inventories
$3,274,000
$3,519,000
Deposits on merchandise
$16,000
$-
Current liabilities
$940,000
$1,103,000
Long-term liabilities
$5,952,000
$5,944,000
Working capital
$8,724,000
$9,073,000

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

●

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

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

Three Months

Ended March 31,
(Unaudited)

2018

2017

Revenues, Net
$1,312,000
$1,099,000
Gross Profit
$821,000
$682,000
Total Operating Expenses(1)
$1,317,000
$1,294,000
Loss from Operations
$(496,000)
$(612,000)
Total Other Income (Expense)
$(67,000)
$(14,000)
Net Loss
$(563,000)
$(626,000)
Basic Net Loss per Share
$(0.00)
$(0.01)
Diluted Net Loss per Share
$(0.00)
$(0.01)

~~(1)~~

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

~~Net Revenue~~

~~Sales~~

~~During the three months ended March 31, 2018 and 2017, we had net revenue of approximately $1,312,000 and $1,099,000, respectively, representing an increase in revenue of $213,000 or 19%.~~

~~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

~~Cost of Sales~~

During the three months ended March 31, 2018 and 2017, our cost of sales was approximately $492,000 and $416,000, respectively, representing an increase of $76,000 or 18%. The primary reason for the increase in cost of sales is attributable to the increase in sales during the three months ended March 31, 2018 as compared to the prior year period. Our gross profit margin as a percentage of sales for the three months ended March 31, 2018 was consistent with the same period in 2017.

~~Professional Fees~~

Professional fees for the three months ended March 31, 2018 were approximately $106,000, as compared to $272,000 during the prior year period, representing a decrease of approximately $166,000 or 61%. The 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 our lawsuit with Astro Pak Corporation, which we settled in July 2017. Professional fees are comprised mainly of legal, accounting and financial consulting fees.

~~Depreciation and Amortization~~

Depreciation and amortization was approximately $163,000 and $159,000 for the three months ended March 31, 2018 and 2017, respectively, representing an increase of $4,000 or 3% in the current year period.

~~Selling Expenses~~

Selling expenses for the three months ended March 31, 2018 were approximately $204,000, as compared to $179,000 in the same period in 2017, representing an increase of $25,000 or 14%. The increase in selling expenses is attributable to higher marketing and advertising costs incurred in 2018 compared to the prior 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 March 31, 2018 were approximately $132,000, as compared to $31,000 for the three months ended 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 Expen~~se

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 March 31, 2018 were approximately $35,000, as compared to $31,000 during the three months ended March 31, 2017, representing an increase of approximately $4,000 or 13%.

~~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 $664,000 and $610,000 for the three months ended March 31, 2018 and 2017, respectively, representing an increase of $54,000 or 9%. The primary reason for the increase is attributable to higher salaries and wages due to an increase in the number of our employees in the three months ended March 31, 2018 as compared to the same period in 2017.

~~Other Income and Expense~~

Amortization of debt discount was approximately $8,000 and $100 during the three months ended March 31, 2018 and 2017, 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 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.

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

Interest expense for the three months ended March 31, 2018 and 2017 was approximately $60,000 and $14,000, respectively. Interest expense for the three months ended March 31, 2018 consisted of the interest incurred on the $6,000,000 principal amount of Notes issued in March and May 2017.

~~Net Loss~~

Net loss for the three months ended March 31, 2018 and 2017 was approximately $563,000 and $626,000, respectively, representing a decrease of $63,000 or 10%. The primary reasons for the decrease in the net loss are attributable to:

●

~~Higher revenue and gross profit of approximately $213,000 and $138,000, respectively, offset by;~~

●

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

●

~~Increased Interest expense of approximately $46,000.~~

~~Liquidity and Capital Resources~~

~~As of~~ ~~March~~ ~~31, 2018, we had cash and cash equivalents of approximately $3,867,000 and working capital of $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 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 of the Notes. We issued the 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. 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. Interest on the Notes is payable semi-annually in cash on February 28 and August 31 of each year 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. Currently, we are using the proceeds from the private placement 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 three months ended March 31, 2018 and 2017, we incurred losses from operations of approximately $496,000 and $612,000, respectively. The cash used in operations was approximately $683,000 and $248,000 for the three months ended March 31, 2018 and 2017, respectively.

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

●

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

●

~~Length of our sales cycle;~~

●

~~Expansion into new territories and markets; and~~

●

~~Timing of orders from distributors.~~

~~We could incur 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 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;~~

●

~~Expansion of international distributors; and~~

●

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

~~Cash used in operating activities~~ for the three months ended March 31, 2018 and 2017 was approximately $683,000 and $248,000, respectively. Cash used in operating activities increased in 2018 approximately $435,000 as compared to the prior year period primarily due to an increase in our accounts receivable, a decrease in our accounts payable, offset by a decrease in our inventory.

~~Investing Activities~~

~~Cash used in investing activities~~ ~~for the three months ended March 31, 2018 and 2017 was approximately $0 and $4,800, respectively.~~

~~Financing Activities~~

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

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

Recently Issued Accounting Pronouncements

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

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

~~The Company is~~We are 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 isare 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~~Principal Executive Officer and ~~CFO, has evaluated~~Principal Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this quarterly report on Form 10-Q. ~~Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2018, our~~Our disclosure controls and procedures are ~~designed at a reasonable assurance level and are effective~~intended to ~~provide reasonable assurance~~ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms ~~of the SEC,~~ and ~~that such information is~~(ii) accumulated and communicated to our management, including ~~our CEO~~the Principal Executive Officer and ~~CFO, as appropriate,~~Principal Financial Officer, to allow timely decisions regarding required ~~disclosure.~~

disclosures.

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.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material ~~proceedings~~adverse effect on our results of operations, financial position or ~~threatened proceedings as~~cash flows. Regardless of the ~~date~~outcome, any litigation could have an adverse impact on us due to defense and settlement costs, diversion of ~~this Form 10-Q.~~management resources and other factors.

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, ~~2017.~~2018. 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.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not ~~applicable.~~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: May ~~15, 2018~~14, 2019	By:	/s/ Halden S. Shane
		Halden S. Shane
		Chief Executive Officer
		(Principal Executive Officer)



Date: May ~~15, 2018~~14, 2019	By:	/s/ Nick Jennings
		Nick Jennings
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

~~Exhibit~~

Incorporated by Reference

Filed

Herewith

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

~~Filed Herewith~~

~~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

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.SCH~~101.INS

XBRL ~~Taxonomy Extension Schema~~Instance 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.~~Ac

3441


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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company ☑☒
	Emerging growth company ☐

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

	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

	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

TOMI ENVIRONMENTAL SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

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)

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS

		Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		2

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements.	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2125

Item 3	Quantitative and Qualitative Disclosures About Market Risk.	3038

Item 4	Controls and Procedures.	3038

PART II	OTHER INFORMATION

Item 1	Legal Proceedings.	3239

Item 1A	Risk Factors.	3239

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds.	3239

Item 3	Defaults Upon Senior Securities.	3239

Item 4	Mine Safety Disclosures.	3239

Item 5	Other Information.	3239

Item 6	Exhibits.	3239

SIGNATURES		3340

EXHIBIT INDEX		3441

ASSETS
Current Assets:	March 31, 2019 (Unaudited)	December 31, 2018
Cash and Cash Equivalents	$1,195,938	$2,004,938
Accounts Receivable - net	2,027,700	2,145,622
Inventories (Note 3)	2,393,188	2,682,014
Deposits	188,716	109,441
Prepaid Expenses	259,140	301,797
Total Current Assets	6,064,682	7,243,812

Property and Equipment – net (Note 4)	1,528,907	1,588,591

Other Assets:
Intangible Assets – net (Note 5)	1,143,439	1,235,816
Operating Lease - Right of Use Asset (Note 6)	703,823	-
Capitalized Software Development Costs (Note 7)	125,704	-
Other Assets	76,309	11,395
Total Other Assets	2,049,275	1,247,211
Total Assets	$9,642,863	$10,079,614

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$657,798	$1,133,649
Accrued Expenses and Other Current Liabilities (Note 12)	580,426	415,199
Accrued Officers Compensation	29,792	70,000
Accrued Interest (Note 8)	16,667	66,667
Customer Deposits	-	1,486
Current Portion of Long-Term Operating Lease	23,436	-
Deferred Rent	-	13,215
Total Current Liabilities	1,308,119	1,700,216

Long-Term Liabilities:
Long-Term Operating Lease, Net of Current Portion (Note 6)	1,089,316	-
Deferred Rent and Tenant Improvement Allowances	-	401,734
Convertible Notes Payable, net of discount of $0 and $17,534
at March 31, 2019 and December 31, 2018, respectively (Note 8)	5,000,000	4,982,466
Total Long-Term Liabilities	6,089,316	5,384,200
Total Liabilities	7,397,435	7,084,416

Commitments and Contingencies	-	-

Shareholders’ Equity:
Cumulative Convertible Series A Preferred Stock;
par value $0.01 per share share, 1,000,000 shares authorized; 510,000 shares issued
and outstanding at March 31, 2019 and December 31, 2018	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, 2019 and December 31, 2018	-	-
Common stock; par value $0.01 per share, 200,000,000 shares authorized;
124,690,418 and 124,290,418 shares issued and outstanding
at March 31, 2019 and December 31, 2018, respectively.	1,246,904	1,242,904
Additional Paid-In Capital	43,129,467	42,948,705
Accumulated Deficit	(42,136,043)	(41,201,511)
Total Shareholders’ Equity	2,245,428	2,995,198
Total Liabilities and Shareholders’ Equity	$9,642,863	$10,079,614

	For The Three Months Ended
	March 31,
	2019	2018

Sales, net	$1,252,658	$1,312,466
Cost of Sales	493,310	491,659
Gross Profit	759,348	820,807

Operating Expenses:
Professional Fees	105,481	106,458
Depreciation and Amortization	176,845	162,738
Selling Expenses	441,670	204,005
Research and Development	92,577	132,487
Equity Compensation Expense (Note 9)	80,917	12,685
Consulting Fees	35,006	35,026
General and Administrative	694,880	663,887
Total Operating Expenses	1,627,376	1,317,287
Loss from Operations	(868,028)	(496,480)

Other Income (Expense):
Amortization of Debt Discounts	(17,534)	(8,037)
Interest Income	1,030	1,198
Interest Expense	(50,000)	(60,000)
Total Other Income (Expense)	(66,504)	(66,839)

Net Loss	$(934,532)	$(563,319)

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


Basic and Diluted Weighted Average Common Shares Outstanding	124,659,307	122,229,959

	Three Months Ended		For the Three Months Ended
	March 31,		March 31,
	2018	2017	2019	2018
Cash Flow From Operating Activities:
Cash Flow from Operating Activities:
Net Loss	$(563,319)	$(625,897)	$(934,532)	$(563,319)
Adjustments to Reconcile Net Loss to
Net Cash Used In Operating Activities:
Depreciation and Amortization	162,738	159,151	176,845	162,738
Lease Expense			39,644	-
Amortization of Debt Discount	8,037	137	17,534	8,037
Equity Based Compensation	13,590	11,553
Equity Compensation Expense			80,917	13,590
Value of Equity Issued for Services	30,000	-	44,000	30,000
Reserve for Bad Debt			(105,000)	-
Changes in Operating Assets and Liabilities:
Decrease (Increase) in:
Accounts Receivable	(394,453)	110,250	222,922	(394,453)
Inventory	245,271	(453,144)	288,827	245,271
Prepaid Expenses	(6,266)	(18,951)	6,792	(6,266)
Deposits on Merchandise	(15,714)	67,890
Deposits			(79,275)	(15,714)
Other Assets			(64,914)	-
Increase (Decrease) in:
Accounts Payable	(116,927)	541,012	(475,851)	(116,927)
Accrued Expenses	20,725	(49,024)	225,072	20,725
Accrued Interest	(64,000)	14,133	(50,000)	(64,000)
Accrued Officer Compensation			(40,208)	-
Deferred Rent	(781)	(1,940)	-	(781)
Customer Deposits	(1,484)	(2,695)	(1,486)	(1,484)
Net Cash Used in Operating Activities	(682,583)	(247,525)	(648,714)	(682,583)

Cash Flow From Investing Activities:
Capitalized Software Costs			(125,704)	-
Purchase of Property and Equipment	-	(4,768)	(34,582)	-
Net Cash Used in Investing Activities	-	(4,768)	(160,286)	-

	Three Months Ended
	March 31,		For the Three Months Ended March 31,
	2018	2017	2019	2018
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
(Decrease) In Cash and Cash Equivalents			(809,000)	(682,583)
Cash and Cash Equivalents - Beginning	4,550,003	948,324	2,004,938	4,550,003
Cash and Cash Equivalents – Ending	$3,867,420	$5,996,031	$1,195,938	$3,867,420

Supplemental Cash Flow Information:
Cash Paid For Interest	$124,000	$-	$100,000	$124,000
Cash Paid for Income Taxes	$800		$800
Non-Cash Investing and Financing Activities :
Establishment of Discount on Convertible Debt	$-	$57,106
Non-Cash Investing and Financing Activities:
Right of Use Asset Arising from Adoption of ASC 842			$714,421	$-
Warrants and Options as Consideration for Accrued Expenses			$59,845	$-

	March 31,
	2018 (Unaudited)	December 31, 2017	March 31, 2019 (Unaudited)	December 31, 2018
Furniture and fixtures	$91,216		$280,042	$277,976
Equipment	1,192,293		1,322,910	1,300,139
Vehicles	56,410		60,703
Computer and Software	113,319
Leasehold Improvements	15,554
Computer and software			153,324	143,579
Leasehold improvements			355,898
Tenant Improvement Allowance			405,000
	1,468,792		2,577,877	2,543,295
Less: Accumulated depreciation	826,331	755,969	1,048,970	954,704
	$642,461	$712,822	$1,528,907	$1,588,591

Trademarks	$440,000		$496,792

Total Intangible Assets, net	$1,456,155	$1,548,532	$1,143,439	$1,235,816

Twelve Month Period Ending March 31,	Amount

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

Year Ended:	Operating Lease
December 31, 2019	$102,000
December 31,2020	147,000
December 31,2021	151,000
December 31,2022	156,000
December 31,2023	160,000
Thereafter	923,000
	$1,639,000

	Balances at December 31, 2018	Effect of Adoption of New Lease Standard	Balances at January 1, 2019
Assets
Prepaid Expenses	$301,797	$(35,865)	$265,932
Operating Lease Right of Use Asset	$-	$714,421	$714,421
Liabilities
Deferred Rent	$13,215	$(13,215)	$-
Current Portion of Long-Term Operating Lease	-	-	-
Deferred Rent and Tenant Improvement Allowances	$401,734	$(401,734)	$-
Long-Term Operating Lease, Net of Current Portion	-	$1,093,505	$1,093,505
Shareholders' Equity
Accumulated Deficit	$(41,201,511)	$-	$(41,201,511)

	Three Months Ended March 31,		For the Three Months Ended March 31, (Unaudited)
	2018 (Unaudited)	2017	2019	2018

Net loss	$(563,319)	$(625,897)	$(934,532)	$(563,319)
Adjustments for convertible debt - as converted
Interest on convertible debt	60,000	14,133	50,000	60,000
Amortization of debt discount on convertible debt	8,037	137	17,534	8,037
Net loss attributable to common shareholders	$(495,282)	$(611,627)	$(866,998)	$(495,282)
Weighted average number of common shares outstanding:
Weighted average number of shares of common stock outstanding:
Basic and diluted	122,229,959	120,825,134	124,659,307	122,229,959
Net loss attributable to common shareholders per share:
Basic and diluted	$(0.00)	$(0.01)	$(0.01)	$(0.00)

	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

Year Ended:	Amount

April 1 – December 31, 2019	$277,000
December 31, 2020	370,000
December 31, 2021	-
December 31, 2022	-
December 31, 2023	-
	$647,000

Operating leases:	March 31, 2019 (Unaudited)
Assets:
Operating lease right-of-use asset	$703,823
Liabilities:
Current Portion of Long-Term Operating Lease	$23,436
Long-Term Operating Lease, Net of Current Portion	1,089,316
	$1,112,752

General and Administrative Expenses:	Three Months Ended March 31, 2019 (Unaudited)
Operating lease expense	$39,644

		March 31, 2019 (Unaudited)
Weighted-average remaining lease term:
Operating leases		10.00 years

Discount rate:
Operating leases		7.00%

	Three Months Ended March 31, 2019 (Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:	$-

Year Ended:	Operating Lease
April 1 - December 31, 2019	$65,753
December 31, 2020	146,688
December 31, 2021	151,088
December 31, 2022	155,621
December 31, 2023	160,290
Thereafter	910,280
Total minimum lease payments	1,589,720
Less: Interest	476,968
Present value of lease obligations	1,112,752
Less: Current portion	23,436
Long-term portion of lease obligations	$1,089,316

	March 31,
	2018	December 31,	March 31, 2019 (Unaudited)	December 31, 2018
	(Unaudited)	2017
Convertible notes	$6,000,000		$5,000,000
Initial discount	(61,904)		(53,873)
Accumulated amortization	14,316	6,279	53,873	36,339
Convertible notes, net	$5,952,412	$5,944,375	$5,000,000	$4,982,466

	March 31, 2018 (Unaudited)		December 31, 2017		March 31, 2019 (Unaudited)		December 31, 2018
	Number of Options	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price	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	320,000	$0.52	200,000	$0.76
Granted	120,000	$0.12	—		300,000	$0.11	120,000	$0.12
Exercised	—				—
Outstanding, end of period	320,000	$0.52	200,000	$0.76	620,000	$0.32	320,000	$0.52

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

$0.05	20,000	2.78	20,000	$0.05	20,000	1.78	20,000	$0.05
$0.10	20,000	9.83	20,000	$0.10	70,000	5.97	70,000	$0.10
$0.11					250,000	4.76	250,000	$0.11
$0.12	100,000	4.77	100,000	$0.12	100,000	3.78	100,000	$0.12
$0.27	40,000	6.76	40,000	$0.27	40,000	5.76	40,000	$0.27
$0.55	100,000	7.85	100,000	$0.55	100,000	6.85	100,000	$0.55
$2.10	40,000	1.76	40,000	$2.10	40,000	0.76	40,000	$2.10
	320,000	5.80	320,000	$0.52	620,000	4.79	620,000	$0.32

	March 31, 2018 (Unaudited)		December 31, 2017
	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price
Outstanding, beginning of period	35,501,411	$0.33	37,076,413	$0.31
Granted	-	-	4,774,998	0.24
Exercised	-	-	(975,000)	0.05
Expired	(250,000)	(0.15)	(5,375,000)	0.13
Outstanding, end of period	35,251,411	$0.33	35,501,411	$0.33

Outstanding Warrants	Outstanding Warrants		Exercisable Warrants		Outstanding Warrants		Exercisable Warrants
Exercise Price	Number	Average Weighted Remaining Contractual Life in Years	Number	Weighted Average Exercise Price	Number	Average Weighted Remaining Contractual Life in Years	Number	Weighted Average Exercise Price
$0.08					250,000	4.65	250,000	$0.08
$0.10	265,000	4.29	265,000	$0.10	1,265,000	4.51	1,265,000	$0.10
$0.12	7,500,000	3.03	7,500,000	$0.12	3,750,000	3.67	3,750,000	$0.12
$0.12					4,000,000	0.54	4,000,000	$0.12
$0.17	10,000	4.57	10,000	$0.17	10,000	3.57	10,000	$0.17
$0.26	100,000	0.24	100,000	$0.26
$0.27	250,000	3.75	250,000	$0.27	250,000	2.75	250,000	$0.27
$0.29	10,125,613	2.55	10,125,613	$0.29	10,125,613	1.55	10,125,613	$0.29
$0.30	11,925,800	0.50	11,925,800	$0.30	2,300,000	1.39	2,300,000	$0.30
$0.32	250,000	3.50	250,000	$0.32	250,000	2.50	250,000	$0.32
$0.33	75,000	0.50	75,000	$0.33
$0.42	250,000	3.25	250,000	$0.42	250,000	2.25	250,000	$0.42
$0.50	325,000	2.32	325,000	$0.50	250,000	2.00	250,000	$0.50
$0.55	100,000	2.83	100,000	$0.55	100,000	1.83	100,000	$0.55
$0.62	75,000	0.30	75,000	$0.62
$0.69	999,998	1.96	999,998	$0.69	999,998	0.97	999,998	$0.69
$1.00	3,000,000	2.09	3,000,000	$1.00	3,000,000	1.09	3,000,000	$1.00
	35,251,411	1.99	35,251,411	$0.33	26,800,611	1.81	26,800,611	$0.33

	Three Months
	Ended March 31, (Unaudited)
	2018	2017
Revenues, Net	$1,312,000	$1,099,000
Gross Profit	$821,000	$682,000
Total Operating Expenses(1)	$1,317,000	$1,294,000
Loss from Operations	$(496,000)	$(612,000)
Total Other Income (Expense)	$(67,000)	$(14,000)
Net Loss	$(563,000)	$(626,000)
Basic Net Loss per Share	$(0.00)	$(0.01)
Diluted Net Loss per Share	$(0.00)	$(0.01)