NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
TOMI
Environmental Solutions, Inc., a Florida corporation
(“TOMI”, the “Company”, “we”,
“our” and “us”) is a global provider of
disinfection and decontamination essentials through its premier
Binary Ionization Technology®
(BIT™)
platform, under which it manufactures, licenses, services and sells
its SteraMist™ brand of
products, including SteraMist™ BIT™, a hydrogen
peroxide-based mist and fog.
Invented under a defense grant in association with
the Defense Advanced Research Projects Agency (DARPA) of the U.S.
Department of Defense, BIT™ is
registered with the U.S. Environmental Protection Agency
(“EPA”) and uses a low
percentage hydrogen peroxide as its only active ingredient to
produce a fog composed mostly of a hydroxyl radical
(.OH
ion), known as ionized Hydrogen Peroxide
(“iHP™”).
Represented by the SteraMist™ brand
of products, iHP™ produces a germ-killing aerosol that works
like a visual non-caustic gas.
TOMI’s
products are designed to service a broad spectrum of commercial
structures, including, but not limited to, hospitals and medical
facilities, bio-safety labs, pharmaceutical facilities, meat and
produce processing facilities, universities and research
facilities, vivarium labs, all service industries including cruise
ships, office buildings, hotel and motel rooms, schools,
restaurants, military barracks, police and fire departments, and
athletic facilities. TOMI products are also used in
single-family homes and multi-unit residences.
TOMI’s
mission is to help its customers create a healthier world through
its product line in its divisions (Healthcare, Life Sciences, TOMI
Service Network and Food Safety).
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, 2018 and
notes thereto which are included in the Annual Report on Form 10-K
previously filed with the SEC on April 1, 2019. 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.
The
Company's convertible notes payable aggregating $5,000,000
principal (see Note 8) are due April 3, 2020. As a result, the
Company has a working capital deficiency of $880,271 at September
30, 2019 and does not currently have sufficient resources to
satisfy this debt when due. This raises substantial doubt about the
Company's ability to continue as a going concern. The Company plans
to raise additional capital in order to satisfy this debt when
due.
The
accompanying unaudited condensed consolidated financial statements
do not include any adjustments related to the recoverability or
classification of asset-carrying amounts or the amounts and
classifications of liabilities that may result should the Company
be unable to continue as a going concern.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of TOMI and its wholly owned subsidiary, TOMI
Environmental Solutions, Inc., a Nevada corporation. All
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 consolidated financial statements in conformity with
U.S. GAAP requires us to make estimates and assumptions that affect
the amounts reported and disclosed in the accompanying condensed
consolidated financial statements and the accompanying notes.
Actual results could differ materially from these estimates. On an
ongoing basis, we evaluate our estimates, including those related
to accounts receivable, inventory, fair values of financial
instruments, intangible assets, useful lives of intangible assets
and property and equipment, fair values of stock-based awards,
income taxes, and contingent liabilities, among others. We base our
estimates on historical experience and on various other assumptions
that are believed to be reasonable, the results of which form the
basis for making judgments about the carrying values of our assets
and liabilities.
Fair Value Measurements
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
Level
1:
|
Quoted
prices in active markets for identical assets or
liabilities.
|
Level
2:
|
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data 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 8).
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 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 nine months ended September 30, 2019 was
approximately $1,000 and $33,000, respectively. Bad debt expense
for the three and nine months ended September 30, 2018 was
approximately $0 and $64,000, respectively.
At
September 30, 2019 and December 31, 2018, the allowance for
doubtful accounts was $110,000 and $300,000,
respectively.
As of September 30, 2019, two customers accounted for 22% of
accounts receivable. As of December 31, 2018, two customers
accounted for 37% of accounts receivable.
One customer accounted
for 12% and 32% of net revenue for the three
months ended September 30, 2019 and 2018,
respectively.
One customer accounted
for 10% and 16% of net revenue for the nine
months ended September 30, 2019 and 2018,
respectively.
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.
We
expense costs to maintain certification to cost of goods sold as
incurred.
We
review inventory on an ongoing basis, considering factors such as
deterioration and obsolescence. We record an allowance for
estimated losses when the facts and circumstances indicate that
particular inventories may not be usable. Our reserve for obsolete
inventory was $100,000 as of September 30, 2019 and December 31,
2018.
Property and Equipment
We
account for property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Depreciation for equipment, furniture and
fixtures and vehicles commences once placed in service for its
intended use. Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or
service lives of the improvements, whichever is
shorter.
Leases
In
February 2016, the FASB issued ASU No. 2016-02 (“ASC
842”), Leases, to
require lessees to recognize all leases, with certain exceptions,
on the balance sheet, while recognition on the statement of
operations will remain similar to current lease accounting.
Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842,
Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20,
Narrow-Scope Improvements for
Lessors, and ASU 2019-01, Codification Improvements, to clarify
and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real
estate-specific provisions and modifies certain aspects of lessor
accounting. This standard is effective for interim and annual
periods beginning after December 15, 2018, with early adoption
permitted. We adopted ASC 842 as of January 1, 2019 using the
modified retrospective basis with a cumulative effect adjustment as
of that date. In addition, we elected the package of practical
expedients permitted under the transition guidance within the new
standard, which allowed us to carry forward the historical
determination of contracts as leases, lease classification and not
reassess initial direct costs for historical lease arrangements.
Accordingly, previously reported financial statements, including
footnote disclosures, have not been recast to reflect the
application of the new standard to all comparative periods
presented.
Operating lease
assets are included within operating lease right-of-use assets, and
the corresponding operating lease liabilities are recorded as
current portion of long-term operating lease, and within long-term
liabilities as long-term operating lease, net of current portion on
our condensed consolidated balance sheet as of September 30,
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.
Adoption of the new
lease standard on January 1, 2019 had a material impact on our
interim unaudited condensed consolidated financial statements. The
most significant impacts related to the recognition of right-of-use
("ROU") asset of $714,421 and lease liability of $678,556 for our
operating lease on the consolidated balance sheet. We also
reclassified prepaid expenses of $35,865 and deferred rent balance,
including tenant improvement allowances, and other liability
balances of $414,949 relating to our existing lease arrangements as
of December 31, 2018, into the ROU asset balance as of January 1,
2019. ROU assets represent our right to use an underlying asset for
the lease term and lease liabilities represent our obligation to
make lease payments arising from the lease. The standard did not
materially impact our consolidated statement of operations and
consolidated statement of cash flows.
The
cumulative effect of the changes made to our consolidated balance
sheet as of January 1, 2019 for the adoption of the new lease
standard was as follows:
|
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)
|
|
|
|
|
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 cost of sales. Amortization
expense for the three and nine months ended September 30, 2019 was
$6,285.
Accounts
Payable
As of September 30, 2019, two vendors accounted for approximately
27% of accounts payable. As of December 31, 2018, three vendors
accounted for approximately 63% of accounts payable.
For
the three and nine months ended September 30, 2019, one vendor
accounted for 54% and 68% of cost of sales, respectively. For the
three and nine months ended September 30, 2018, one vendor
accounted for 80% and 76% of cost of sales,
respectively.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We estimate
the expected costs to be incurred during the warranty period and
record the expense to the consolidated statement of operations at
the date of sale. Our 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 September 30, 2019 and
December 31, 2018, our warranty reserve was $30,000 (See Note
13).
Income Taxes
Deferred income tax
assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits that are, on a more
likely than not basis, not expected to be realized in accordance
with Accounting Standards Codification (“ASC”) guidance
for income taxes. Net deferred tax benefits have been fully
reserved at September 30, 2019 and December 31, 2018. 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 September
30, 2019 consisted of 9,259,250 shares of common stock from
convertible debentures, 21,340,523 shares of common stock issuable
upon exercise of outstanding warrants, 620,000 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 September 30, 2018 consisted of 9,814,805
shares of common stock from convertible debentures, 26,375,611
shares of common stock issuable upon exercise of outstanding
warrants, 320,000 shares of common stock issuable upon outstanding
options and 510,000 shares of common stock 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.
Diluted
net 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 stock that would have been
outstanding if the potential shares of common stock had been issued
and if such additional shares were dilutive. Options, warrants,
preferred stock and shares associated with the conversion of debt
to purchase approximately 31.7 million and 36.6 million shares of
common stock were outstanding at September 30, 2019 and December
31, 2018, respectively, but were excluded from the computation of
diluted net loss per share due to the anti-dilutive effect on net
loss per share.
|
For the Three Months Ended September 30,
(Unaudited)
|
|
|
|
|
|
|
Net
loss
|
$(236,813)
|
$(373,158)
|
Adjustments
for convertible debt - as converted
|
|
|
Interest
on convertible debt
|
50,000
|
53,000
|
Amortization
of debt discount on convertible debt
|
-
|
7,851
|
Net
loss attributable to common shareholders
|
$(186,813)
|
$(312,307)
|
Weighted
average number of shares of common stock outstanding:
|
|
|
Basic
and diluted
|
124,709,440
|
124,290,418
|
Net
loss attributable to common shareholders per share:
|
|
|
Basic
and diluted
|
$(0.00)
|
$(0.00)
|
|
|
|
|
For the Nine Months Ended September 30,
(Unaudited)
|
|
|
|
|
|
|
Net
loss
|
$(1,756,049)
|
$(1,921,977)
|
Adjustments
for convertible debt - as converted
|
|
|
Interest
on convertible debt
|
150,000
|
168,878
|
Amortization
of debt discount on convertible debt
|
17,534
|
23,792
|
Net
loss attributable to common shareholders
|
$(1,588,515)
|
$(1,729,307)
|
Weighted
average number of shares of common stock outstanding:
|
|
|
Basic
and diluted
|
124,686,572
|
123,333,468
|
Net
loss attributable to common shareholders per share:
|
|
|
Basic
and diluted
|
$(0.01)
|
$(0.01)
|
|
|
|
Revenue Recognition
We recognize revenue in accordance with Financial
Accounting Standards Board (“FASB”) Accounting
Standards Update (“ASU”) No. 2014-09,
Revenue from
Contracts with Customers (Topic 606), 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
|
For the three months ended September 30,
(Unaudited)
|
|
|
|
SteraMist
Product
|
$928,000
|
$1,613,000
|
Service
and Training
|
672,000
|
335,000
|
Total
|
$1,600,000
|
$1,948,000
|
|
For the nine months ended September 30,
(Unaudited)
|
|
|
|
SteraMist
Product
|
$3,461,000
|
$3,723,000
|
Service
and Training
|
1,031,000
|
784,000
|
Total
|
$4,492,000
|
$4,507,000
|
Revenue by Geographic Region
|
For the three months ended September 30,
(Unaudited)
|
|
|
|
United
States
|
$1,288,000
|
$1,754,000
|
International
|
312,000
|
194,000
|
Total
|
$1,600,000
|
$1,948,000
|
|
For the nine months ended September 30,
(Unaudited)
|
|
|
|
United
States
|
$3,852,000
|
$3,545,000
|
International
|
640,000
|
962,000
|
Total
|
$4,492,000
|
$4,507,000
|
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products or services.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within selling
expenses.
Contract Balances
As of
September 30, 2019, and December 31, 2018 we did not have any
unsatisfied performance obligations for (i) contracts with an
original expected length of one year or less and (ii) contracts for
which we recognize revenue at the amount to which we have the right
to invoice for services performed.
Arrangements with Multiple Performance Obligations
Our
contracts with customers may include multiple performance
obligations. We enter into contracts that can include various
combinations of products and services, which are primarily distinct
and accounted for as separate performance obligations.
Significant Judgments
Our
contracts with customers for products and services often dictate
the terms and conditions of when the control of the promised
products or services is transferred to the customer and the amount
of consideration to be received in exchange for the products and
services.
Equity Compensation Expense
We
account for equity compensation expense using the Black Scholes
model in accordance with FASB ASC 718, “Compensation Stock
Compensation.” Under the provisions of FASB ASC 718, equity
compensation expense is estimated at the grant date based on the
award’s fair value.
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. 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 nine
months ended September 30, 2019 and 2018, we issued 400,000 and
300,000 shares of common stock, respectively, 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 and nine months ended September
30, 2019 and 2018.
Advertising and Promotional Expenses
We
expense advertising costs in the period in which they are incurred.
Advertising and promotional expenses
included in selling expenses for the three and nine months ended
September 30, 2019 were approximately $29,000 and $94,000,
respectively. Advertising and promotional expenses included in
selling expenses for the three and nine months ended September 30,
2018 were approximately $44,000 and $156,000,
respectively.
Research and Development Expenses
We expense research and
development expenses in the period in which they are
incurred. For the three
and nine months ended September 30, 2019, research and development
expenses were approximately $88,000 and $249,000, respectively. For
the three and nine months ended September 30, 2018, research and
development expenses were approximately $130,000 and $372,000,
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 $59,000 and $138,000
for the three and nine months ended September 30, 2019,
respectively. Shipping and handling costs included in general
and administrative expense were approximately $52,000 and $143,000
for the three and nine months ended September 30, 2018,
respectively.
Business Segments
We
currently have one reportable business segment due to the fact that
we derive our revenue primarily from one product. A breakdown of
revenue is presented in “Revenue Recognition” in Note 2
above.
Recent Accounting Pronouncements
In
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. 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 ASU
No. 2017-04 is prospective.
NOTE
3. INVENTORIES
Inventories consist
of the following at:
|
September
30,
2019
(Unaudited)
|
|
Finished
goods
|
$2,475,891
|
$2,782,014
|
Raw
Materials
|
29,685
|
-
|
Inventory
Reserve
|
(100,000)
|
(100,000)
|
|
$2,405,576
|
$2,682,014
|
NOTE 4. PROPERTY AND EQUIPMENT
Property and
equipment consist of the following at:
|
September 30,
2019
(Unaudited)
|
|
Furniture
and fixtures
|
$357,236
|
$277,976
|
Equipment
|
1,336,440
|
1,300,139
|
Vehicles
|
60,703
|
60,703
|
Computer
and software
|
161,665
|
143,579
|
Leasehold
improvements
|
362,898
|
355,898
|
Tenant
Improvement Allowance
|
405,000
|
405,000
|
|
2,683,942
|
2,543,295
|
Less:
Accumulated depreciation
|
1,246,038
|
954,704
|
|
$1,437,904
|
$1,588,591
|
For
the three and nine months ended September 30, 2019, depreciation
was $90,312 and $261,939, respectively. For the three and nine
months ended September 30, 2018, depreciation was $61,195 and
$191,647, respectively. For the three and nine months ended
September 30, 2019, amortization of tenant improvement allowance
was $9,798 and $29,395, respectively and was recorded as lease
expense and included within general and administrative expense on
the consolidated statement of operations.
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 $277,131 for the three and nine months ended September 30, 2019
and 2018, respectively.
Definite life
intangible assets consist of the following:
|
September
30,
2019
(Unaudited)
|
|
Intellectual
Property and Patents
|
$2,906,507
|
$2,848,300
|
Less: Accumulated
Amortization
|
2,386,407
|
2,109,276
|
Intangible Assets,
net
|
$520,100
|
$739,024
|
Indefinite life
intangible assets consist of the following:
Trademarks
|
$496,792
|
496,792
|
Total
Intangible Assets, net
|
$1,016,892
|
$1,235,816
|
Approximate future
amortization is as follows:
Year Ended:
|
|
|
|
October
1 – December 31, 2019
|
$93,000
|
December
31, 2020
|
373,000
|
December
31, 2021
|
3,000
|
December
31, 2022
|
3,000
|
December
31, 2023
|
3,000
|
Thereafter
|
45,000
|
|
$520,000
|
NOTE 6. LEASES
In
April 2018, we entered into a 10-year lease agreement for a new
9,000-square-foot facility that contains office, warehouse, lab and
research and development space in Frederick, Maryland. The lease
agreement was scheduled to commence on December 1, 2018 or when the
property was ready for occupancy. The agreement provided for annual
rent of $143,460, an escalation clause that increases the rent 3%
year over year, a landlord tenant improvement allowance of $405,000
and additional landlord work as discussed in the lease agreement.
We took occupancy of the property on December 17, 2018 and the
lease was amended in March 2019 to provide for a 4-month rent
holiday and a commencement date of April 1, 2019. Lease expense for
operating lease payments is recognized on a straight-line basis
over the lease term.
The
balances for our operating lease where we are the lessee are
presented as follows within our condensed consolidated balance
sheet:
Operating leases:
|
September 30, 2019
(Unaudited)
|
Assets:
|
|
Operating
lease right-of-use asset
|
$684,457
|
Liabilities:
|
|
Current
Portion of Long-Term Operating Lease
|
$69,210
|
Long-Term
Operating Lease, Net of Current Portion
|
$1,053,034
|
|
$1,122,244
|
The
components of lease expense are as follows within our condensed
consolidated statement of operations:
|
Three Months Ended
September 30, 2019
(Unaudited)
|
Nine Months Ended
September 30, 2019
(Unaudited)
|
|
|
|
Operating
lease expense
|
$39,329
|
$117,986
|
Other
information related to leases where we are the lessee is as
follows:
|
September 30, 2019
(Unaudited)
|
Weighted-average
remaining lease term:
|
|
Operating
leases
|
|
|
|
Discount
rate:
|
|
Operating
leases
|
7.00%
|
|
|
Supplemental cash
flow information related to leases where we are the lessee is as
follows:
|
Three Months Ended September 30, 2019
(Unaudited)
|
Nine Months Ended September 30, 2019
(Unaudited)
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
$29,888
|
$29,888
|
As of
September 30, 2019, the maturities of our operating lease liability
are as follows:
Year Ended:
|
|
October 1 –
December 31, 2019
|
$35,865
|
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
|
1,559,833
|
Less:
Interest
|
437,589
|
Present
value of lease obligations
|
1,122,244
|
Less:
Current portion
|
69,210
|
Long-term
portion of lease obligations
|
$1,053,034
|
As
previously reported in our Annual Report on Form 10-K for the year
ended December 31, 2018 and under legacy lease accounting (ASC
840), future minimum lease payments under non-cancellable leases as
of December 31, 2018 were as follows:
Year
Ended:
|
|
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
|
NOTE 7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In
accordance with ASC 985-20 we capitalized certain software
development costs associated with updating our continuing line of
product offerings. Capitalized software development costs consist
of the following at:
|
|
|
|
|
|
Capitalized
Software Development Costs
|
$125,704
|
$-
|
Less:
Accumulated Amortization
|
(6,285)
|
-
|
|
$119,419
|
$-
|
Amortization
expense for the three and nine months ended September 30, 2019 was
$6,285.
NOTE 8. CONVERTIBLE DEBT
In
March and May 2017, we closed a private placement transaction in
which we 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 was originally
scheduled to mature on August 31, 2018 and $700,000 in principal
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. 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. 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 nine months ended September 30, 2019
was $50,000 and $150,000, respectively. Interest expense
related to the Notes for the three and nine months ended September
30, 2018 was $53,000 and $168,878,
respectively.
The
warrants were valued at $62,559 using the Black-Scholes pricing
model with the following assumptions: expected volatility: 104.06%
–111.54%; expected dividend: $0; expected term: 3 years; and
risk-free rate: 1.49%–1.59%. We recorded the warrants’
relative fair value of $61,904 as an increase to additional paid-in
capital and a discount against the related Notes.
The
debt discount was amortized over the life of the Notes using the
effective interest method. Amortization expense for the three and nine months
ended September 30, 2019 was $0 and $17,534, respectively.
Amortization expense for the three and nine months ended September
30, 2018 was $7,851 and $23,792, respectively.
In February and March 2018, we extended the
maturity date of the Notes— we
extended the maturity date to April 1, 2019 for $5,300,000 of
principal on the Notes and to June 8, 2019 for the remaining
$700,000 Note. No additional consideration was paid or accrued by
us. 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”.
In May 2018, we offered
a noteholder the option to convert its Note at a reduced
conversion price of $0.46. The
noteholder accepted and converted at such price. Pursuant to the terms
of the conversion offer, an aggregate of $700,000 of
principal
and $5,212 of accrued interest outstanding under the
Note were converted into 1,877,960 shares of common
stock. We recognized an induced conversion cost of
$57,201 related to the conversion.
In December 2018, a
noteholder redeemed a note with a principal balance of $300,000 in
exchange for $150,000 in cash. We recognized a gain on redemption of convertible
note income in the amount of $150,000 as a result of the
transaction.
On
March 30, 2019, the two-remaining noteholders agreed to extend the
maturity dates of their notes totaling $5,000,000 to April 3, 2020.
As part of the extensions, we agreed that if we do not make payment
on or before the new maturity dates, after five (5) days written
notice, the holders will have the right, but not the obligation, to
convert the notes into our common shares at a conversion price of
$0.11 per share or a total of 45,454,545 shares. All other
provisions of the notes remain unchanged. We determined that the
modification of these Notes is not a substantial modification in
accordance with ASC 470-50, “Modifications and
Extinguishments”. At September 30, 2019, the convertible
notes payable with a maturity of April 3, 2020 is classified as a
current liability on our balance sheet.
Convertible notes
consist of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes
|
$5,000,000
|
$5,000,000
|
Initial
discount
|
(53,873)
|
(53,873)
|
Accumulated
amortization
|
53,873
|
36,339
|
Convertible
notes, net
|
$5,000,000
|
$4,982,466
|
NOTE 9. SHAREHOLDERS’ EQUITY
Our
Board of Directors (the “Board”) may, without further
action by our shareholders, from time to time, direct the issuance
of any authorized but unissued or unreserved shares of preferred
stock in series and at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of such
preferred stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of our common
stock. Furthermore, the Board could issue preferred stock with
voting and other rights that could adversely affect the voting
power of the holders of our common stock.
Convertible Series A Preferred Stock
Our
authorized Convertible Series A Preferred Stock, $0.01 par value,
consists of 1,000,000 shares. At September 30, 2019 and December
31, 2018, there were 510,000 shares issued and outstanding. The
Convertible Series A Preferred Stock is convertible at the rate of
one share of common stock for one share of Convertible Series A
Preferred Stock.
Convertible Series B Preferred Stock
Our
authorized Convertible Series B Preferred Stock, $1,000 stated
value, 7.5% cumulative dividend, consists of 4,000 shares. At
September 30, 2019 and December 31, 2018, 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 nine months ended September 30, 2018, we issued 362,500 shares
of common stock valued at $37,500 to members of our board of
directors (see Note 11).
In May 2018, we issued 1,877,960 shares
of common stock in connection with the conversion of $705,212 of
principal and accrued interest outstanding under a
Note (see Note 8).
During
the nine months ended September 30, 2019, we issued 400,000 shares
of common stock valued at $44,000 to members of our board of
directors (see Note 11). During the nine months ended September 30,
2019, we issued 10,000 shares of common stock valued at $1,200 to a
consultant.
Stock Options
In
January 2018, we issued options to purchase an aggregate of 100,000
shares of common stock to our Chief Operating Officer, valued at
$11,780. The options have an exercise price of $0.12 per share and
expire in January 2023. The options were valued using the
Black-Scholes model using the following assumptions: volatility:
146%; dividend yield: 0%; zero coupon rate: 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.
In
January 2019, pursuant to an employment agreement, we issued
options to purchase an aggregate of 250,000 shares of common stock
to our Chief Operating Officer, valued at $24,694. The options have
an exercise price of $0.11 per share and expire in January 2024.
The options were valued using the Black-Scholes model using the
following assumptions: volatility: 144%; dividend yield: 0%; zero
coupon rate: 2.47%; and a life of 5 years. The value of the options
was expensed in the fourth quarter of 2018 and included in accrued
expenses at December 31, 2018.
In
January 2019, we issued options to purchase an aggregate of 50,000
shares of common stock to our Chief Financial Officer, valued at
$4,483. The options have an exercise price of $0.10 per share and
expire in January 2024. The options were valued using the
Black-Scholes model using the following assumptions: volatility:
143%; dividend yield: 0%; zero coupon rate: 2.58%; and a life of 5
years.
The
following table summarizes stock options outstanding as of
September 30, 2019 and December 31, 2018:
|
September 30,
2019
(Unaudited)
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
Outstanding,
beginning of period
|
320,000
|
$0.52
|
200,000
|
$0.76
|
Granted
|
300,000
|
0.11
|
120,000
|
0.12
|
Exercised
|
—
|
—
|
—
|
—
|
Outstanding,
end of period
|
620,000
|
$0.32
|
320,000
|
$0.52
|
Options
outstanding and exercisable by price range as of September 30, 2019
were as follows:
|
|
|
|
|
Remaining
Contractual
Life in
Years
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
$0.05
|
20,000
|
1.28
|
20,000
|
$0.05
|
$0.10
|
70,000
|
5.47
|
70,000
|
$0.10
|
$0.11
|
250,000
|
4.26
|
250,000
|
$0.11
|
$0.12
|
100,000
|
3.28
|
100,000
|
$0.12
|
$0.27
|
40,000
|
5.26
|
40,000
|
$0.27
|
$0.55
|
100,000
|
6.35
|
100,000
|
$0.55
|
|
40,000
|
0.26
|
40,000
|
$2.10
|
|
620,000
|
4.29
|
620,000
|
$0.32
|
Stock Warrants
We
did not issue any warrants during the nine months ended September
30, 2018.
In
January 2019 we issued a warrant to purchase 1,000,000 shares of
common stock to the CEO at an exercise price of $0.10 per share
pursuant to an employment agreement. The warrant was valued at
$89,654 and has a term of 5 years. We utilized the Black-Scholes
model to fair value the warrant received by the CEO with the
following assumptions: volatility, 143%; expected dividend yield,
0%; risk free interest rate, 2.58%; and a life of 5 years. The
grant date fair value of each share of common stock underlying the
warrant was $0.09.
In January 2019 we issued a warrant to purchase
250,000 shares of common stock to an employee at an exercise price
of $0.12 per share. The warrant was valued at $21,931 and has a
term of 3 years. We utilized the Black-Scholes model to fair value
the warrant received by the employee with the following
assumptions: volatility, 148%; expected dividend yield, 0%; risk
free interest rate, 2.55%; and a life of 3 years. The grant date
fair value of each share of common stock underlying the warrant was
$0.09. The value of the warrants was expensed in the fourth
quarter of 2018 and included in accrued expenses at December 31,
2018.
In
April 2019 we issued a warrant to purchase 50,000 shares of common
stock to an employee at an exercise price of $0.14 per share. The
warrant was valued at $6,116 and has a term of 5 years. We utilized
the Black-Scholes model to fair value the warrant received by the
employee with the following assumptions: volatility, 134%; expected
dividend yield, 0%; risk free interest rate, 2.32%; and a life of 5
years. The grant date fair value of each share of common stock
underlying the warrant was $0.12.
The
following table summarizes the outstanding common stock warrants as
of September 30, 2019 and December 31, 2018:
|
September 30,
2019
(Unaudited)
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
Outstanding,
beginning of period
|
26,550,611
|
$0.34
|
35,501,411
|
$0.33
|
Granted
|
1,300,000
|
0.11
|
250,000
|
0.08
|
Exercised
|
-
|
-
|
-
|
-
|
Expired
|
(6,510,088)
|
(0.29)
|
(9,200,800)
|
(0.30)
|
Outstanding,
end of period
|
21,340,523
|
$0.34
|
26,550,611
|
$0.34
|
Warrants
outstanding and exercisable by price range as of September 30, 2019
were as follows:
|
|
|
|
|
Average Weighted
Remaining Contractual
Life in Years
|
|
Weighted Average
Exercise Price
|
$0.08
|
250,000
|
4.15
|
250,000
|
$0.08
|
$0.10
|
1,265,000
|
4.01
|
1,265,000
|
$0.10
|
$0.12
|
3,750,000
|
3.17
|
3,750,000
|
$0.12
|
$0.12
|
4,000,000
|
0.04
|
4,000,000
|
$0.12
|
$0.14
|
50,000
|
4.55
|
50,000
|
$0.14
|
$0.17
|
10,000
|
3.07
|
10,000
|
$0.17
|
$0.27
|
250,000
|
2.25
|
250,000
|
$0.27
|
$0.29
|
4,615,525
|
2.41
|
4,615,525
|
$0.29
|
$0.30
|
2,300,000
|
0.89
|
2,300,000
|
$0.30
|
$0.32
|
250,000
|
2.00
|
250,000
|
$0.32
|
$0.42
|
250,000
|
1.75
|
250,000
|
$0.42
|
$0.50
|
250,000
|
1.50
|
250,000
|
$0.50
|
$0.55
|
100,000
|
1.33
|
100,000
|
$0.55
|
$0.69
|
999,998
|
0.47
|
999,998
|
$0.69
|
$1.00
|
3,000,000
|
0.59
|
3,000,000
|
$1.00
|
|
21,340,523
|
1.68
|
21,340,523
|
$0.34
|
There
were no unvested warrants outstanding as of September 30,
2019.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
We may become a party to litigation in the normal
course of business. In the opinion of management, there
are no legal matters involving us that would have a material
adverse effect upon our financial condition, results of operations
or cash flows. In addition, from time to time, we may have
to file claims against parties that infringe on our intellectual
property.
Product Liability
As
of September 30, 2019, and December 31, 2018, there were no claims
against us for product liability.
NOTE 11. CONTRACTS AND AGREEMENTS
Agreements with Directors
In
December 2017, we increased the annual board fee to directors to
$40,000, to be paid in cash on a quarterly basis, with the
exception of the audit committee chairperson, whose annual fee we
increased to $45,000, also to be paid in cash on a quarterly basis.
Director compensation also includes the annual issuance of our
common stock.
For
the nine months ended September 30, 2018, we issued an aggregate of
362,500 shares of common stock that were valued at $37,500 to
members of our board of directors.
For
the nine months ended September 30, 2019, we issued an aggregate of
400,000 shares of common stock that were valued at $44,000 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
(“PSPs”). The licensing agreements grant protected
territories to PSPs to perform services using our
SteraMist™ platform of
products and also provide for potential job referrals to PSPs
whereby we are entitled to referral fees. Additionally, the
agreement provides for commissions due to PSPs for equipment and
solution sales they facilitate to other service providers in their
respective territories. As part of these agreements, we are
obligated to provide to the PSPs various training, ongoing support
and facilitate a referral network call center. As of September 30,
2019, we had entered into 93 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.
NOTE 12. ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the following
at:
|
|
|
|
|
September 30,
2019
(Unaudited)
|
|
Commissions
|
$136,287
|
$136,631
|
Payroll
and related costs
|
173,475
|
144,359
|
Director
fees
|
41,250
|
41,250
|
Sales
Tax Payable
|
3,652
|
11,296
|
Accrued
warranty (Note 13)
|
30,000
|
30,000
|
Other
accrued expenses
|
61,894
|
51,663
|
Total
|
$446,558
|
$415,199
|
NOTE 13. 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:
|
September 30,
2019
(Unaudited)
|
|
Beginning
accrued warranty costs
|
$30,000
|
$5,000
|
Provision for
warranty expense
|
1,839
|
47,454
|
Settlement of
warranty claims
|
(1,839)
|
(22,454)
|
Ending
accrued warranty costs
|
$30,000
|
$30,000
|
NOTE 14. CUSTOMER CONCENTRATION
The
Company had certain customers whose revenue individually
represented 10% or more of the Company’s total revenue, or
whose accounts receivable balances individually represented 10% or
more of the Company’s accounts receivable.
As of September 30, 2019, two customers accounted for 22% of
accounts receivable. As of December 31, 2018, two customers
accounted for 37% of accounts receivable.
One customer accounted
for 12% and 32% of net revenue for the three
months ended September 30, 2019 and 2018,
respectively.
One customer accounted
for 10% and 16% of net revenue for the nine
months ended September 30, 2019 and 2018,
respectively.
NOTE 15. SUBSEQUENT EVENTS
In
November 2019, we filed an amendment to our Restated Articles of
Incorporation, increasing the number of authorized shares of our
Common Stock from 200,000,000 to 250,000,000.