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,
prisons, and athletic facilities. TOMI products are also
used in single-family homes and multi-unit residences. Recently
TOMI’s products was included in List N from the EPA to help
combat COVID-19. TOMI is actively using its SteraMist brand of
products in the frontline for combating COVID-19 around the
world.
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, 2019 and
notes thereto which are included in the Annual Report on Form 10-K
previously filed with the SEC on March 30, 2020. The Company
follows the same accounting policies in the preparation of interim
reports. The results of operations for the interim periods covered
by this Form 10-Q may not necessarily be indicative of results of
operations for the full fiscal year or any other interim
period.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of TOMI and its wholly owned subsidiary, TOMI
Environmental Solutions, Inc., a Nevada corporation. 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 the condensed consolidated financial statements in
conformity with U.S. GAAP requires us to make estimates and
assumptions that affect the amounts reported and disclosed in the
accompanying condensed consolidated financial statements and the
accompanying notes. Actual results could differ materially from
these estimates. On an ongoing basis, we evaluate our estimates,
including those related to accounts receivable, inventory, fair
values of financial instruments, intangible assets, useful lives of
intangible assets and property and equipment, fair values of
stock-based awards, income taxes, and contingent liabilities, among
others. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable, the
results of which form the basis for making judgments about the
carrying values of our assets and liabilities.
Fair Value Measurements
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
Level
1:
|
Quoted
prices in active markets for identical assets or
liabilities.
|
Level
2:
|
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data 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 and accrued expenses. All these items
were determined to be Level 1 fair value measurements.
The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash
and cash equivalents includes cash on hand, held at financial
institutions and other liquid investments with original maturities
of three months or less. At times, these deposits may be in excess
of insured limits.
Accounts Receivable
Our
accounts receivable are typically from credit worthy customers or,
for certain international customers, are supported by pre-payments.
For those customers to whom we extend credit, we perform periodic
evaluations of them and maintain allowances for potential credit
losses as deemed necessary. We have a policy of reserving for
doubtful accounts based on our best estimate of the amount of
potential credit losses in existing accounts receivable. We
periodically review our accounts receivable to determine whether an
allowance is necessary based on an analysis of past due accounts
and other factors that may indicate that the realization of an
account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. Bad debt expense for the three and six months
ended June 30, 2020 was approximately $48,000 and $73,000,
respectively. Bad debt expense for the three and six months ended
June 30, 2019 was approximately $(27,000) and $32,000,
respectively.
At
June 30, 2020 and December 31, 2019, the allowance for doubtful
accounts was $165,000 and $110,000, respectively.
As of December 31, 2019, three customers accounted for 37% of
accounts receivable.
One
customer/distributor accounted for 13% of net revenue for the six
months ended June 30, 2020. One customer accounted for 26% of net
revenue for the three months ended June 30, 2019 and two customers
accounted for 29% of net revenue for the six months ended June 30,
2019.
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 $0 and $100,000 as of June 30, 2020 and December 31,
2019, respectively.
Property and Equipment
We
account for property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Depreciation for equipment, furniture and
fixtures and vehicles commences once placed in service for its
intended use. Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or
service lives of the improvements, whichever is
shorter.
Leases
In
February 2016, the FASB issued ASU No. 2016-02 (“ASC
842”), Leases, to
require lessees to recognize all leases, with certain exceptions,
on the balance sheet, while recognition on the statement of
operations will remain similar to current lease accounting.
Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842,
Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20,
Narrow-Scope Improvements for
Lessors, and ASU 2019-01, Codification Improvements, to clarify
and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real
estate-specific provisions and modifies certain aspects of lessor
accounting. This standard is effective for interim and annual
periods beginning after December 15, 2018, with early adoption
permitted. We adopted ASC 842 as of January 1, 2019 using the
modified retrospective basis with a cumulative effect adjustment as
of that date. In addition, we elected the package of practical
expedients permitted under the transition guidance within the 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 June 30, 2020 and
December 31, 2019.
We have
elected not to present short-term leases on the condensed
consolidated balance sheet as these leases have a lease term of 12
months or less at lease inception and do not contain purchase
options or renewal terms that we are reasonably certain to
exercise. All other lease assets and lease liabilities are
recognized based on the present value of lease payments over the
lease term at commencement date. Because most of our leases do not
provide an implicit rate of return, we used our incremental
borrowing rate based on the information available at adoption date
in determining the present value of lease payments.
Capitalized Software Development Costs
In
accordance with ASC 985-20 regarding the development of software to
be sold, leased, or marketed, 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 six months ended June 30, 2020 was
$10,475 and $20,950, respectively.
Accounts Payable
As of June 30, 2020, two vendors accounted for approximately 64% of
accounts payable. As of December 31, 2019, one vendor accounted for
approximately 40% of accounts payable.
For
the three and six months ended June 30, 2020, two vendors accounted
for 78% and 80% of cost of sales, respectively. For the three and
six months ended June 30, 2019, one vendor accounted for 79% and
74% of cost of sales, respectively.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We estimate
the expected costs to be incurred during the warranty period and
record the expense to the condensed consolidated statement of
operations at the date of sale. Our manufacturers assume the
warranty against product defects from date of sale, which we extend
to our customers upon sale of the product. We assume responsibility
for product reliability and results. As of June 30, 2020, and
December 31, 2019, our warranty reserve was $90,000 and $30,000,
respectively (See Note 15).
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 June 30, 2020 and December 31, 2019. The effect on
deferred income tax assets and liabilities of a change in tax rates
is recognized in the period that such tax rate changes are
enacted.
Net Income (Loss) Per Share
Basic
net income or (loss) per share is computed by dividing the
Company’s net income or (loss) by the weighted average number
of shares of common stock outstanding during the period presented.
Diluted income or (loss) per share is based on the treasury stock
method and includes the effect from potential issuance of shares of
common stock, such as shares issuable pursuant to the exercise of
options and warrants and conversions of preferred stock or
debentures.
Potentially
dilutive securities as of June 30, 2020 consisted of 13,696,675
shares of common stock issuable upon exercise of outstanding
warrants, 810,000 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”).
Potentially
dilutive securities as of June 30, 2019 consisted of 9,259,250
shares of common stock from convertible debentures, 26,850,611
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.
Diluted
net income or (loss) per share is computed similarly to basic net
income or (loss) per share except that the denominator is increased
to include the number of additional shares of common stock that
would have been outstanding if the potential shares of common stock
had been issued and if such additional shares were dilutive.
Options, warrants, preferred stock and shares associated with the
conversion of debt to purchase approximately 15.0 million and 27.6
million shares of common stock were outstanding at June 30, 2020
and December 31, 2019, respectively, but were excluded from the
computation of diluted net loss per share at December 31, 2019 due
to the anti-dilutive effect on net loss per share.
|
For the Three Months Ended June 30,
(Unaudited)
|
|
|
|
Net
Income (Loss)
|
$3,656,916
|
$(584,704)
|
Adjustments
for convertible debt - as converted
|
|
|
Interest
on convertible debt
|
-
|
50,000
|
Amortization
of debt discount on convertible debt
|
-
|
-
|
Net
income (loss) attributable to common shareholders
|
$3,656,916
|
$(534,704)
|
Weighted
average number of shares of common stock outstanding:
|
|
|
Basic
|
133,541,403
|
124,699,539
|
Diluted
|
148,558,078
|
124,699,539
|
Net
income (loss) attributable to common shareholders per
share:
|
|
|
Basic
|
$0.03
|
$(0.00)
|
Diluted
|
$0.02
|
$(0.00)
|
The following provides a reconciliation of the shares used in
calculating the per share amounts for the periods
presented:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
Net
Income (Loss)
|
$3,656,916
|
$(584,704)
|
|
|
|
Denominator:
|
|
|
Basic
weighted-average shares
|
133,541,403
|
124,699,539
|
Effect
of dilutive securities
|
|
|
Warrants
|
13,696,675
|
-
|
Convertible
Debt
|
-
|
-
|
Options
|
810,000
|
-
|
Preferred
Stock
|
510,000
|
-
|
Diluted
Weighted Average Shares
|
148,558,078
|
124,699,539
|
|
|
|
Net
Income (Loss) Per Common Share:
|
|
|
Basic
|
$0.03
|
$(0.00)
|
Diluted
|
$0.02
|
$(0.00)
|
Note: Warrants, options and preferred stock for the three months
ended June 30, 2019 are not included in the computation of diluted
weighted average shares as such inclusion would be
anti-dilutive.
Income (loss) from Operations Data:
|
|
|
|
|
|
Income
(Loss) from Operations
|
$3,656,660
|
$(535,333)
|
Basic
and Diluted Weighted
|
|
|
Average
Shares
|
|
|
Basic
|
133,541,403
|
124,699,539
|
Diluted
|
148,558,078
|
124,699,539
|
Basic
and Diluted Income (loss) Per Common Share
|
|
|
Basic
|
$0.03
|
$(0.00)
|
Diluted
|
$0.02
|
$(0.00)
|
|
For the Six Months Ended June 30,
(Unaudited)
|
|
|
|
|
|
|
Net
Income (Loss)
|
$6,276,178
|
$(1,519,236)
|
Adjustments
for convertible debt - as converted
|
|
|
Interest
on convertible debt
|
40,689
|
100,000
|
Amortization
of debt discount on convertible debt
|
-
|
17,534
|
Net
income (loss) attributable to common shareholders
|
$6,316,867
|
$(1,401,702)
|
Weighted
average number of shares of common stock outstanding:
|
|
|
Basic
|
130,172,111
|
124,679,534
|
Diluted
|
145,188,786
|
124,679,534
|
Net
income (loss) attributable to common shareholders per
share:
|
|
|
Basic
|
$0.05
|
$(0.01)
|
Diluted
|
$0.04
|
$(0.01)
|
|
|
|
The following provides a reconciliation of the shares used in
calculating the per share amounts for the periods
presented:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
Net
Income (Loss)
|
$6,276,178
|
$(1,519,236)
|
|
|
|
Denominator:
|
|
|
Basic
weighted-average shares
|
130,172,111
|
124,679,534
|
Effect
of dilutive securities
|
|
|
Warrants
|
13,696,675
|
-
|
Convertible
Debt
|
-
|
-
|
Options
|
810,000
|
-
|
Preferred
Stock
|
510,000
|
-
|
Diluted
Weighted Average Shares
|
145,188,786
|
124,679,534
|
|
|
|
Net
Income (Loss) Per Common Share:
|
|
|
|
|
|
Basic
|
$0.05
|
$(0.01)
|
Diluted
|
$0.04
|
$(0.01)
|
Note: Warrants, options and preferred stock for the six months
ended June 30, 2019 are not included in the computation of diluted
weighted average shares as such inclusion would be
anti-dilutive.
Income (loss) from Operations Data:
|
|
|
|
|
|
Income
(Loss) from Operations
|
$6,316,069
|
$(1,403,361)
|
Basic
and Diluted Weighted
|
|
|
Average
Shares
|
|
|
Basic
|
130,172,111
|
124,679,534
|
Diluted
|
145,188,786
|
124,679,534
|
Basic
and Diluted Income (loss) Per Common Share
|
|
|
Basic
|
$0.05
|
$(0.01)
|
Diluted
|
$0.04
|
$(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). The Company recognizes revenue when we
transfer promised goods or services to customers in an amount that
reflects the consideration to which we expect to be entitled in
exchange for those goods or services. To determine revenue
recognition for contracts with customers we perform the following
five steps: (i) identify the contract(s) with a customer; (ii)
identify the performance obligation(s) in the contract; (iii)
determine the transaction price; (iv) allocate the transaction
price to the performance obligation(s) in the contract; and (v)
recognize revenue when (or as) we satisfy the performance
obligation(s). At contract inception, we assess the goods or
services promised within each contract, assess whether each
promised good or service is distinct and identify those that are
performance obligations.
The
Company must use judgment to determine: a) the number of
performance obligations based on the determination under step (ii)
above and whether those performance obligations are distinct from
other performance obligations in the contract; b) the transaction
price under step (iii) above; and c) the stand-alone selling price
for each performance obligation identified in the contract for the
allocation of transaction price in step (iv) above.
Title
and risk of loss generally pass to our customers upon shipment. Our
Customers include end users as well as dealers and distributors who
market and sell our products. Our revenue is not contingent upon
resale by the dealer or distributor, and we have no further
obligations related to bringing about resale. Shipping and handling
costs charged to customers are included in Product Revenues. The
associated expenses are treated as fulfillment costs and are
included in Cost of Revenues. Revenues are reported net of sales
taxes collected from Customers.
Disaggregation of Revenue
The
following table presents our revenues disaggregated by revenue
source.
Product and Service Revenue
|
For the three months ended June 30,
(Unaudited)
|
|
|
|
SteraMist
Product
|
$9,235,000
|
$1,504,000
|
Service
and Training
|
793,000
|
135,000
|
Total
|
$10,028,000
|
$1,639,000
|
|
For the six months ended June 30,
(Unaudited)
|
|
|
|
SteraMist
Product
|
$15,880,000
|
$2,533,000
|
Service
and Training
|
1,202,000
|
358,000
|
Total
|
$17,082,000
|
$2,891,000
|
Revenue by Geographic Region
|
For the three months ended June 30,
(Unaudited)
|
|
|
|
United
States
|
$8,392,000
|
$1,428,000
|
International
|
1,636,000
|
211,000
|
Total
|
$10,028,000
|
$1,639,000
|
|
For the six months ended June 30,
(Unaudited)
|
|
|
|
United
States
|
$11,961,000
|
$2,563,000
|
International
|
5,121,000
|
328,000
|
Total
|
$17,082,000
|
$2,891,000
|
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within selling
expenses.
Contract Balances
As of
June 30, 2020 and December 31, 2019 we did not have any unsatisfied
performance obligations for (i) contracts with an original expected
length of one year or less and (ii) contracts for which we
recognize revenue at the amount to which we have the right to
invoice for services performed.
Arrangements with Multiple Performance Obligations
Our
contracts with customers may include multiple performance
obligations. We enter into contracts that can include various
combinations of products and services, which are primarily distinct
and accounted for as separate performance obligations.
Significant Judgments
Our
contracts with customers for products and services often dictate
the terms and conditions of when the control of the promised
products or services is transferred to the customer and the amount
of consideration to be received in exchange for the products and
services.
Equity Compensation Expense
We
account for equity compensation expense in accordance with FASB ASC
718, “Compensation—Stock Compensation.” Under the
provisions of FASB ASC 718, equity compensation expense is
estimated at the grant date based on the award’s fair
value.
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 six months ended June 30, 2020 and
2019, we issued 400,000 and 400,000 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 six
months ended June 30, 2020 and 2019.
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 six months ended
June 30, 2020 were approximately $53,000 and $99,000,
respectively. Advertising and
promotional expenses included in selling expenses for the three and
six months ended June 30, 2019 were approximately $25,000 and
$65,000, respectively.
Research and Development Expenses
We expense research and
development expenses in the period in which they are
incurred. For the three and six
months ended June 30, 2020, research and development expenses were
approximately $141,000 and $201,000, respectively. For the three
and six months ended June 30, 2019, research and development
expenses were approximately $69,000 and $161,000,
respectively.
Business Segments
We
currently have one reportable business segment due to the fact that
we derive our revenue primarily from one product. A breakdown of
revenue is presented in “Revenue Recognition” in Note 2
above.
Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU No. 2018-15,
“Intangibles-Goodwill and Other-Internal-Use Software (Topic
350): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That is a Service Contract.”
This new guidance aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use
software. This new guidance is effective for the Company on a
prospective or retrospective basis beginning on January 1, 2020,
with early adoption permitted. The Company elected to adopt this
guidance early, in 2020 on a prospective basis. The new guidance
did not have a material impact on the Company’s Consolidated
Financial Statements.
NOTE
3. INVENTORIES
Inventories consist
of the following at:
|
June
30,
2020
(Unaudited)
|
|
Finished
goods
|
$2,144,725
|
$2,364,786
|
Raw
Materials
|
614,574
|
50,428
|
Inventory
Reserve
|
-
|
(100,000)
|
|
$2,759,299
|
$2,315,214
|
NOTE 4. VENDOR DEPOSITS
At June
30, 2020 and December 31, 2019, we maintained vendor deposits of
$568,599 and $141,052, respectively, for open purchase orders for
inventory.
NOTE 5. PROPERTY AND EQUIPMENT
Property and
equipment consist of the following at:
|
June 30,
2020
(Unaudited)
|
|
Furniture
and fixtures
|
$357,236
|
$357,236
|
Equipment
|
1,292,860
|
1,355,014
|
Vehicles
|
60,703
|
60,703
|
Computer
and software
|
189,388
|
166,598
|
Leasehold
improvements
|
386,120
|
362,898
|
Tenant
Improvement Allowance
|
405,000
|
405,000
|
|
2,691,307
|
2,707,449
|
Less:
Accumulated depreciation
|
1,490,797
|
1,339,585
|
|
$1,200,510
|
$1,367,864
|
For
the three and six months ended June 30, 2020, depreciation was
$78,950 and $157,513, respectively. For the three and six months
ended June 30, 2019, depreciation was $87,160 and $171,626,
respectively. For the three and six months ended June 30, 2020 and
2019, amortization of tenant improvement allowance was $9,798 and
$19,597, respectively and was recorded as lease expense and
included within general and administrative expense on the
consolidated statement of operations.
NOTE 6. INTANGIBLE ASSETS
Intangible assets
consist of patents and trademarks related to our Binary Ionization
Technology. We amortize the patents over the estimated remaining
lives of the related patents. The trademarks have an indefinite
life. Amortization expense was $93,347
and $186,694 for the three and six months ended June 30, 2020,
respectively. Amortization expense was $92,377 and $184,754 for the
three and six months ended June 30, 2019,
respectively.
Definite life
intangible assets consist of the following:
|
June
30,
2020
(Unaudited)
|
|
Intellectual
Property and Patents
|
$2,906,507
|
$2,906,507
|
Less: Accumulated
Amortization
|
2,666,448
|
2,479,754
|
Intangible Assets,
net
|
$240,059
|
$426,753
|
Indefinite life
intangible assets consist of the following:
Trademarks
|
$512,257
|
$512,257
|
Total Intangible
Assets, net
|
$752,316
|
$939,010
|
Approximate future
amortization is as follows:
Year
Ended:
|
|
|
|
July 1 –
December 31, 2020
|
$186,000
|
December 31,
2021
|
3,000
|
December 31,
2022
|
3,000
|
December 31,
2023
|
3,000
|
December 31,
2024
|
3,000
|
Thereafter
|
42,000
|
|
$240,000
|
NOTE 7. LEASES
In
April 2018, we entered into a 10-year lease agreement for a new
9,000-square-foot facility that contains office, warehouse, lab and
research and development space in Frederick, Maryland. The lease
agreement was scheduled to commence on December 1, 2018 or when the
property was ready for occupancy. The agreement provided for annual
rent of $143,460, an escalation clause that increases the rent 3%
year over year, a landlord tenant improvement allowance of $405,000
and additional landlord work as discussed in the lease agreement.
We took occupancy of the property on December 17, 2018 and the
lease was amended in March 2019 to provide for a 4-month rent
holiday and a commencement date of April 1, 2019. Lease expense for
operating lease payments is recognized on a straight-line basis
over the lease term.
The
balances for our operating lease where we are the lessee are
presented as follows within our condensed consolidated balance
sheet:
Operating leases:
|
June 30,
2020
(Unaudited)
|
|
Assets:
|
|
|
Operating
lease right-of-use asset
|
$653,626
|
$674,471
|
Liabilities:
|
|
|
Current
Portion of Long-Term Operating Lease
|
$76,266
|
$71,510
|
Long-Term
Operating Lease, Net of Current Portion
|
995,068
|
1,034,413
|
|
$1,071,333
|
$1,105,923
|
The
components of lease expense are as follows within our condensed
consolidated statement of operations:
|
Three Months Ended June 30, 2020
(Unaudited)
|
Three Months Ended June 30, 2019
(Unaudited)
|
|
|
|
Operating
lease expense
|
$39,329
|
$39,644
|
|
Six Months Ended June 30, 2020
(Unaudited)
|
Six Months Ended June 30, 2019
(Unaudited)
|
|
|
|
Operating
lease expense
|
$78,657
|
$79,289
|
Other
information related to leases where we are the lessee is as
follows:
|
June 30,
2020
(Unaudited)
|
|
December 31,
2019
|
Weighted-average remaining lease term:
|
|
|
|
Operating leases
|
8.75 years
|
|
9.25 years
|
|
|
|
|
Discount rate:
|
|
|
|
Operating leases
|
7.00%
|
|
7.00%
|
Supplemental cash
flow information related to leases where we are the lessee is as
follows:
|
Three Months Ended
June 30,
2020
(Unaudited)
|
Three Months Ended
June 30,
2019
(Unaudited)
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
$36,940
|
$-
|
|
Six Months Ended
June 30,
2020
(Unaudited)
|
Six Months Ended
June 30,
2019
(Unaudited)
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
$72,806
|
$-
|
As of
June 30, 2020, the maturities of our operating lease liability are
as follows:
Year Ended:
|
|
July 1 –
December 31, 2020
|
$73,881
|
December
31, 2021
|
151,088
|
December
31, 2022
|
155,621
|
December
31, 2023
|
160,290
|
December
31, 2024
|
165,098
|
Thereafter
|
745,183
|
Total
minimum lease payments
|
1,451,162
|
Less:
Interest
|
379,829
|
Present
value of lease obligations
|
1,071,333
|
Less:
Current portion
|
76,266
|
Long-term
portion of lease obligations
|
$995,068
|
NOTE 8. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In
accordance with ASC 985-20 we capitalized certain software
development costs associated with updating our continuing line of
product offerings. Capitalized software development costs consist
of the following at:
|
|
|
|
|
|
Capitalized
Software Development Costs
|
$125,704
|
$125,704
|
Less:
Accumulated Amortization
|
(52,377)
|
(31,426)
|
|
$73,327
|
$94,278
|
Amortization
expense for the three and six months ended June 30, 2020 was
$10,475 and $20,950, respectively. Amortization expense for the
three and six months ended June 30, 2019 was $0.
NOTE 9. CLOUD COMPUTING SERVICE
CONTRACT
In May 2020 we entered into a cloud computing service contract. The
contract provides for annual payments in the amount of $30,409 and
has a term of 5 years. The annual contract payments are capitalized
as a prepaid expense and amortized over a twelve-month period.
Amortization expense for the three and six months ended June 30,
2020 were $2,540.
We have incurred
implementation costs of $9,880 in connection with the cloud
computing service contract which have been capitalized in prepaid
expenses as of June 30, 2020. In accordance with ASU No.
2018-15, such implementation
costs will be amortized once the cloud-based service contract is
placed in service.
NOTE 10. 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 six months ended June 30,
2020 was $0 and $40,689, respectively. Interest expense related to
the Notes for the three and six months ended June 30, 2019 was
$50,000 and $100,000, 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 six months
ended June 30, 2019, was $0 and $17,534,
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”.
In March 2020, convertible notes with a principal
balance of $4,500,000 were converted into 8,333,332 shares
of our common stock at a conversion
price of $0.54 per share and the remaining outstanding balance of
$500,000 was repaid in the form of cash. With respect to the
999,998 warrants issued as part of the convertible note
transaction, 799,999 warrants expired in March 2020. In March 2020,
83,333, warrants were exercised, and 116,666 warrants expired in
May 2020.
Convertible notes
consist of the following at:
|
June 30,
2020
(Unaudited)
|
|
|
|
|
Convertible
notes
|
$-
|
$5,000,000
|
Initial
discount
|
-
|
(53,873)
|
Accumulated
amortization
|
-
|
53,873
|
Convertible
notes, net
|
$-
|
$5,000,000
|
NOTE 11. 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 June 30, 2020 and December 31,
2019, 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 June
30, 2020 and December 31, 2019, there were no shares issued and
outstanding, respectively. Each share of Convertible Series B
Preferred Stock may be converted (at the holder’s election)
into two hundred shares of our common stock.
Common Stock
During
the six months ended June 30, 2019, we issued 400,000 shares of
common stock valued at $44,000 to members of our board of directors
(see Note 13). During the six months ended June 30, 2019, we issued
10,000 shares of common stock valued at $1,200 to a
consultant.
During
the six months ended June 30, 2020, we issued 400,000 shares of
common stock valued at $48,000 to members of our board of directors
(see Note 13).
In
March 2020, 8,333,332 shares of common stock were issued in
connection with the conversion of convertible notes payable
aggregating $4,500,000 (see Note 10).
In
March 2020, 83,333 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$57,500.
In
May 2020, 20,000 shares of common stock were issued in connection
with the exercise of options for which we received proceeds of
$1,000.
In
June 2020, 215,517 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$62,500.
Stock Options
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.
In
January 2020, we issued two options to purchase an aggregate of
250,000 shares of common stock to the COO at an exercise price of
$0.10 and $0.12 per share pursuant to her employment agreement with
the Company. The options were valued at a total of $23,595 and have
a term of 5 years. We utilized the Black-Scholes method to fair
value the options received by the COO with the following
assumptions: volatility, 135%; expected dividend yield, 0%; risk
free interest rate, 1.64%; and a life of 5 years. The grant date
fair value of each share of common stock underlying the options was
$0.09 and $0.10. The value of the stock option was included in
accrued expenses at December 31, 2019.
The
following table summarizes stock options outstanding as of June 30,
2020 and December 31, 2019:
|
June 30, 2020
(Unaudited)
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
Outstanding,
beginning of period
|
620,000
|
$0.32
|
320,000
|
$0.52
|
Granted
|
250,000
|
0.11
|
300,000
|
0.11
|
Exercised
|
(20,000)
|
0.05
|
-
|
-
|
Expired
|
(40,000)
|
2.10
|
—
|
—
|
Outstanding,
end of period
|
810,000
|
$0.17
|
620,000
|
$0.32
|
Options
outstanding and exercisable by price range as of June 30, 2020 were
as follows:
|
|
|
|
|
Average
Weighted
Remaining
Contractual
Life in
Years
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
$0.10
|
220,000
|
4.60
|
220,000
|
$0.10
|
$0.11
|
250,000
|
3.51
|
250,000
|
$0.11
|
$0.12
|
200,000
|
3.52
|
200,000
|
$0.12
|
$0.27
|
40,000
|
4.51
|
40,000
|
$0.27
|
$0.55
|
100,000
|
5.60
|
100,000
|
$0.55
|
|
|
|
|
|
|
810,000
|
4.12
|
810,000
|
$0.17
|
Stock Warrants
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.
In
January 2020 we issued a warrant to purchase 1,250,000 shares of
common stock to the CEO at an exercise price of $0.15 per share
pursuant to an employment agreement. The warrant was valued at
$164,201 and has a term of 5 years. We utilized the Black-Scholes
model to fair value the warrant received by the CEO with the
following assumptions: volatility, 136%; expected dividend yield,
0%; risk free interest rate, 1.64%; and a life of 5 years. The
grant date fair value of each share of common stock underlying the
warrant was $0.13.
In January 2020 we issued a warrant to purchase
41,667 shares of common stock to an employee at an exercise price
of $0.12 per share. The warrant was valued at $3,594 and has a term
of 5 years. We utilized the Black-Scholes model to fair value the
warrant received by the employee with the following assumptions:
volatility, 135%; expected dividend yield, 0%; risk free interest
rate, 1.58%; and a life of 5 years. The grant date fair value of
each share of common stock underlying the warrant was $0.09.
The value of the warrants was expensed in the fourth quarter of
2019 and included in accrued expenses at December 31,
2019.
In
February 2020 we issued a warrant to purchase 150,000 shares of
common stock to an employee at an exercise price of $0.15 per
share. The warrant was valued at $18,571 and has a term of 3 years.
We utilized the Black-Scholes model to fair value the warrant
received by the employee with the following assumptions:
volatility, 155%; expected dividend yield, 0%; risk free interest
rate, 1.64%; and a life of 3 years. The grant date fair value of
each share of common stock underlying the warrant was
$0.12.
In
April 2020 we issued a warrant to purchase 100,000 shares of common
stock to the CEO at an exercise price of $0.50 per share pursuant
to an employment agreement. The warrant was valued at $49,693 and
has a term of 10 years. We utilized the Black-Scholes model to fair
value the warrant received by the CEO with the following
assumptions: volatility, 173%; expected dividend yield, 0%; risk
free interest rate, 0.68%; and a life of 10 years. The grant date
fair value of each share of common stock underlying the warrant was
$0.50.
In
April 2020 we issued a warrant to purchase 50,000 shares of common
stock to the COO at an exercise price of $0.50 per share pursuant
to an employment agreement. The warrant was valued at $24,846 and
has a term of 10 years. We utilized the Black-Scholes model to fair
value the warrant received by the COO with the following
assumptions: volatility, 173%; expected dividend yield, 0%; risk
free interest rate, 0.68%; and a life of 10 years. The grant date
fair value of each share of common stock underlying the warrant was
$0.50.
In
April 2020 we issued a warrant to purchase 50,000 shares of common
stock to the CFO at an exercise price of $0.50 per share pursuant
to an employment agreement. The warrant was valued at $24,846 and
has a term of 10 years. We utilized the Black-Scholes model to fair
value the warrant received by the CFO with the following
assumptions: volatility, 173%; expected dividend yield, 0%; risk
free interest rate, 0.68%; and a life of 10 years. The grant date
fair value of each share of common stock underlying the warrant was
$0.50.
In
April 2020 we issued a warrant to purchase 30,000 shares of common
stock to a consultant at an exercise price of $0.50 per share. The
warrant was valued at $14,908 and has a term of 10 years. We
utilized the Black-Scholes model to fair value the warrant received
by the consultant with the following assumptions: volatility, 173%;
expected dividend yield, 0%; risk free interest rate, 0.68%; and a
life of 10 years. The grant date fair value of each share of common
stock underlying the warrant was $0.50.
The
following table summarizes the outstanding common stock warrants as
of June 30, 2020 and December 31, 2019:
|
June 30, 2020
(Unaudited)
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
Outstanding,
beginning of period
|
17,240,523
|
$0.39
|
26,550,611
|
$0.34
|
Granted
|
1,671,667
|
0.17
|
1,300,000
|
0.11
|
Exercised
|
(298,850)
|
(0.40)
|
-
|
-
|
Expired
|
(4,916,665)
|
(0.80)
|
(10,610,088)
|
(0.23)
|
Outstanding,
end of period
|
13,696,675
|
$0.22
|
17,240,523
|
$0.39
|
Warrants
outstanding and exercisable by price range as of June 30, 2020 were
as follows:
|
|
|
|
Average Weighted
Remaining Contractual
Life in Years
|
|
Weighted Average
Exercise Price
|
$0.08
|
250,000
|
3.40
|
250,000
|
$0.08
|
$0.10
|
1,265,000
|
3.26
|
1,265,000
|
$0.10
|
$0.12
|
3,791,667
|
2.44
|
3,791,667
|
$0.12
|
$0.14
|
50,000
|
3.80
|
50,000
|
$0.14
|
$0.15
|
1,400,000
|
4.38
|
1,400,000
|
$0.15
|
$0.17
|
10,000
|
2.32
|
10,000
|
$0.17
|
$0.27
|
250,000
|
1.50
|
250,000
|
$0.27
|
$0.29
|
4,400,008
|
1.66
|
4,400,008
|
$0.29
|
$0.30
|
1,200,000
|
0.64
|
1,200,000
|
$0.30
|
$0.32
|
250,000
|
1.25
|
250,000
|
$0.32
|
$0.42
|
250,000
|
1.00
|
250,000
|
$0.42
|
$0.50
|
480,000
|
5.10
|
480,000
|
$0.50
|
$0.55
|
100,000
|
0.58
|
100,000
|
$0.55
|
|
13,696,675
|
2.35
|
13,696,675
|
$0.22
|
There
were no unvested warrants outstanding as of June 30,
2020.
NOTE 12. 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 June 30, 2020, and December 31, 2019, there were no claims
against us for product liability.
SARS CoV-2 coronavirus
On
March 11, 2020 the World Health Organization declared the SARS
CoV-2 coronavirus a global pandemic and recommended
containment and mitigation measures worldwide. We are monitoring
this closely. We have been identified as an essential disinfectant
and decontamination vendor by various agencies and countries. Our
operations being essential have been materially affected by the
coronavirus outbreak to date, as demand for our product and
services is increasing. The uncertain nature of its spread globally
may or may not impact our business operations resulting from
quarantines of employees, customers and suppliers as well as
potential travel restrictions in areas affected or may be affected
in the future.
NOTE 13. 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 six months ended June 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.
For
the six months ended June 30, 2020, we issued an aggregate of
400,000 shares of common stock that were valued at $48,000 to
members of our board of directors.
Manufacturing Agreement
In June 2020 we entered into a new manufacturing agreement with
Planet Innovation Products, Pty Ltd (“PI”). The
agreement does not provide for any minimum purchase commitments and
is for a term of three years. The agreement also provides for a
warranty against product defects.
Cloud Computing Service Contract
In May 2020 we entered
into an agreement for a cloud computing service contract. The
contract provides for annual payments in the amount of $30,409 and
has a term of 5 years. Approximate minimum payments under the contract
are as follows:
Year
Ended:
|
|
|
|
July 1 –
December 31, 2020
|
$15,000
|
December 31,
2021
|
30,000
|
December 31,
2022
|
30,000
|
December 31,
2023
|
30,000
|
December 31,
2024
|
30,000
|
Thereafter
|
15,000
|
|
$150,000
|
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 June 30, 2020,
we had entered into 167 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. As
of January 1, 2020, we have removed the exclusivity portion of our
service partner company agreements
NOTE 14. ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the following
at:
|
June 30, 2020
(Unaudited)
|
|
Commissions
|
$268,378
|
$112,102
|
Payroll
and related costs
|
116,345
|
167,689
|
Director
fees
|
41,250
|
41,250
|
Sales
Tax Payable
|
129,052
|
21,814
|
Accrued
warranty (Note 15)
|
90,000
|
30,000
|
Other
accrued expenses
|
65,245
|
77,257
|
Total
|
$710,270
|
$450,112
|
NOTE 15. ACCRUED WARRANTY
Our
manufacturers assume warranty against product defects, 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:
|
June 30, 2020
(Unaudited)
|
|
Beginning
accrued warranty costs
|
$30,000
|
$30,000
|
Provision for
warranty expense
|
61,864
|
2,609
|
Settlement of
warranty claims
|
(1,864)
|
(2,609)
|
Ending
accrued warranty costs
|
$90,000
|
$30,000
|
NOTE 16. LOAN PAYABLE
On
April 21, 2020, TOMI Environmental Solutions, Inc. (the "Company")
received $410,700 in loan funding from the Paycheck Protection
Program (the "PPP") established pursuant to the recently enacted
Coronavirus Aid, Relief, and Economic Security Act of 2020 (the
"CARES Act") and administered by the U.S. Small Business
Administration ("SBA"). The unsecured loan (the "PPP Loan") is
evidenced by a promissory note of the Company, dated April 21, 2020
(the "Note") in the principal amount of $410,700 with City National
Bank (the "Bank"), the lender. Interest expense for the three
months ended June 30, 2020 was $787.
Under
the terms of the Note and the PPP Loan, interest accrues on the
outstanding principal at the rate of 1.0% per annum. The term of
the Note is two years, though it may be payable sooner in
connection with an event of default under the Note. To the extent
the loan amount is not forgiven under the PPP, the Company will be
obligated to make equal monthly payments of principal and interest
beginning on the date that is seven months from the date of the
Note, until the maturity date.
NOTE 17. INCOME TAXES
For the three and six-months months ended June 30, 2020 and 2019,
our provision for income tax was $0. Deferred income tax assets and
liabilities are determined based on differences between the
financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits, which are, on a more
likely than not basis, not expected to be realized in accordance
with ASC guidance for income taxes. As of June 30, 2020 and
December 31, 2019, we recorded a valuation allowance of $3,742,000
and $5,580,000, respectively for the portion of the deferred tax
assets that we do not expect to be realized. The valuation
allowance on our net deferred taxes decreased by $1,838,000 during
the six months ended June 30, 2020, primarily due to U.S. deferred
tax assets incurred in the current period that cannot be realized.
Management believes that based on the available information, it is
more likely than not that the remaining U.S. deferred tax assets
will not be realized, such that a valuation allowance is required
against U.S. deferred tax assets. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.
NOTE 18. 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
December 31, 2019, three customers accounted for 37% of accounts
receivable.
One
customer accounted for 26% of net revenue for the three months
ended June 30, 2019 and two customers accounted for 29% of net
revenue for the six months ended June 30, 2019.
One
customer/distributor accounted for 13% of net revenue for the six
months ended June 30, 2020.
NOTE 19. SUBSEQUENT EVENTS
In
July 2020, 215,517 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$62,500.